Should We Make the Tax Cuts Permanent?

Yes . . . except (as I’ve argued before) those tax cuts that would benefit only, say, the top 5% of taxpayers.

Michael Rutkaus: ‘The WSJ had a recent editorial about who pays how much taxes, complete with a chart; their point was that the richer pay more than their share. Could you explain this relative to your position? Honestly confused in Winchester Virginia . . .’

☞ Sure, the rich pay more than others do. What’s more, they often use less in the way of government services. They tend not to send their kids to public school, yet they pay more than their share of the cost of the public school system. They qualify for no food stamps, yet pay the bulk of the cost. It’s called a ‘progressive income tax’ system (as you know), and it can be taken too far, as it was from World War II to 1980 when the top bracket was 90% and then 70% and then (from 1980 to 1986) 50%. But I thought the Clinton/Gore team found a good balance, setting it at 39.6%. Everyone prospered, most definitely including those at the top. (Remember, for those at the top, a good deal of income is taxed at the 0% tax-free bond rate or the 20% long-term capital gains rate.)

The chart in the January 22 Wall Street Journal editorial you read showed that those who reported Adjusted Gross Income in the top 1% of taxpayers in 1999 accounted for not 1% but 19.5% of the total income pie. If we had a tax where everyone paid exactly the same tax rate, then these folks, having earned 19.5% of the total income pie, would have contributed 19.5% of the total tax pie. But we have a progressive income tax, where people at the bottom pay nothing (except, sales tax and Social Security tax and gas tax and cigarette tax and, in the unlikely event they own homes, property tax), while people at the top pay more than their proportionate share.

This is not big news.

So, as the Journal noted, even though the top 1% reported adjusted gross income equal to only 19.5% of the total income pie, they paid 36.2% of the total income tax pie.

What’s I find telling is the tone with which the Journal revealed this, as if it were almost a scoop, if not an outrage:

‘Start with the richest of the rich, the top 1% of all earners. In 1999 they earned 19.5% of all adjusted gross income reported to the IRS. Yet they paid 36.2% of all federal income taxes that year. You read that correctly: The superrich pay in taxes nearly double their proportion of national income.’

All that was missing was an exclamation mark. Yet that’s what a progressive income tax is. And it’s been around for nearly a century. Only the editors of the Wall Street Journal would find this endlessly surprising, endlessly galling.

Some would argue that the 36.2% share of income taxes that the 1% pay is too much, some would argue it’s too little. And some would point out that where almost everyone pays 7.65% of every dollar they earn in Social Security tax – 15.3% if self-employed – those at the top see that 7.65% drop all the way down to 1.45% on most of the income that they earn – 2.9% if self-employed.

That last is fair, one should be quick to note, because Social Security benefits don’t rise beyond a certain point either. But then again, it could be noted that we’re not really using all that Social Security money for Social Security. The ‘lock box’ is being raided right and left.

You can see that there are endless arguments within arguments here. Ultimately it has to be solved by compromise and good will. There is no one ‘correct’ objective answer as to what’s fair. Personally, I think there is tremendously good reason, both logical and moral, for a progressive income tax. To me, the flat-taxers are flat-earthers. Yes, I’m all for great simplifying the tax code (whatever happened to that notion?). But what makes it complicated is not having two or three different tax brackets. That takes just a couple of sentences to explain. It’s the other million pages of the tax code that get a little dense.

Coming soon (really!): The Wisdom of Dick Davis