David Cay Johnston’s latest attack on Bush’s tax cuts is one of his weirdest. Supposedly the tax code now violates principles of “horizontal equity” (similarly situated people should pay the same rate) and “vertical equity” (people with a greater ability to pay should pay more) that were valued by the citizens of Athens, John Locke, Adam Smith, and even the Cato Institute.
Johnston uses the Bush and Cheney tax returns to illustrate the supposed problem. The Cheneys had more than twice the income of the Bushes but paid about the same in taxes. The Cheneys paid a lower tax rate than most people in their income range. Much of the difference, as Johnston acknowledges, has to do with the taxation of dividends. But a reduction in the double taxation of dividends is compatible with both horizontal and vertical equity; it just changes the definition of that equity. To make the point as simply as possible: If all the dividends were taxed at the individual level and left untaxed at the corporate level, Johnston’s “problem” would go away–yet nothing substantial would have changed.
It all depends on definitions of terms such as “income”–and “equity.” Here’s Johnston: “The Bush and Cheney returns also show the collapse of vertical equity, under which one’s tax burden rises with income and which the libertarian Cato Institute calls a ‘bedrock American principle.’” I googled “cato institute ‘bedrock american principle’” and got an article that does indeed suggest that at least one Cato policy analyst is against something he calls “vertical inequality.” But this analyst means something quite different from what Johnston means. He fairly clearly is suggesting that it is unfair to tax someone at a higher rate just because he makes more money. That’s not quite what Johnston has in mind.