Tax the rich

And feed the poor

October 15, 2005

 

MYTH: The rich are getting soaked by the US tax system, protestations by the left wing New York Times notwithstanding

The first of these deals with taxation and appeared on Oct. 4. It was written by Times editorial board member Teresa Tritch, who writes most of its economic editorials. She lists her qualifications as having degrees in German and journalism, as well as years writing about personal finance for Money magazine—explaining why people should shop around for the lowest price before buying soap and things of that sort.

What really qualifies Ms. Tritch to lecture the rest of us about tax policy is an absolute conviction that our tax system is tilted too much toward the rich.  To read her diatribe, one would think that the wealthy pay no taxes at all and that the tax burden falls almost entirely on the poor and middle class. One would also come away thinking that taxes do not affect economic growth in any way.

Interestingly, the latest Internal Revenue Service data on distribution of the tax burden were released the same day Ms. Tritch’s tirade appeared. They show that the top one percent of taxpayers paid 34.3 percent of all federal income taxes in 2003, although they earned just 16.8 percent of the adjusted gross income. The top five percent of taxpayers paid more than half of all federal income taxes, the top 10 percent paid two-thirds, and the top half of taxpayers paid 96.5 percent, meaning that the bottom half paid just 3.5 percent.

--Bruce Bartlett, “The Times is Still Wrong on Taxation,” Town Hall, 10/11/05

REALITY

How anyone on the right can question the credentials of anyone writing about economic issues while Jack Kemp still freely babbles on the economy’s problems is amazing to us. If we are going to compare the resumes of economic writers, let’s start with Kemp’s degree in physical education….

Getting back to the topic at hand, though, I am not going to dispute Bartlett’s numbers. They are correct. What is necessary in this situation, however, is to examine the numbers and to think about what they mean. While it is true that the top 1% of wage earners paid 34.3 % of all federal income, while only earning 16.8% of the adjusted gross income, it is instructive to think about the usefulness of the last dollar earned for people in the top 1%, versus the people in the bottom 50%.

The people in the top 1% had incomes of at least $295,000 per year. The people in the bottom 50% had incomes that did not exceed $30,000 per year. Keep in mind these totals are just yearly incomes—they do not include a person’s wealth. The top 1% of wage earners have more wealth than the entire lowest 95% of wage-earners. This obviously makes it easier to pay income taxes and to subsist off of your higher-taxed wages. Let’s say that you have two people—one who makes $750,000 and has great wealth and another who makes $17,500 and barely has enough in savings to cover 2 months of living expenses. If the person making $17,500 had to pay taxes at the average tax rate the top 1 % has to pay (24%), he would be left with only $13,300 of post-tax income, or a little over $1100 per month, to spend on rent, food, transportation, etc. In 2001, the average rent was $633. That leaves $467 to spend on all other of life’s necessities. Not a lot of room to save and increase one’s wealth is there? In fact this person would probably have to dip into what little wealth they have now just to cover the tax bill. Now take the person earning $750,000. After the 24% average tax rate, he still takes home $570,000. Even if this person had a $1 million mortgage, resulting in monthly payments of $5300, this person would still be left with over $500,000 of disposable income every year. That’s a lot of money to save, spend on boats, etc. From this example it is easy to see which person is more capable of paying the higher tax rate, without a great deal of suffering and sacrifice.

The other injustice, which Bartlett fails to point out, is that the Bush tax cuts have gone largely to the rich and wealthy. Instead of giving tax cuts, and therefore more money, to the very richest Americans, if one really wished to stimulate the economy with tax cuts, a better course of action would be to give tax cuts to the low- and middle-class, the sect most apt to spend money on goods and services. For example, if a multi-millionaire gets an extra $70,000 from Uncle Sam, is this going to change their spending habits? If they already earn drastically more than they spend, what will happen to the extra money? It will probably be saved--perhaps in a money-market account or in the form of stocks or bonds, but it will not be actively spent. However, for someone who is in the low- or middle-class, who is barely getting by or is saving up to buy a car, the infusion of extra cash would be huge. There is a good chance almost the entirety of that money would be spent on goods and services, most likely provided by the higher wage-earners. Under this tax-cut policy, therefore, the rich still get richer, but the low- and middle-class are made better-off, too.