With taxes on the wealthy on the political radar, we’re going to drowning in a vast wave of double-talk and smothered by vast amounts of fuzzy math. Still, one has to try. So, a couple of notes.
One is that you have to beware of the old trick of saying “taxes”, then slipping into “income taxes”. Most Americans pay more payroll than income taxes, but the reverse is true at high incomes. So focusing only on income taxes makes it seem as if the rich pay much more of the burden than they really do.
Another, more subtle trick involves comparing percentage changes in taxes as opposed to tax changes as a percentage of income.
The starting point is that federal taxes are indeed progressive on average (although there are billionaires who pay a lower rate than their secretaries). And this in turn means that you have to be careful about the question when evaluating a change in taxes.
Suppose that it’s 1979, and individual A is a member of the working poor, paying 12 percent of his income in taxes — basically payroll tax and not much else. Meanwhile, individual B is very wealthy, and pays 40 percent of his income in taxes — as the very wealthy did on average 30 years ago.
Now suppose that 30 years of conservative governance lead to a fall of a quarter in both individuals’ average tax rates; A’s rate falls from 12 to 9, B’s from 40 to 30. Would it make sense to say that they have gained equally from tax cuts?
Clearly not. A’s after-tax income has risen from 88 to 91 percent of pretax income, a gain of 3.4 percent. B’s after-tax income has risen from 60 to 70 percent of pretax income, a gain of 16.7 percent. The distribution of after-tax income has become substantially less equal. And that’s the calculation I was doing here.
Now, right-wingers come back and say that this is what has to happen when you cut taxes. No, it doesn’t. And anyway, cutting taxes is itself a choice — and they’re a choice that then leads to demands that we cut programs for the poor and middle class to close the deficit those tax cuts created.
The point is that yes, tax policy these past 30 years has been very much tilted toward benefiting the rich.
Further to this post about whether the Obama/Boo-Fay — sorry, Obama/ Buffett with two t’s – claim is true: the Tax Policy Center has new numbers about the distribution of average tax rates by income class. Consider, in particular, the estimates of the combined income and payroll tax by income class; I’ve deleted a couple of columns to make the thing fit with more or less legible type:
Here’s how to read this: 40 percent of taxpayers with incomes between 30K and 40K pay more than 12.9 percent of their income in income and payroll taxes; meanwhile, 25 percent of people with incomes over $1M pay less than 12.6 percent of their income in these taxes. This suggests that there are a lot of very-high-income guys paying a lower tax rate than their secretaries.
And that doesn’t even take into account state and local taxes, which are quite regressive.
Taken as a whole, the US tax system is probably somewhat progressive — but not as much as you might think, especially at the upper end, and very erratically. There are a lot of rich people basically free-riding on the system.