Death and Taxes (But Mostly Taxes)

The fog of war is alive and well in Washington, D.C., as Republicans and Democrats battle endlessly over budget deficits, taxes and the economy. Below, some pieces of information worth remembering when conservatives whine that taxes are too high, that government is too big, and that the best remedy for the recession would be to ask even less of the wealthiest two percent of Americans.

The New York Times’ revamped “Week in Review” section ran a great piece on May 14, “Rich and Sort of Rich,” which debates the usefulness of lumping people who make $250,000 per year together with millionaires and billionaires. While I can’t manage much sympathy for those who feel they just can’t live on $250k, no matter what high-tax state they live in, Times writer Andrew Ross Sorkin does make two important points:

• “The truly rich — the ‘millionaires and billionaires’ — often pay much less in taxes. The wealthiest 400 Americans in the country paid, on average, a rate of only 16.6 percent, according to the latest report from the I.R.S. that examined returns from 2007. That is because much of the income of the country’s wealthiest people comes from investments, which is taxed at the long-term capital gains rate of just 15 percent.”

• A “study on economic equality showed that the rich have gotten richer — income for the top 1 percent rose by $261,930, or 30 percent, from 2002 to 2008 — while the bottom 90 percent saw their incomes drop by $1,170, or 4 percent, on an inflation adjusted basis.”

• The highest tax bracket today is 35% and starts at $379,150. The key thing to remember — something that I didn’t understand until recently — is that these are marginal tax rates. A billionaire’s entire income is not taxed at 35%, only the portion of his or her income that exceeds $379,150. Every dollar below that is taxed in the (lower) bracket it falls into. Bill Gates pays the same taxes on his first $20,000 as I do. Sorkin writes that “for most of the 1950s, ’60s and ’70s the highest rate was about 70 percent. Even under President Ronald Reagan in 1986, the highest rate was 50 percent.”

A blog post on The Atlantic Monthly by Derek Thompson also offers a reality-check on the statement, frequently quoted by Grover Norquist-type conservatives, that “half of American tax payers owe no federal income tax.” Thompson concedes that this is indeed true — about 15 million low-income Americans either pay no net taxes or receive more in tax credits than they pay — but lists some crucial caveats:

• It’s not all income taxes: “The majority of households who pay no income tax still pay net taxes to the IRS. Federal income taxes account for about 40 percent of total government receipts. Most of the rest comes from payroll taxes, which workers of all income levels do pay. Since every dollar up to $106,800 is subject to taxes, a typical middle class family pays payroll taxes on all its income while a millionaire employee pays payroll taxes on only a tenth of his income.” Not to mention the state and local taxes that aren’t included in the “no federal income tax” statement.

• The richest 20 percent of the country pays more than half of income taxes for two simple reasons: America’s wealthiest 20 percent earns half the nation’s income and their income is taxed at a higher rate.

• The wealthiest quintile’s share of federal taxes has grown more rapidly than their share of income. This suggests that the rich are facing steeper taxes. Not so. Effective tax rates at the top have fallen in every decade since 1970. But since effective tax rates also fell for every other quintile, the share of taxes paid by the rich has increased.

The Wall Street Journal’s “High-Earning Households Pay Growing Share of Taxes” (5/3/11) was on the site’s Most Popular list for over a week. However, though the WSJ readers e-mailing the piece to their friends may have focused more on the supposed unfairness of taxing the rich, I came away with some different conclusions. Even a conservative paper can’t hide the facts, most of which echo the findings of the more liberal publications mentioned above.

• “For their part, Democrats note that the incomes of higher earners have been growing far more rapidly, so it’s only natural that they would pay a higher share of tax. As for those Americans who pay no federal income tax, most of them still pay Social Security and Medicare payroll taxes that can take a significant share of their income, Democrats said.”

• “The growth in higher earners’ tax share has been due to several factors, experts say. Their incomes have been growing more rapidly than others, resulting in generally higher tax collections, even as rates dropped for virtually all earners during the administration of President George W. Bush.”

• “In the U.S., the average tax rate for higher earners has fluctuated, but generally has declined for the top 10% from 29.6% in 1979, to 26.7% in 2007, according to the CBO, even as incomes for that group were rising. Average rates for the very wealthy are often lower than that because of low tax rates on investment income.“

The lower taxation of investment income is something that numerous columnists have brought up. When Republicans complain that the highest tax bracket is a “confiscatory” 35%, they decline to mention that effective tax rate for the wealthy is lowered by the 15% rate on capital gains. Newsweek’s Gary Rivlin points out that “It’s easy for Mark Zuckerberg to say he’s ‘cool’ with raising income-tax rates. Because it won’t affect him.” Zuckerberg, like many billionaires, doesn’t care about that 35%. “Most of his wealth is tied up in stock,” Rivlin writes, and no one is seriously talking about raising the capital gains tax.

“When Warren Buffett talks about paying a lower tax rate than his secretary, that’s because she sees most of her pay through a paycheck, while the bulk of his compensation comes in the form of capital gains and dividends. In 2006, for instance, Buffett paid 17.7 percent in taxes on the $46 million he booked that year, while his secretary lost 30 percent of her $60,000 salary to the government.”

Rivlin quotes author and tax columnist David Cay Johnston as saying, “America has two tax systems. Separate and unequal.”

A longer but certainly worthwhile piece in the New York Review of Books looks at the partisan fight over deficits and taxes. Michael Tomasky lays out the problem as well as some simple but politically untenable solutions. He notes that, in 2008, the left-leaning Center on Budget and Policy Priorities “released a report finding that keeping George W. Bush’s tax cuts intact through 2018 would cost $4.4 trillion.” In April, the CBPP estimated that the Republican budget as designed by Paul Ryan would cut not the promised $5.8 trillion but actually around $4.3 billion, given that some of its savings came from accounting tricks and already-planned cuts in defense spending for Iraq and Afghanistan. Tomasky offers some perspective:

Put the numbers side by side. The Bush tax cuts, if maintained, will cost $4.4 trillion. Ryan proposes to reduce spending by $4.3 trillion over a similar period. “In a way, all of this debate, all of this ‘bravery,’ is largely about paying for the Bush tax cuts,” says the economist Lawrence Mishel of the liberal Economic Policy Institute.

The New York Times columnist David Leonhardt wrote in April that if the President and Congress were somehow to let the Bush tax cuts expire for all taxpayers at the end of 2012 (which would happen if they simply did nothing), 75 percent of the deficit problem would be addressed over the next five years.

Like others, Tomasky has little good to say about the low tax rate on capital gains and the reduction in the estate tax. “Just before this year’s tax deadline,” he writes, “The Washington Post reported that the richest four hundred Americans went from paying an effective rate of 26 percent in 1992 to 17 in 2007.”

Seventeen percent? And the GOP has the audacity to whine that these people are overtaxed, that the government is stifling investment and job creation? The claim is absurd. It is laughable. There is an overwhelming amount of (mis)information on taxes being spouted by conservative talking heads and Republican stalking horses; sometimes even when I know their views are wrong, I’m not sure how to articulate what I feel is right. That’s why it’s so important to me to uncover arguments like Tomasky’s, which are based in reality instead of in some Laffer-curve Wonderland. It’s pretty clear I’m a liberal, but unless I know why, I will be just as bad as the Republicans I disdain.