Tuesday, October 11, 2005

Income taxes

I keep threatening to do it, but I think I might get off my duff and start this week. I'm a firm believer in the Fair Tax, and I will begin a series of posts tauting its virtues, and how typical liberal arguments against it would be rendered impotent. Until the series begins, though, here's a great Bruce Bartlett column on how a NYT columnist rails against our current income tax system...because the rich don't pay enough.
The first of these deals with taxation and appeared on Oct. 4. It was written by Times editorial board member Teresa Tritch, who writes most of its economic editorials. She lists her qualifications as having degrees in German and journalism, as well as years writing about personal finance for Money magazine—explaining why people should shop around for the lowest price before buying soap and things of that sort.
Nothing says "I'm a tax policy expert" more than being able to spot a great bargain on Dove, and telling us about said bargain in German! Continuing:
According to Ms. Tritch, our tax system should serve one purpose and one purpose only—to soak the rich. Any reduction in tax rates, especially on saving and investment, has nothing to do with raising growth, but is nothing but a give-away to the ultra-wealthy. One can see now why she was hired by the Times despite a paucity of knowledge or experience in the field of economics.

The reality is that the wealthy pay almost all of the federal income tax and there is clear and compelling evidence that our tax system—especially its misguided redistributive elements—impose a heavy cost in terms of growth that is ultimately paid by the non-wealthy in the form of lower productivity and, hence, lower wages and incomes.
The NYT hired another class warfare economics ignoramus? Damn...I heard that Paul Krugman hates competition! Her hiring should make standing in line at Starbucks getting their $7 lattés more awkward, huh? Continuing:
Interestingly, the latest Internal Revenue Service data on distribution of the tax burden were released the same day Ms. Tritch’s tirade appeared. They show that the top one percent of taxpayers paid 34.3 percent of all federal income taxes in 2003, although they earned just 16.8 percent of the adjusted gross income. The top five percent of taxpayers paid more than half of all federal income taxes, the top 10 percent paid two-thirds, and the top half of taxpayers paid 96.5 percent, meaning that the bottom half paid just 3.5 percent.

Another IRS report decomposed the top one percent and found that the top ten percent of the top one percent (the top 0.1 percent) increased their share of all federal income taxes from seven percent in 1980 to 15.3 percent in 2003. These 129,000 tax filers earned 7.6 percent of the income and paid an average tax rate of 23.6 percent. This came to $114.6 billion—four times more than all the taxes paid by the 64 million taxpayers in the bottom 50 percent—who paid an average tax rate of 2.9 percent.

I would be curious to know just how much more Ms. Tritch thinks the wealthy ought to be paying? Back in the good old days (from her point of view) when Jimmy Carter was president and the top statutory tax rate was 70 percent (versus 35 percent today), the top one percent of taxpayers paid only 19.7 percent of all federal income taxes. In other words, although their marginal tax rate has fallen by 50 percent, their tax share has almost doubled.
In short, the top half of income-earners in this country pay about 97% of all income taxes, and the top 1% pay over 1/3 of all income taxes. Truly, just how much more should half of the country be shielded from virtually no income tax liability?

Also read that last paragraph in the prior blockquote again. Under Carter, the top tax rate was 70%. It's half of that now...yet the amount of taxes paid by the same group has nearly doubled! That's supply-side economics in its beauty: cut tax rates, and tax revenues increase! What Congress does with those revenues is a different matter.

Finally, Bartlett's column mentions how Britain has a top tax rate of 40%, but the wealthiest 1% pay only 21% of the income taxes. The bottom half pay 11%, or over 300% more, than our bottom half. So rich Brits pay higher tax rates, but less of the tax burden, than rich Americans.

Make up you mind, people! Do you want higher tax rates or more taxes collected? Because as this evidence (and a cursory grasp of economics) reveals, you cannot have both.

By the way...the
Fair Tax eliminates the problems inherent in the income tax model. Future posts coming soon!