Monday, August 3, 2009

Do the top 1% of Americans pay their fair share in taxes?

Instapundit links to some new data on who pays how much in taxes:
Tax Burden of Top 1% Now Exceeds That of Bottom 95%. “Newly released data from the IRS clearly debunks the conventional Beltway rhetoric that the ‘rich’ are not paying their fair share of taxes. Indeed, the IRS data shows that in 2007—the most recent data available—the top 1 percent of taxpayers paid 40.4 percent of the total income taxes collected by the federal government. This is the highest percentage in modern history. By contrast, the top 1 percent paid 24.8 percent of the income tax burden in 1987, the year following the 1986 tax reform act.”
The link goes to the blog of an organization called the Tax Foundation, which claims to be "non-partisan." Let's see their non-partisan analysis:
Some in Washington say the tax system is still not progressive enough. However, the recent IRS data bolsters the findings of an OECD study released last year showing that the U.S.—not France or Sweden—has the most progressive income tax system among OECD nations. We rely more heavily on the top 10 percent of taxpayers than does any nation and our poor people have the lowest tax burden of those in any nation.

We are definitely overdue for some honesty in the debate over the progressivity of the nation's tax burden before lawmakers enact any new taxes to pay for expanded health care.
First of all, Instapundit's heading -- "Tax Burden of Top 1% Now Exceeds That of Bottom 95%" -- is incorrect. The report is only about the federal income tax. There are other federal taxes and state taxes, and many of them are regressive. Instapundit and the Tax Foundation are cherry-picking one particular tax, which they presumably know is far more progressive than others. That's not a valid basis on which to draw any conclusions about America's "tax structure" or any particular group's "tax burden."

But even if we drop that objection -- that is, let's pretend that the federal income tax is the only tax that matters -- Instapundit and the Tax Foundation aren't simply shedding light on facts; they're revealing their ideology. When they look at America's state of affairs, their reaction is to feel sorry for the rich. After all, the data clearly show that the rich carry the biggest "tax burden," right?

Well, only if you think that what counts as a "burden" is the absolute amount of money you have to pay. But that's just not realistic. The more money you make, the less burdensome it is to pay any given amount of money to the government. Someone who makes a million dollars a year will have an easier time paying $100,000 in taxes than someone who makes $50,000 paying $10,000. If you define "burden" purely in terms of absolute amounts, you'll incorrectly conclude that the person paying $100,000 suffers 10 times the burden as the person paying $10,000.

It's also noteworthy that Instapundit and the Tax Foundation don't make any attempt to explain the trend. Why have the top 1% just surpassed the bottom 95% in how much they pay in federal income taxes? As the New York Times' Economix blog points out, this might be because, since around 2002, the top 1%'s share of the countries' overall GDP has been going up, while the bottom 95%'s has been going down.

And what about the Tax Foundation's assertion that "our poor people have the lowest tax burden of those in any nation"? The Foundation frames the discussion as if we're talking about the same kinds of people from one country to another. But we're not. "Poor people" is always a relative term -- it really means the poorest people in a given country. Maybe the "poor" in the United States pay less money in taxes than the "poor" in other countries because they have less money to begin with.

So, contrary to the Tax Foundation's assertion, the report doesn't "clearly debunk" the idea that the United States doesn't have a very progressive tax structure. But it does debunk another idea: that taxing the rich isn't an effective source of revenue because there aren't enough of them. Clearly, the rich are an extraordinarily fruitful source of government revenue.

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