The debate rages on as we go to press with candidates taking sides on the issue of taxes. Tax cuts and who gets them are hot issues with many Americans. Few would argue with the need to collect taxes to pay for public goods such as national defense, basic research, and other items the private sector would be unwilling or unable to provide. However, exactly how much from whom is a highly charged question.
One of the most overlooked aspects of this entire can of worms is consideration of where the tax burden currently falls. It is meaningless rhetoric, for example, to discuss lowering tax rates for people who are not paying taxes anyway because of their income levels. It is also nonsensical to lament tax cuts for the rich without explaining such specifics as (1) what is meant by “rich,” (2) what is actually cut—rates or levels or deductions or any number of other possibilities, and (3) what benefits for lower-income groups are incorporated in the tax policy changes.
In 2001, the bottom 50% of earners paid a tax share of just 4.0%, down slightly over the past decade. By contrast, families in the top 20% of the income scale pay more than 80% of all income taxes while earning less than half of all the income. In 2001, the income tax share of the top 50%, which includes those individuals or couples filing jointly earning $26,000 and above, was 96% of all federal income taxes paid.
The top 25% of income earners shouldered some 83% of the tax burden in 2001, and the top 1% paid 34%. In terms of sheer dollars, it is only natural (and appropriate) that tax relief is more heavily weighted toward those paying the highest shares. In fact, it would be difficult to design any type of meaningful tax cut otherwise. In terms of income, the only group receiving a larger share of income than their share of taxes paid was the bottom 50%.
Another distinction lost in many sound bites regarding taxes is that they are driven by income, not wealth. While wealth can generate substantial income, simply having a high current income does not imply wealth. Wealth is the accumulated savings of prior income (or the assets inherited or otherwise acquired). Consider the situation of a person with a huge portfolio of stocks, real estate, or other assets. These may or may not generate current income and, thus, may or may not lead to a large tax bill. On the other hand, it’s possible to have a high income without much wealth.
The key point is that many of the most productive Americans, those in high-demand jobs offering the highest salaries, are the ones who shoulder the largest tax burden. The very wealthy, by contrast, may pay a lower effective rate depending on the assets they own. The oft-cited stories of the “rich” avoiding taxes are most often a case of confusing wealth (which is not the basis of most federal taxes) with current income (which is).
Sound bites about tax cuts for the rich can be very misleading. In fact, recent tax “cuts” are actually expected to increase the share paid by high-income earners. The US Treasury’s Office of Tax Analysis estimates that the net effect of President Bush’s tax cuts will be to shift a larger share of individual income taxes paid to higher income taxpayers. Thanks to various credits (such as the $1,000 child credit and marriage penalty relief), lower-income Americans see notable gains.
All of these numbers, of course, beg the question of whether or not tax cuts are advisable at all given present fiscal circumstances. They are almost always good politics, but not necessarily good economics. Some of us (including me) would prefer to see any tax relief directed toward investment and research and development, thus expanding long-range opportunities for all. The basic lesson here is simply that, although adequate tax receipts are certainly necessary for the well-being of all Americans, it is a far more complex issue than can be meaningfully addressed in a typical campaign slogan or media sound bite. Both sides will give you plenty of those, but real answers are far more elusive.