Who pays taxes? Who should?
At a fascinating TPC panel this afternoon, TPC’s Bob Williams, former CBO director (and McCain economic adviser) Doug Holtz-Eakin, former top Ronald Reagan tax adviser John (Buck) Chapoton, and Center on Budget & Policy Priorities executive director Bob Greenstein all wrestled with the nature—and future–of our progressive tax system.
It is more than an academic question. President Obama wants to extend the 2001 and 2003 tax cuts for all but the highest earners. He wants to cut taxes for those making $200,000 or less, and raise them for those making $250,000 or more. Is this demarcation class warfare as Republicans would have it? Or a matter of simple fairness as Democrats suggest. And whoever is right, is this strategy a fiscal dead-end?
Start thinking about this by ignoring the fevered rhetoric of the Left and the Right. The distribution of federal taxes is torn by crosscurrents that are much more complex than politicians claim.
On one hand, it is true that after-tax income of the highest earners has been rising at a remarkable pace. And it is also true that one reason for this good fortune is that their effective federal tax rates have been plunging.
New CBO estimates show that between 1979 and 2006, average pre-tax income of the top one percent of earners more than tripled, even after accounting for inflation. Their average income went from half a million dollars to $1.7 million even as incomes were basically flat for all households. At the same time, effective federal tax rates for the rich plunged from 37 percent to 31 percent while they barely budged for taxpayers as a whole. Bottom line: after-tax income at the very top increased from $330,000 to $1.2 million
But it's also true that the top one percent have been paying an ever-larger share of the nation’s total tax bill. In 2006, these lucky duckies—to borrow a phrase from The Wall Street Journal—paid 28 percent of all federal taxes. The top 10 percent paid more than half, while the bottom 20 percent effectively contributed nothing. While many of those low-earners did pay payroll taxes, they paid negative income tax rates thanks to refundable income tax credits.
So do the rich pay their fair share or not? Buck Chapoton may have it about right. His conclusions: Given both massive deficits and the huge increase in incomes for the very rich, there is a strong equity argument for raising taxes at the top. There is little credibility to the claim that boosting their tax liability will further damage an already-weak economy. However, by proposing to raise rates rather than broadening the tax base, Obama is practically begging the wealthy to seek out new sheltering opportunities.
Finally, Buck raises another important issue that has little to do with economics (at least directly) and a lot to do with the nature of our democracy. Is it healthy to have a nation where a few pay most of the costs while millions pay no taxes at all, even as they enjoy the benefits of those programs largely financed by the wealthy. It brings to mind Obama’s plan to cover the uninsured by raising taxes only on those making more than $250,000. That’s a kind of class warfare that really does trouble me.