I was too sick to blog yesterday (big-time congestion + fever + I’m a wimp), and am still too sick to blog much today, but when I saw that the most-viewed piece on wsj.com is another one of Ari Fleischer’s muddle-headed screeds on taxes, I perked up at least a little. Ari Fleischer’s tax ideas always get my adrenaline flowing. His point this time, as always, is that:
A very small number of taxpayers — the 10% of the country that makes more than $92,400 a year — pay 72.4% of the nation’s income taxes. They’re the tip of the triangle that’s supporting virtually everyone and everything. Their burden keeps getting heavier.
Well, no. If you define “burden” as the percent of your income that goes to income taxes, it has actually gone down over the past decade for those at top 10% of the income distribution (as it has for every segment of the income distribution). The effective federal income tax rate for the top decile was 16% in 2006, the most recent year for which data is available, down from 18.3% in 1996—and 18.2% in 1980, before the dawn of the Reagan revolution. It went even lower in the Reagan years, bottoming out at 15.4% in 1985.
The percentage of all income taxes paid by those in the top 10% has gone up over the years, but this has little to do with tax rates. It’s because the percentage of income going to the top 10% has been rising, to 41.6% in 2006 from 36.5% in 1996 and 30.6% in 1980. (These numbers are all from the Congressional Budget Office.) So Fleischer real complaint appears to be with rising income inequality. Right?
There’s more truth to Fleischer’s other main point—that the addition of lots of new tax credits since the early 1980s has made it so the bottom 40% of the income distribution pays, as a group, a negative amount of income tax. But that’s partly just an artifact of how you account for this stuff, as the earned income tax credit (an idea that can be traced back to that pinko Milton Friedman) has become the country’s biggest form of welfare, displacing programs that showed up on the spending side of the government ledger rather than as negative tax revenue. Plus, the income tax isn’t the only federal tax, and the overall federal tax burden for the bottom 40% is still positive. Throw in state taxes, which are less progressive than the federal ones, and their burden is even higher. Fleischer seems to think it would be better if we replace our current income and payroll taxes with a “progressive, multitiered income tax in which everyone pays,” and maybe it would, but that seems to be an awfully big change to make just to address the perceived problem that many Americans don’t pay income taxes. Especially when you consider that the income tax was originally intended to hit only high earners. It became a mass tax for the first time during World War II.
Another thing that Fleischer doesn’t mention is that the percentage of taxes paid by the top 10% of the income distribution is sure to head downward at least temporarily because of the financial crisis. Wall Street has been the biggest single driver of the rise in the share of income going to those at the very top. Now Wall Street incomes are way down, meaning that the horrible “burden” of income taxes that Wall Streeters bear is headed down too. Problem solved!
Update: Ezra Klein is on this case in a big way today, showing that even in an economy with regressive taxation you can still get a situations where the top of the income distribution pays the majority of the taxes.