Thursday, April 11, 2002
The wealthy now pay an astonishing proportion of this country's tax take, and that proportion is growing at an alarming pace. In 1989, the top 5 percent paid 44 percent of federal taxes. Today, they pay 55 percent. Al Gore's favorite "top one percent" now pay one third of all taxes, while accounting for only 19 percent of national taxable income. Bush's tax cut - which will, in my mind, be remembered as second only to the war against terror as his greatest legacy - only arrests the pace at which this skewed and democratically dangerous imbalance accelerates. Yes, I know it partly reflects growing income inequality. But please don't describe our current system as regressive. It's the opposite. It's downright punitive of success.
The top marginal tax rate has gone from 31% to 38.6% during the time period Sullivan cites. I don't know the point at which a tax rate becomes "punitive," but I wouldn't normally associate a "you keep more than 3/5" rate to be one that punishes success. This is a far cry from the 90%-plus rates in Britain back in the 1970s, and I believe it is a far cry from the rates charged on much lower incomes in most other Western nations.
More important, Sullivan instinctively chalks this increase up primarily to unfairly progressive taxation rules, asserting that it only "partly" reflects growing income inequality. Had he clicked on the link to the Taxpayer Foundation provided in the article he cited, he would have found a table that listed sufficient data to test this assertion.
Top 1% earned 19.5% of all income and paid 36.2% of all income taxes
Top 5% earned 34% of all income and paid 55.5% of all income taxes
Top 1% earned 14.2% of all income and paid 25.2% of all income taxes
Top 5% earned 27.8% of all income and paid 43.9% of all income taxes
If you divide the % of tax paid by the % of income earned for a given category, you find that in 1989 the top 1% had a tax-to-income ratio of 1.77, which sort of means that they paid 77% more tax than their "fair share" under a non-progressive, single-rate tax system. In 1999, this ratio had only risen to 1.86 -- hardly a huge, undemocratic increase. Rather, the vast majority of the increase in tax share paid by the top 1% was due to their increased share of the income pie.
More important, the top 1% skews the results for the top 5% that Sullivan cites. If you take the top 1% out of the top 5%, so that you look only at the "next 4%," you find:
1999: earned 14.5% of all income; paid 19.3% of all taxes; ratio = 1.33
1989: earned 13.6% of all income; paid 18.7% of all taxes; ratio = 1.38
This means that between 1989 and 1999, the "next 4%" of Americans saw their tax share rise at a lower rate than their income share did! This is also true for the top 10% once you remove the top 1%. It's similarly true for the top 25%, etc.
Put differently, forget all the talk about the top 5% paying more taxes these days. All of the action is among the top 1%, and the "next 4%" are added into these news stories so that the writer can decry the rising burden on people earning $125K (the approximate cutoff for the top 5%). It generates less sympathy to talk about the rising burden on those earning in excess of $300K (the approximate cutoff for the top 5%).
And, based on this analysis, I would be keen to see the top 1% disaggregated into, say, quartiles. I have a funny feeling that the vast majority of the rising burden falls on the top 0.25%, whose earnings likely exceed $1M and whose incomes have risen dramatically over the last ten years, while the remaining 0.75% of the top 1% have had stable tax-to-income ratioes, or even lower relative tax shares as did the "next 4%."
One other thing. This table notes the average tax rate paid by each category of taxpayer, in 1989 and in 1999. This is the rate that taxpayers actually paid on their income, rather than the top marginal rate that they presumably paid on their last dollar). The top 1% paid an average tax rate of 27.1% in 1999. Yes, this is higher than the 23.3% average tax rate in 1989, but punitive? I scoff. Hah!