Monday, August 06, 2012

A data point on the conservative side

The Wall Street Journal's David Wessel has a useful primer on basic U.S. tax facts today. While highlighting the top one percent's increased share of nation wealth, Wessel also notes:
From Ronald Reagan to Barack Obama, the tax code has been tweaked and the economy has had its ups and downs, and the share of federal taxes paid by the top 5% and the top 1% has risen faster than their share of income:

In the 1980s, the top 5% averaged 22.6% of income and paid 28.5% of taxes.
In the 1990s, the top 5% averaged 25.3% of income and paid 34.3% of taxes
In the 2000s, the top 5% averaged 28.4% of the income and paid 40.3% of the taxes.

If taxes for the wealthy have been radically cut (which they have), and the share of national wealth captured by the top 1% has radically grown (which it has), how can the share of federal taxes paid by the wealthy have shrunk?

The answer must be that federal taxes have been cut even more radically for the nonwealthy. That suggests that the whole nation is crazy-undertaxed and would be much better off under Clinton-era rates. Obama and the Democrats, after all, are fighting for only a sliver of the revenue lost to the Bush tax cuts -- a fifth to a quarter of it, all taken from the wealthiest. (Caveat: as Wessel also notes, Bush Jr.'s 2003 capital gains/dividends tax cut and prior cuts in these rates radically lower the taxes of all those who, like Romney, derive most of their income from these sources. That includes the 400 richest taxpayers in the nation -- and also, I imagine, various subgroups among the wealthy such as trust fund babies and execs whose compensation is mostly in stock.)

The battle lines illustrate, to me, the extent to which Republican antitax dogma distort the politics of taxation.  Just as it's easier to destroy a city than to rebuild it, it's easier to deprive the government of revenue than to restore it.  Every time the Republicans gut federal revenue, as Reagan did in his first year and Bush Jr. did in 2001 and 2003, Democrats get politically savaged for fighting to restore it, and they always must perforce limit the clawback to the politically palatable, which for Obama has meant aiming relentlessly at families and individuals over the $250k/$200k threshold.

Regarding the policy merits, it's true that for all the shift in relative tax burden toward the wealthiest, the lower four quintiles' share of national wealth -- in fact, the lower 99%'s share -- has shrunk over the past thirty-plus years.  According to Wessel, shifts in the tax burden have partially offset that flow of wealth to the top. The extent to which the tax burden can profitably be shifted more toward the wealthy, rather than (or along with) being boosted across the board, is a question that it would be nice to be able to hash out dispassionately.

One point that I recall either Jonathan Cohn or Ezra Klein or Jonathan Chait making, when comparing U.S. tax rates to European, is that European tax burdens are not only higher across the board but less progressive than ours -- and that broader-based taxation (e.g., a value-added tax) is more conducive to a more adequate social safety net. A populace with adequate health insurance, maternal leave and unemployment insurance is willing to pay more in taxes. But how can the U.S. ever get there?

The Brookings/Urban Leage Tax Policy Center analysis of Romney's tax plan ironically suggests a path. That study has provided a shock by clearly exposing the fact that Romney would raise taxes on the lower 95% to pay for further tax cuts to the wealthy.  That suggests to me that when events finally force a tax compromise, Republicans may end up advocating increased taxes on most of us -- through agreed-on reductions in popular tax reductions -- to minimize the hit to the top 5% or 1%.  That is, instead of getting a tax cut for the wealthiest, they may succeed in holding their rates steady while getting more revenue out of everyone else.

Update: at Wonkblog, Dylan Matthews plots the extent to which the U.S. tax code would have had to become more progressive to offset the increase in pretax income inequality since 1979 and shows that Japan, Britain and Italy have used their tax codes to offset pretax inequality at a greater rate than the U.S. since 1979

1 comment:

  1. The percentage paid by the wealthy has increased as more and more of the middle class fall into poverty and pay less. Overall revenue has not kept pace with population growth.