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Thursday, May 26, 2011

Where taxes are always too high

Another day, another deeply misleading screed on taxes by a Wall Street Journal editorialist - in this case, Stephen Moore. Democrats, he warns, are proposing tax increases that will bring us "back to the taxes that prevailed under Jimmy Carter, when the highest tax rate was 70%."  By adding together every tax increase that any Democrat is currently proposing, along with every increase implemented under Bush Sr. and Bill Clinton, he gets to an ill-defined "tax rate" of 62%.  That's hardly 70%, (or the 91% top marginal income tax rate that prevailed under Eisenhower), but what's an extra 8% among scare tacticians?   

Moore would have us believe that federal taxes have been climbing relentlessly since the halcyon days of Reagan's second term, when the top marginal income tax rate was, he says, 28% (it was actually 33% in a bracket below the top bracket).  Never mind that federal tax revenue as a percent of GDP is currently lower than it was at any point in the Reagan years, and is in fact at its lowest point since the early 1950s. To paint this picture, Moore needs almost one distortion per paragraph. A sampling:

If the Democrats' millionaire surtax were to happen—and were added to other tax increases already enacted last year and other leading tax hike ideas on the table this year—this could leave the U.S. with a combined federal and state top tax rate on earnings of 62%. That's more than double the highest federal marginal rate of 28% when President Reagan left office in 1989. Welcome back to the 1970s.
Here, Moore compares the combined Federal and state rates for the imagined Democratic tax Nirvana to the federal rate alone under Reagan.  Later, he eschews this sleight-of-hand, comparing his 62% marquee figure to a 33% federal-and-state estimate under Reagan.  But you've gotta grab 'em early, so why not do it disingenuously?

Next up: how 39% becomes 41.5%:
Here's the math behind that depressing calculation. Today's top federal income tax rate is 35%. Almost all Democrats in Washington want to repeal the Bush tax cuts on those who make more than $250,000 and phase out certain deductions, so the effective income tax rate would rise to about 41.5%.
It's true that any proposal that has a ghost of a chance of shaping current bipartisan tax negotiations bids to "phase out [or reduce] certain deductions," i.e. vastly reduce "tax expenditures," or targeted tax breaks ranging from the mortgage  interest deduction to the sugar subsidy. The corollary, though, is to lower marginal tax rates; the premise of the The Bowles-Simpson plan, the Bipartisan Policy Center plan and most other plans out there is that if enough tax expenditures are eliminated or reduced, additional revenue can be raised while still lowering rates. The president's deficit reduction plan outline "supports efforts to build on the Fiscal Commission’s goal of reducing tax expenditures so that there is enough savings to both lower rates and lower the deficit" -- though it is admittedly vague about how such a goal would interact with phasing out the Bush tax cuts for the wealthiest 2%.  The Senate Gang of Six (currently five, with Coburn dropped out) is negotiating with Bowles-Simpson as a baseline -- and the impediment to a deal that would raise revenue while lowering marginal rates is not the Democrats, but the vast majority of Republicans in Congress who refuse to raise revenue at all.

It's true that the House Progressive Budget relies more exclusively on tax rate hikes and caps the total value of individuals' deductions.  But that plan has zero chance of shaping policy at this point and does not represent the effective party position.

Next, Moore blithely tacks the employer's as well as the employee's share of the Medicare payroll tax added in 1993 to individuals' "top tax" rates, on the assumption that the whole of the employer's share will be passed to the employee.  Why not then add both halves of the FICA tax to all individual rates, in Reagan's time as well as in the coming Democratic dystopia?

Moore gets his single largest jump toward 62% by imagining a "topless" hike in FICA taxes:

But that's not all. Several weeks ago, Mr. Obama raised the possibility of eliminating the income ceiling on the Social Security tax, now capped at $106,800 of earnings a year. (Never mind that the program was designed to operate as an insurance system, with each individual's payment tied to the benefits paid out at retirement.) Subjecting all wage and salary income to Social Security taxes would add roughly 10.1 percentage points to the top tax rate. This takes the grand total tax rate on each additional dollar earned in America to about 58%.
Here again, Moore is beating up on a maximalist imagined Democratic position. Both Bowles-Simpson and the BPC plans propose raising the FICA cap to a level at which it would capture the statutorily-set target of subjecting 90% of Americans' earned income to the tax -- which means raising the cap to the range of $180,000--190,000 of earnings per year.  At the far left goalpost,  the House Progressive Budget proposes to "raise the taxable maximum on the employee side to 90% of earnings and eliminate the taxable maximum on the employer side."  That proposal, again, has zero chance of becoming law. And no one is seriously  proposing lifting the cap entirely.

Finally, Moore denies that tax cuts for the rich are an important part of the U.S.'s structural deficit:
Despite all of this, the refrain from Treasury Secretary Tim Geithner and most of the Democrats in Congress is our fiscal mess is a result of "tax cuts for the rich." When? Where? Who? The Tax Foundation recently noted that in 2009 the U.S. collected a higher share of income and payroll taxes (45%) from the richest 10% of tax filers than any other nation, including such socialist welfare states as Sweden (27%), France (28%) and Germany (31%)

Moore has a point here.  The U.S. does have a more progressive income tax than most European countries-- though its low taxes on capital gains and loophole-ridden code translate to very low overall taxes on most wealthy people. All the European countries cited have VATs, which are less progressive than income taxes, but which are used in wealthy European countries to fund a far more extensive safety net than we have in the U.S.  But more to the point, Moore's piece is about how far the U.S. has strayed from the Tax Paradise Lost of Latter-Day Reagan.  And as the Joint Economic Committee of the U.S. Congress highlighted in a 1996 report, changes to the tax code in the Reagan era made income taxes more progressive:  "The share of the income tax burden borne by the top 10 percent of taxpayers increased from 48.0 percent in 1981 to 57.2 percent in 1988. Meanwhile, the share of income taxes paid by the bottom 50 percent of taxpayers dropped from 7.5 percent in 1981 to 5.7 percent in 1988."  If we're now back down to 45%, that's because of the Bush tax cuts, which are the single greatest contributor to our current deficit.

Of course Democrats want to raise taxes. And of course they want to reverse the reduction in tax code progressivity effected by the Bush tax cuts.  But Moore's piece exaggerates the difference between anything a strong Democratic majority would implement and the unsustainably low rates (why do you think Bush Sr. raised them?) of the late Reagan years.

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