What SHOULD the Top 1% Be Taxed? February 4, 2004February 24, 2017 This all stems from January 29, wherein I tried to explain my sarcasm in a previous column . . . I was trying to show how callous and wrong-headed the Republicans are for tilting things even further in favor of the best off. It is appalling. It drives me to sarcasm. Sarcasm can backfire. My apologies! ( For the record: most American workers make nothing like $100,000 a year – $38,000 is closer to the median, if memory serves – let alone the $250 million I referred to in the same sentence.) . . . and wherein, also, I offered this exchange: John Brownie: ‘Last week, John Stossel (ABC-20/20) stated that IRS data shows that the top 1% of income earners (over $300,000 a year) pay 34% of the Federal tax and that the top 5% (over $125,000 a year) pay 53%. What do you think they should pay?’ ☞ Good question. Maybe what they were paying under Clinton? That seemed to work pretty well. From which I got a good bit of feedback. For example: Tom: ‘Not to derail your rhetoric with the cold hard facts, but your ‘median’ American $38,000 wage earner does not pay ANY federal income tax. But that same wage earner, if s/he had children, would receive a refund via the Additional Child Tax credit. Perhaps you need to select a better example of the rich not paying their ‘fair share.’ But your failure to directly address the final question is why so many of us simply disregard your position as typical liberal class warfare. If you truly believe our steeply progressive tax system is not steep enough (where the median does not have any federal tax liability but may well receive a refund anyway) why not simply lay your cards face up on the table so we can decide whether your position is to our liking? But rather than specifics, you resort to some line about how the percentage paid by the top was just about right under Clinton. Direct answer, Andrew: in your world, what percentages of total income tax paid should come from the top 1%, top 5% and top 50%. Should the bottom 50% owe any federal income tax at all? Should you have the mettle to print my message and address it directly, only print it in its entirety. Thanks again for the CICI tip.’ ☞ Where to begin. First, I wasn’t being flip, suggesting that the Clinton tax brackets seemed about right. Empirically, they seemed high enough to balance the budget, yet low enough to allow the best-off to see their after-tax income rise smartly. If the Clinton/Gore tax regime was placed a drag on capital formation, or inhibited investment, or stunted job growth, you could have fooled me. People were throwing capital at new ventures. We added 22 million jobs. So if you want to try to base policy partly on simple real-world experience, we know that things worked pretty well under Clinton/Gore’s tax regime. Under Reagan/Bush, we added $3 trillion to the National Debt, in part because the top tax bracket was dropped from 70% (way, way too high) to 28% (too low, as it turned out). Second, I never argued that those earning $38,000 are over-taxed, although I am guessing that a lot of them think they do pay taxes. Third, I do believe in a progressive income tax – and I don’t believe it’s quite as ‘steeply progressive,’ to use his phrase, as Tom thinks it is. Really rich people get most of their income from capital gains, now taxed at 15% (down from 20%), dividends, now also taxed at 15% (down from 39.6%), and tax-free interest, now taxed at 0%, as it always was. (If you impute a tax to it based on the slightly lower interest that tax-free bonds pay relative to, say, Treasuries, it still may come out to only 15% or 20%.) So take Dick Cheney. On $560,000 of his 2002 income he paid zero tax, because it came from tax-free bonds. How steeply progressive, really, are rates of 15% and 20%? In the year 2000, four hundred Americans reported income to the IRS of $86 million or more. They were, one might expect, at the peak of the steeply progressive income tax pyramid. Yet on average, they paid not 90% or 70% or 50% or 39% or 35% of their income in federal tax . . . they paid 22.3%. To their rescue rode George W. Bush, cutting the capital gains tax by 25% and the tax on dividends by 62% (and proposing to cut the estate tax by 100%). Had today’s Bush tax cuts been in effect in 2000, the aforementioned 400 zillionaires would have seen their federal income tax burden fall from 22.3%, on average, to 17.5%. To me, a 22.3% effective tax rate on income of $100 million or $200 million – let alone a 17.5% rate – is not steeply progressive. Consider that a self-employed lawn maintenance man earning $38,000 a year pays, for starters, 15.3% of his income in FICA. So even if he paid zero income tax – and he might well not – how steep is the climb from 15.3% to 17.5%? There’s more to say about all this, but let me hand the microphone back to some of you to say it: D.H.: ‘John Brownie asks how much tax the top 1% and 5% should pay. He points out that these two groups pay 34% and 53% respectively. But he didn’t show what percentage of wealth in America these two groups hold (from reports documented on The Office for Social Justice website): The top 1% paid 34% of all federal income taxes and 25% of ALL PERSONAL FEDERAL TAXES (when the payroll tax is factored in) BUT HOLDS 38% OF ALL WEALTH IN THIS COUNTRY. The top 5% paid 53% of all federal income taxes and 38% of ALL PERSONAL FEDERAL TAXES (when the payroll tax is factored in) BUT HOLDS 59% OF ALL WEALTH IN THIS COUNTRY. ‘A couple of other things John Brownie forgot to mention are that these numbers are from tax year 2001 (income in 2000), so Bush’s tax cut had barely begun to phase in at this point. (And he completely ignored the impact of the payroll tax on the average American. Almost 80% of all Americans pay more in payroll taxes than they do in income taxes.)’ Tim Nieman: ‘Let’s put 100 people in a room. One of them makes $10 million a year and the other 99 make $100,000 each. Let’s make it a flat tax of 10%. The rich guy pays $1 million; the rest combined pay $990,000. So John Stossel would lament the fact that the ‘top 1% of income earners pays more than the other 99% combined.’ Sadly, this kind of statistical manipulation works – the viewers think there’s a gross unfairness that may not exist at all! Ridiculous!’ So what percentages of the total federal tax burden should the top 1%, top 5% and bottom 50% pay? Well, start with the fact that the gap between the rich and everyone else has been steadily widening. That might suggest that we should modestly steepen the progressivity of the tax code, at least partially to compensate. Instead, by cutting the capital gains rate by 25% and the dividend rate by 62% and proposing to cut the estate tax rate by 100%, we are making our tax system less progressive, actively moving to widen the inequality gap. The census bureau tells us that in 2001, the top 5% earned 22.4% of total US income. So if the tax rate were proportional and not progressive, the answer to Tom’s question would be: 22.4%. The top 5% should be paying 22.4% in total federal tax because they are earning 22.4% of the income. But, because those in the top 5% pay so much less than 22.4% of the total payroll tax (the self employed plumber with $87,900 in income pays $13,448; the retiree with $5 million in investment income pays nothing) – the top 5% should be paying a significantly larger share of the income tax just to bring their total federal tax burden back to proportionality. But a lot of us believe in a progressive income tax. The guy making $5 million, we believe, should pay a higher percentage of his income in federal tax than the guy making $35,000. Thus, we believe, the top 5% earning 22.4% of all the income should pay more than 22.4% of the total federal tax burden. If DH’s numbers (above) are correct, the top 5% were paying 38% before Bush made the cuts. So I’ll say it again. While there is no precise magic number, I think the percentages we had under Clinton/Gore were about right. Everyone did pretty well. And we worked ourselves out of the giant Reagan/Bush budget deficits that we have now so quickly worked ourselves back into (yesterday‘s column). To see just how blood-boilingly unfair all this is, read David Cay Johnston’s new best-seller Perfectly Legal: The Covert Campaign to Rig Our Tax System to Benefit the Super Rich — and Cheat Everybody Else. Or start with an excerpt. Then remind yourself that the main focus of the Bush administration has been to tilt the playing field dramatically further in favor of the very best off.