Saturday, April 15, 2006

Misleading commentary on taxes from the Goldwater Institute

On April 3, the Goldwater Institute released a short opinion piece by former state senator Tom Patterson titled "Same Old Story," in which he claims that "A new report shatters the 'tax cuts for the wealthy' myth." But the figures he gives do not shatter any such myth, and the facts are that Bush's tax cuts have gone overwhelmingly to the top 1% of income earners.

Patterson writes:
According to the Congressional Budget Office, between 1979 and 2003 the share of income taxes paid by the highest earning 20 percent of Americans jumped from 65 percent to 85 percent. The top 10 percent of income earners in 2003 paid 70 percent of the income tax. The infamous top one percent shouldered 35 percent of total income taxes paid.

Meanwhile, the proportion of income tax paid by the lowest two quintiles has dropped to minus two percent. And, according to Office of Management and Budget figures, anti-poverty programs in 2004 consumed 16 percent of federal spending, an all-time high.

The first thing to notice about these figures is that the only comparison between two time periods for share of income taxes is for the top 20% of Americans (their share went from 65% to 85% between 1979 and 2003). All of the other figures are for 2003 (except for the 2004 OMB figures on federal spending, which I won't address--I'm just interested in the tax question here).

These figures don't even attempt to refute the claim that the Bush tax cuts primarily went to the wealthiest Americans--this data in no way "shatters the myth." A look at the facts shows that this is no myth.

I sent the following email to Tom Patterson on April 3:
Tom:

This data doesn't seem consistent with other reports of more recent CBO data, e.g.:

http://www.washingtonpost.com/wp-dyn/articles/A61178-2004Aug12.html

It also doesn't seem consistent with the data in David Cay Johnston's book, Perfectly Legal.

Does Riedl look at tax as a percentage of income, as well as just percentage of the tax burden?

My understanding is that tax as a percentage of income has increased on the middle class and bottom of the upper class, while it has significantly decreased for the richest of the rich.
I then included the text of my Amazon.com review of Johnston's book (which I've moved to the bottom of this post). I was mistaken that the facts "aren't consistent" with the other sources--those facts are indeed consistent, but conceals the point that the per-dollar burden on the top 20% has declined. The top 20% is paying a greater share of income tax because they are taking home a greater share of the total income, and being taxed less per dollar of income--and most of that is occurring within the top 10%.

As Johnston's book shows (p. 31), the top 10% of American taxpayers saw their average income rise 88.6% between 1970 to 2000, from $119,249 to $224,877 (inflation-adjusted); their percentage of the total U.S. income increased from 33% to 48%. The bottom 90% of American taxpayers saw their average income go from $27,060 in 1970 to $27,035 in 2000, and their percentage of total U.S. income dropped from 67% to 52%. Within the top 10%, those at the 90-95th percentile saw a 29.6% increase in income between 1970 and 2006, those from the 95th to 99th percentile saw a 54.2% increase in income during that period, those from the 99th to 99.5th percentile saw an 89.5% increase in income, and those in the 99.5th to 99.9th percentile saw a 144.8% increase in income (p. 34). Those in the 100th percentile saw a 558.3% increase in income from 1970 to 2000 (p. 36).

The result of Bush's 2001, 2002, and 2003 tax cuts by 2010 will be an increase in the share of taxes paid by the bottom 95% of taxpayers by 3.8%, and decrease the share of taxes paid by the top 5% by 3.8%. The top 1% will see a decrease in their share by 2.7% (p. 94).
Looking at it another way, the percentage of income paid as taxes by the top 20% of taxpayers in 2001 was 19%; the percentage of income paid as taxes by the bottom 20% of taxpayers was 18% (also p. 94). That's practically a flat tax today, yet the relative burden on the poorest is much greater than on the richest, since a smaller percentage of their income is discretionary.

Dr. Patterson kindly replied to my email:
Mr. Lippard, I appreciate your reply. You bring up a number of interesting considerations, but my column was only a rebuttal of the "Bush tax cuts for the rich hurt the poor" mantra. I think the numbers, while always debatable, are reasonably authoritative and on point, or at least on the point I was trying to make. Tom
If that was what he was rebutting, I didn't get that from the wording--the specific claim made is that the claim that Bush's tax cuts went primarily to the rich is a "myth," and that's just not so.

