The Corner

Taxes v. Income Taxes

From an overheated reader with a legitimate point nonetheless:

Jonah:

 

Saw this in Brooks’ piece that you posted part of today:

 

“…According to the most recent IRS data, the top 5% of earners bring in 37% of the income but pay 60% of the federal individual income taxes…”

 

This sort of language is killing the conservative/right/free market side.

 

Income taxes account for less than half of all federal revenues: http://www.taxpolicycenter.org/briefing-book/background/numbers/revenue.cfm

 

At the state and local level, it accounts for a little over a fifth: http://www.taxfoundation.org/publications/show/25301.html

 

What this means is that every time someone from Cato, the Tax Foundation, Heritage, etc, goes on television and starts saying things like “most Americans don’t pay taxes” they are antagonizing large numbers of Americans who don’t pay income taxes but are looking at their FICA withholding tax, property tax bill and the sales tax they pay and are saying “what the hell is this idiot talking about? I pay plenty of taxes.”

 

Republicans, being the stupid party (although I always thought Simpson – Alan, not Homer – underestimated both the Republican capacity for evil and the Democratic capacity for stupidity), grasp onto the soundbite that “most Americans don’t pay taxes” without really understanding that it makes them look out of touch, or stupid, or like liars to the large number of people who feel they are plenty overtaxed despite the fact that they pay little income tax.

 

This is largely the result of the supply-siders and their obsession with marginal income tax rates and capital gains taxes. Don’t get me wrong, I’m a supply sider in the purest sense of the term – obviously lowering tax rates spurs economic growth, and depending where one is on the Laffer curve it can increase tax revenue over time (although why we’re supposed to want to give the government more money to waste is beyond me). But by focusing so much on income and capital gains taxes, supply-siders have lost sight of the fact that there are other taxes that are also too damned high, and that tax relief that doesn’t necessarily spur economic growth but that does reduce the tax burden also has merit and is important. Especially politically when you’re dealing with families that don’t pay much in income taxes but are getting crushed by property taxes.

 

There are many ways the Republicans, conservatives, and free market advocates manage to shoot themselves in the foot repeatedly when discussing public policy. Pretending that income taxes are the only taxes around is just one of them.

I think it is true that conservatives too often ignore payroll, property and sales taxes when they talk about how the tax burden is skewed. Everyday I reply to at least a couple readers to correct them when they say that half the country pays no taxes.

But — and you knew there had to be a but — the reader is missing quite a few points.

In terms of the big picture, even conceding some of the objections above, it is hugely important that the income tax system is so skewed for all sorts of reasons. I see no reason for conservatives to stop calling attention to this fact simply because there are other facts that they should also bring to the public’s attention.

On the more wonky side of things, it’s definitely worth keeping in mind, that according to the Tax Foundation, the “bottom” 60 percent of American families get more from  government spending than they receive. No doubt it doesn’t always feel that way for many people, but the reality is that the top is carrying quite a disproportionate share of the load, no matter which taxes you look at.  An excerpt from the Tax Foundation:

The results of this analysis show that federal tax and spending policies are already very heavily tilted to the poor and middle-class, even before we consider the Obama administration’s budget proposals. Indeed, in 2010, before any of Obama’s major policy initiatives-such as health care reform, cap and trade, and tax rate increases-are enacted, the bottom 60 percent of American families will as a group receive more in government spending than they pay in taxes. The lowest-income families will be targeted for $10.44 in spending for every dollar they pay in taxe Remarkably, families in the middle-income group—who are the target of many Obama policies—already receive $1.15 for every dollar they pay in taxes.

I also think that this reader’s analysis overlooks another point. Some of the payroll taxes that the poor and lower middle class are sold not as taxes at all, but as (in)voluntary contributions to a national retirement plan. As Andrew Biggs explains quite well, the top fifth of Americans are the only quintile that actually pays more in  Social Security taxes than it will receive in benefits. The “bottom” 80% of workers get more out of the system than they pay in. The poorest 20% get nearly a third more from Social Security than they pay into it.

As for state and local government taxes, by all means throw them into the larger discussion. But I think it’s nonsense to suggest that conservatives sound stupid because they aren’t including local taxes in their discussions of federal taxation. Local Republican politicians talk about local taxes — a lot. National Republican politicians, when talking on the national stage, talk about federal taxation. I’m always willing to entertain claims that voters are stupid, but I think this doesn’t give them nearly the credit they deserve.

There are other wonky points to make, and maybe some of my colleagues will make them, but I think there’s at least one broader point worth throwing out there. I think the political salience of talking about the lopsidedness of income tax participation stems from the fact that the middle class feels like success is penalized in America. You finally make it into the top forty percent and you all of a sudden discover that you’re role in life is to be a revenue source. The more financially successful you become, the more you feel like this is the case (I think this is particularly true for small business owners). Yes, there are other taxes in the mix (many of them are progressive, too), but  the lopsidedness of the income tax system symbolizes the larger trend. I don’t think it makes conservatives sound “out of touch” to focus on this illustration of the larger problem, because anybody who’s receptive to the anti-tax message gets what conservatives are talking about.

Oh, and just for the record:  I’m personally pretty skeptical that all that many low-income people feel that they are making a serious contribution to the treasury because of the sales taxes they pay at the local level. And, if they do, they’re the ones out of touch.

Update: From a reader, speaking for more than a few others:

Jonah:

 

Perhaps your irate e-mailer is liberal who assumes most non-liberal Americans are too stupid to understand what is meant by “paying taxes,” especially when that term comes up around April 15th.  And just to be clear, there are millions of Americans who don’t pay income tax, FICA, sales tax or property tax because they don’t work, have tax credits/deductions that offset income tax liability, don’t own real estate and/or live on public assistance.  Certainly, your e-mailer would agree that folks who use taxpayer funds to pay for the items they purchase, including sales tax, don’t deserve credit for paying taxes.

Update II:

Two points: (1) income taxes are the largest payment that individuals make to the federal government, sales taxes and property taxes fund local governments.  If someone pays no income tax but receives federal government benefit of any sort, the person is a free rider.  (2) The “rich” tend to get soaked on property taxes too.  In the great State of Texas, property taxes are a percentage of the property’s assessed value as determined by the local appraisal district.  The lower income quintiles consist of both people who own less “valuable” houses and, to a much larger degree, are RENTERS.

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