The federal income-tax system has long been progressive, structured so that those with higher incomes are taxed at higher rates than their fellow citizens at the other end of the scale. This structure is almost universally accepted as fair, so much so that every time the system has been altered it has usually been made more progressive. President Bush’s first tax-cut program, enacted in 2001, continued this trend (contrary to what his political opponents said at the time). His current proposal does the same. The result is a classic example of a good idea carried to a ridiculous extreme.
Progressiveness is fine, up to a point. Unfortunately, we have passed that point and reached a critical juncture in the system. Simply put, the taxpayers at the upper end of the scale now pay essentially all of the tax. The numbers are stark: the most recent IRS data show that the top 50% of earners pay 96% of the total burden, leaving only 4% to be paid by the entire remaining half of the incoming-earning population. Remarkably, the top 5% of taxpayers pay over 56% of the total. These numbers have changed significantly over the past decade. In 1986 the top 5% paid only 42% of the total. At the bottom of the scale the lowest 20% pay no income tax at all. In fact they get a refund from the system through the earned income-tax credit.
Some who find these facts inconvenient claim that the so called payroll tax, which is not progressive, is a burden on low-income earners and should be considered part of the overall tax system. This overlooks the fact that those payments are in many cases offset by the earned income credit. Furthermore, they are not taxes but rather contributions to fund Social Security which, flawed as it may be, is primarily a compulsory pension plan.
It is remarkable indeed that commentators and politicians alike continue to complain that proposed tax cuts favor the rich, and plead for more cuts for those with lower incomes when there is no longer anything there left to cut. White House spokesmen claim that the current program will all but eliminate the income tax for a family of four earning $40,000. Sixty percent of returns show adjusted gross income of that amount or less — prospectively, that means only 40% of tax payers may pay practically all the federal income tax.
It should be obvious that this structure has pernicious consequences. This country was founded on the notion that taxation requires the consent of its citizens. Consent implies approval of the majority, but if the majority is no longer impacted by the income tax it is less and less likely to be concerned with how those taxes are collected and spent. If the need for periodic tax reductions has only a minority constituency federal spending as a share of GNP is likely to follow the line of least resistance: up. Such an outcome would be welcome in some quarters, but a look at European economies where that has happened shows that it leads to stagnation, low growth, and persistently high levels of unemployment.
Lost in all the current discussion is the fact that past tax reductions have led to more tax revenue, not less, as accelerated growth has led to more wealth for everyone, including the federal government. It is rumored that the president would like to completely overhaul the tax system, possibly during a second term. Let’s hope so.