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Is it Really So Tough to Be Rich? The New, Brazen, and Completely Dishonest Attack on Progressive Taxation


Monday, Apr. 23, 2007

Is the key problem facing our country that the rich are overburdened with taxes, while the rest of us are getting a free ride? To listen to some recent commentary, one might think so. The basis for these arguments, though, is profoundly dishonest. The system that we have is, if anything, doing too little to reduce the incredible imbalance in income distribution in this country.

Unfortunately, because tax issues are all about numbers, it is far too easy to introduce confusion into the debate. And conversely, it takes a bit of effort to unsnarl the arguments. But when the facts are laid bare, the brazenness of this new attack on fundamental American notions of fairness is simply stunning.

The Attack on Progressive Taxation

One of the central principles of modern taxation is that the richer you get, the more of society's bills you should pay. The ability-to-pay principle says, in essence, not only that a person making $200,000 a year should pay more in taxes than someone who earns $20,000 a year, but that they should pay more than ten times as much - perhaps significantly more.

That's because the person with the lower income is scraping by, while the higher-income person has a greater ability to pay taxes with less pain. That is, they can pay without also sacrificing fundamental necessities like health care; the extra money comes out of their discretionary income, not from the necessities. It is for this reason that taxation is progressive - that is, those who earn more are taxed a greater percentage of their income.

This basic idea is so central to modern American governance that no serious politician attacks it directly. We can have lively debates over whether certain types of taxes are good or bad, and we can disagree about whether certain tax laws have made the tax code more or less progressive, in the sense of making those who are richer pay a higher or lower percentage of their incomes in taxes, but everyone has seemingly signed onto the notion that progressive taxation - as opposed to, say, a proportional tax that charged everyone ten percent of their income - is the right way to collect revenues for public purposes. Or so I thought.

Lately, a small but influential set of voices has begun a campaign to undermine political support for progressive taxation. Their arguments, moreover, are stated in fundamentally dishonest terms, couched in rhetoric that seems merely to disagree about the appropriate degree of progressivity (how different the percentages the rich and poor pay should be), but that - if taken seriously - would mean an end to progressive taxation itself (forcing the poor to pay the same - or even higher - percentages as the rich).

This attack on the social compact regarding who should pay taxes is being led largely from the editorial pages of the Wall Street Journal, but various other political actors, such as the Republican Staff of Congress's Joint Economic Committee, have joined the chorus. Most recently, the Journal carried an opinion piece by Ari Fleischer, the former press secretary to the current President Bush. Fleischer argues that the income tax has become so skewed against the rich that it threatens the very democracy in which we live.

It is tempting, but far too easy, to focus on Fleischer's complete lack of expertise to weigh in on this subject. Whatever skills he may have exhibited in his years as White House press secretary, after all, they notably did not include any that might be relevant to tax policy. It is precisely Fleischer's lack of qualification to make these arguments, though, that makes it so important to rebut them. The campaign against progressivity has reached the point where it is being turned over to crass political operatives, whose job is evidently to create a big new lie.

What is this lie? Next to a graph labeled "Soaking the Rich," Fleischer argues: "Our tax system comes up short in a lot of areas. It doesn't foster economic growth. It isn't very simple. And it certainly isn't fair. The one place where it does excel is at redistributing income."

How do we know this? Because the richest 1% of all taxpayers paid 37% of all federal personal income taxes in 2004; the richest 10% paid 71% of those taxes; and the "most successful" 40% paid 99%. "Think about it. Ten percent pay seven out of every 10 dollars and their share of the burden is rising," warns Fleischer.

This argument, however, is fundamentally dishonest in at least three ways.

Should a Rich Man and his Valet Pay the Same Amount in Taxes?

Fleischer insinuates that we're doing a great job of redistributing income because, for example, ten percent of the population paid 71% of all federal personal income taxes in 2004. That statistic, however, tells us absolutely nothing about redistribution, nor does it tell us whether the tax code is even mildly progressive in the first place.

Progressivity is not merely a political buzzword. In tax parlance, as indicated above, it has a very specific meaning. A tax is progressive if the percent of a person's income paid in taxes rises with income; it's progressive in the sense that the percentage paid become progressively larger. Similarly, a tax is regressive if the percentage paid becomes smaller as income increases, and it is proportional if the percentage is constant for all incomes.

Thus, suppose a person pays $1,000 in taxes in a year in which they earn $10,000 in income, and another person pays $30,000 in a year in which they earn $300,000 in income. Both have paid 10% of their income in taxes, but this is not a progressive tax system; it is, as noted above, a proportional tax.

By Fleischer's own logic, though, in our hypothetical two-person society, with one "have" and one "have not," this single-rate system would be terrible. If those were the only two people in the country, in fact, the government would collect $31,000 in taxes, almost 97% percent of it from the higher earner. Fleischer could say: "Half the people in the country pay virtually all of the taxes. How unfair!"

When taxes that are simply proportional to income can be described as wildly unbalanced, you know that the issue is being framed dishonestly. Even mild progressivity in the tax code, moreover, would make it even easier to tell a distorted story. Returning to our hypothetical two-person society, if the average tax rate paid by the higher-income person was 15% instead of 10%, that person would pay $45,000 in taxes, or almost 98% of all taxes.

The only way to be fair according to Fleischer's definition, therefore, is by adopting what is called a "head tax," where everyone pays exactly the same tax bill each year, no matter their economic circumstances. If a gardener pays $2000 in taxes, then a law professor and a CEO must also pay $2000 and no more. Anything else will violate Fleischer's core principle.