On April 5, the New York Times reported that:
* Among taxpayers with incomes greater than $10 million, the amount by which their investment tax bill was reduced averaged about $500,000 in 2003, and total tax savings, which included the two Bush tax cuts on compensation, nearly doubled, to slightly more than $1 million.

* These taxpayers, whose average income was $26 million, paid about the same share of their income in income taxes as those making $200,000 to $500,000 because of the lowered rates on investment income.

...

Because of the tax cuts, even the merely rich, making hundreds of thousands of dollars a year, are falling behind the very wealthiest, particularly because another provision, the alternative minimum tax, now costs many of them thousands and even tens of thousands of dollars a year in lost deductions.
And on April 14, Paul Krugman pointed out how the Bush administration has tried to falsely imply that the poor and middle class gained the most from his tax cuts by not being forthright about the actual numbers:
The Treasury Department has put out an exercise in spin called the "Tax Relief Kit," which tries to create the impression that most of the tax cuts went to low- and middle-income families. Conspicuously missing from the document are any actual numbers about how the tax cuts were distributed among different income classes. Yet Treasury analysts have calculated those numbers, and there's enough information in the "kit" to figure out what they discovered.

An explanation of how to extract the administration's estimates of the distribution of tax cuts from the "Tax Relief Kit" is here. Here's the bottom line: about 32 percent of the tax cuts went to the richest 1 percent of Americans, people whose income this year will be at least $341,773. About 53 percent of the tax cuts went to the top 10 percent of the population. Remember, these are the administration's own numbers--numbers that it refuses to release to the public.
Now, it is a simple consequence of mathematics that a government that consumes the amount of tax revenue that the United States does has no choice but to generate most of those revenues from the non-poor, and conversely that the non-poor will get most of the benefits of any tax cuts since they pay the most in taxes. But what the above facts show (and what Johnston's book in particular shows in numerous outrageous details) is that the tax system has been set up in ways that allow the very richest of the rich to benefit even out of proportion to their income, and that the Bush administration has been deceptive about that.

It's high time for real tax reform that greatly simplifies the system, eliminates most deductions and loopholes, doesn't give special breaks for particular corporations owned by friends of people in government, and eliminates the Alternative Minimum Tax. Reducing taxes on dividends and eliminating the estate tax are changes that only benefit the extremely wealthy and don't produce benefits that are likely to create jobs or otherwise benefit most of the population. Reducing taxes on payroll and on small businesses (along with regulatory burdens on them) and eliminating corporate welfare would bring us closer to an actually free market that benefits everyone.

Here's my Amazon.com review of Johnston's book:
While I found much to dismay and horrify me within this book, I suspect I also often did not interpret things in the way the author intended. The author seems to hold a viewpoint in which if you avoid paying a tax--even legally--you have gained income, rather than merely avoided an expense. The author seems to hold the view there is a fixed amount of tax that is the right amount to collected, and if one person or entity reduces its tax burden, it thereby increases the burden on everyone else, cheating them. This is a judgment without any regard to the other side of the coin, government spending. While I agree that at the extremes (many of which are portrayed in this book), there is clear-cut cheating and not paying a fair share by any reasonable standard, I would not agree that all or even most legal tax avoidance falls into that category. Those who favor limited government and balanced budgets are likely to have a similar reaction to much of what the author writes.

That said, however, he makes a very strong case that the U.S. tax system is unfair and corrupt, that the IRS is limited in its ability to go after tax cheats who are breaking the law, and that the net effect is to give tremendous benefits to the richest of the rich, while the burden on everyone else (regardless of whether those taxes are being collected for legitimate or frivolous purposes) has increased.

He has chapters on how the alternative minimum tax (AMT) is completely broken and is now impacting a growing number of the middle class, how tax-exempt insurance companies are being exploited as a mechanism for storing hundreds of millions of dollars in investments and avoiding taxes on the gains, on those who simply refuse to file or pay income taxes at all, on the effects of Reagan-era payroll tax increases, on tax-evading partnership schemes and the IRS's complete inability to devote any resources to detecting them, on American companies moving their headquarters to Bermuda to avoid taxes, and on the destruction of pensions at many large companies. All are fascinating reading.

I agree with the author that something should be done, and that something should include a complete overhaul and simplification of the U.S. tax code, to make it fair and enforceable. But I am not optimistic that anything will be done--I think the level of corruption in the federal government is so high, and that because the behavior of bureaucrats and legislators is more accurately described by public choice theory than by political science, that it is unlikely we'll see radical change in a positive direction.

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