Indeed, even clearly regressive systems that fall short of being a head tax could run afoul of Fleischer's demands. Imagine a country with three people: one earns $50,000 and pays 30% of that ($15,000) in taxes, another earns $100,000 and pays 25% of that ($25,000) in taxes, and a third earns $200,000 and pays 20% of that ($40,000) in taxes. Tax rates fall as income rises, making this a regressive tax system.

Yet out of $80,000 in total taxes paid, the richest one-third of the population pays over 50% of taxes, and two-thirds of the population pays over 81% of total taxes. By Fleischer's lights, that system is too progressive. Counting people without taking account of their incomes leads to absurd - and conveniently misleading - results.

Too Poor to Pay Taxes: The Zero Bracket

Fleischer also complains that some people pay no federal personal income taxes at all: "The income tax system is so bad … that 40% of the country's households -- more than 44 million adults -- pay no income taxes at all. Not a penny." This, of course, ignores the question of whether those 44 million adults are earning enough money to be taxable in the first place. Should they really be paying federal income taxes if the money will come out of their budget for decent food, healthcare, housing and clothes for themselves and their children?

Again, the argument that Fleischer advances makes a big deal out of an unremarkable - but essential - feature of any sensible tax code. The "zero bracket" is the income range within which taxpayers have no tax liability. Because of personal exemptions for each member of a family, as well as a standard deduction, everyone (rich, middle class, and poor) is excused from paying taxes on a basic, low initial amount of income. Taxes are paid only on the amounts earned above that subsistence income level.

The zero bracket is simply a matter of humanity. If someone is working but unable to earn above a basic minimum, then they should not pay income taxes. This principle is, in fact, an essential part of the so-called Flat Tax proposals of which the Wall Street Journal's editorialists are so fond. Even in Flat Tax proposals, which otherwise would abolish progressive tax rates and would not tax any of the income from investments that are almost exclusively owned by the wealthy, there is usually a zero bracket of roughly $30,000 for a family of four.

If the first $30,000 of income is (rightly) free of tax, though, many people will not pay any tax at all, as they earn less than that amount. That means that higher income people inevitably must pay the taxes, because the lower income people "pay no income taxes at all. Not a penny."

Even for those who earn roughly the zero bracket amount, of course, the basic logic of progressivity requires that tax rates start at low levels and rise. For someone who earns only $5000 more than the zero-bracket cutoff, the tax rate is currently 10%. It is only when a person earns significantly higher amounts that we feel that we can impose higher tax rates on their highest earnings.

If we were truly concerned that too few people were paying too much in taxes, therefore, we would have to reduce the point at which even low-income earners start paying taxes. And even then, the system could be attacked because it is not a head tax.

Which Taxes are We Talking About?

Arguments like Fleischer's typically refer to "taxes," but they are really referring only to the federal personal income tax. There are, of course, many other kinds of taxes that people pay. Fleischer argues that Social Security and Medicare taxes do not count because both systems are redistributive in their benefits. He thus rules out of consideration taxes that just happen to be imposed on the first dollar of income earned (while the Social Security tax is not imposed at all on incomes above $97,500). In short, his argument asks us to ignore a significant part of the tax system that is very non-progressive by design.

This selective logic essentially says that it is inappropriate to count these lower- and middle-class taxes at all, because they finance redistributive programs. Why, though, does that mean that the taxes do not count at all? People pay taxes and receive benefits. That is quite different from paying no taxes but receiving benefits anyway, which is what Fleischer seems to be complaining about otherwise.

Moreover, states and localities impose taxes that are notably regressive, especially sales taxes that fall heavily on poorer citizens who spend every dollar on consumption. The provisions that allow these citizens to pay no federal personal income tax thus exist in part to counterbalance the regressivity in the rest of the tax world.

What Should We Really Worry About?

The unacceptable future that Fleischer imagines is one in which democracy runs amok and the poor and middle class gang up on the rich to take their money. "If … 60% of the people in our democracy can force 40% to pay the bills, what's to stop 65% from making 35% pay it all? [W]hat's to stop 90% of people in a democracy from making 10% pay it all? Or why not let 99% of the country off the hook, as long as the remaining 1% picks up the tab?"

It is always possible, of course, to imagine a system that goes too far. But in reality, are we anywhere close to such a situation? In 2005, total income reported to the IRS rose by nine percent, but all of the gains went to the richest 10% of the population. Incomes for the remaining 90% actually declined. Every day brings news of ever-greater income inequality, with measured inequality reaching levels not seen since the Roaring Twenties and the Gilded Age.

If we have a redistributive system, therefore, it is not having any noticeable effect on the party in the penthouse. Any concern that our political system is somehow excessively responsive to the poor, and deaf to the cries of the rich is, moreover, hard to take seriously.

Fleischer allows that "[w]e have an obligation to help the neediest among us and the wealthy should pay more." Yet his arguments simply belie that sentiment, implying as they do that we should lower taxes on the rich and raise them on everyone else. Directly contrary to Fleischer's argument, the federal tax system should be more progressive than it is today, not less.

Poverty in the United States is increasing, health care is out of reach for more and more working families, and pensions are disappearing in a puff of smoke. Misleading arguments about who should pay taxes should not be allowed to distort the debate. It would simply be wrong to reduce taxes on the rich.

Neil H. Buchanan is an Associate Professor of Law at the George Washington University Law School and is currently visiting at NYU School of Law, where he teaches tax law and tax policy.

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