Taxes: Here's the truth

Obama isn't the agent of change he pretended to be during the primaries. He's an old-school "tax and spend" liberal who will pursue an economic plan that involves increases in all the major income and investment tax rates, while spending billions on new social programs and regulatory schemes. Now that the general election is well under way, he and Joe Biden have taken on the populist mantra that is popular in front of liberal audiences -- couching these new taxes in typical "soak the rich" class warfare politics, promising to raise the taxes of "those who can afford it most" to help those "who need it most". If this sounds a lot like Marx -- "from each according to his ability, to each according to his needs" you'd be right. That's why Obama's ecomomic platform is a classic, socialist income redistribution scheme. Not long ago, Stephen Moore of the Wall Street Journal took a look at income, taxes and wealth in this country. The objective was to better understand whether there is merit to the left-wing contention that the rich don't pay "enough", and whether their largesse really comes at the expense of the middle class.

Here are some of his findings:

** Who pays the most taxes? The latest data show that a big portion of the federal income tax burden is shoul­dered by a small group of the very richest Americans.=2 0The wealthiest 1 percent of the population earn 19 per­cent of the income but pay 37 percent of the income tax. The top 10 percent pay 68 percent of the tab. Meanwhile, the bottom 50 percent—those below the median income level—now earn 13 percent of the income but pay just 3 percent of the taxes. These are proportions of the income tax alone and don’t include payroll taxes for Social Security and Medicare.

** Did the Bush tax cuts favor the wealthy? In static terms, yes. But in reality -- when taking in investments and income generated by those savings, the answer is absolutely not. The latest IRS data show an increase of more than $100 billion in tax payments from the wealthy by 2005 alone. The number of tax filers who claimed taxable income of more than $1 million increased from approximately 180,000 in 2003 to over 300,000 in 2005. The total taxes paid by these millionaire households rose by about 80 percent in two years, from $132 billion to $236 billion.

** Did the Bush tax cuts put a greater burden on the middle class and poor? No. Moore examined the Treasury Department analysis of how much the rich would have paid without the Bush tax cuts and how much they actually did pay. The rich are now paying more than they would have paid, not less, after the Bush investment tax cuts. For example, the Treasury’s estimate was that the top 1 percent of earners would pay 31 percent of taxes if the Bush cuts did not go into effect; with the cuts, they actually paid 37 per­cent. Similarly, the share of the top 10 percent of earners was estimated at 63 percent without the cuts; they actually paid 68 percent.

** What has happened to tax rates over time? They've fallen -- and this has made the tax system more fair, not less so. As tax rates have fallen by half over the past quarter-century, taxes paid by the wealthy have increased. In 1980, for example, the top 5 percent of income earners paid only 37 percent of all income taxes. Today, the top 1 percent pay that proportion, and the top 5 percent pay a whopping 57 percent.

** Do the rich pay more in taxes because they earn more income? Yes. There’s no doubt that the share of total income earned by the wealthy has increased steadily over the past 25 years. Since 1980, the share of income earned by the richest 1 percent has more than doubled, from 9 percent to 19 percent. The share of the income going to the poorest income quintile has declined. Income disparities, in absolute dollars, have grown substantially.

What is significant is that for the top 5 percent and 10 percent of earners, the ratio of taxes paid compared with income earned has risen. For example, in 1980, the top 10 percent earned 32 percent of the income and paid 44 percent of the taxes—a ratio of 1.4. In 2004, this group earned more of the income (44 percent) but paid a lot more of the taxes (68 percent)—a ratio of 1.6. In other words, progressivity—in terms of share of total taxes paid—has risen.

Contrary to the Democrats' class-warfare rhetoric, gains by the rich have not come at the expense of the middle class:

Median family income in America between 1980 and 2004 grew by 17 percent. The middle class (defined as those between the 40th and the 60th percentiles of income) isn’t falling behind or “disappearing.” It is getting richer. The lower income bound for the middle class has risen by about $12,000 (after inflation) since 1967. The upper income bound for the middle class is now roughly $68,000—some $23,000 higher than in 1967. Thus, a family in the 60th percentile has 50 percent more buying power than 30 years ago.

Another canard of the left is that the low taxes on dividend income and capital gains -- a central component of the Bush tax cuts -- favors "only the wealthy".

The latest polls show that 52 percent of Americans own stock and thus benefit directly from lower capital gains and dividend taxes. Reduced tax rates on dividends also triggered a huge jump in the number of companies paying out dividends. As the National Bureau of Economic Research put it, “The surge in regular dividend payments after the 2003 reform is unprecedented in recent years.” Dividend income is up nearly 50 percent since the 2003 tax cut.

The 1997 tax reform, passed under President Clinton, reduced the capital gains tax rate from 28 percent to 20 percent, and taxable capital gains nearly doubled over the next three years. The 2003 reform brought the rate down to 15 percent, and between 2002 and 2005 there was a 154 percent increase in capital gains reported as income.

It is appealing populist rhetoric to cry "soak the rich" while talking to crowds of middle-class workers who think that somehow they will get the benefit from making the wealthy pay more. It even works in front of elite crowds who may feel guilty over their success and feel compelled to pay more in. Joe Biden this week famously called paying higher taxes "patriotic" -- as if somehow giving your hard earned money to the federal government for them to waste on pork is good for the nation.

But this analysis by Moore shows clearly that the fundamental logic of this is flawed. The wealthy already pay a disproportionate percentage of their income in taxes. Higher taxes don't result in more income to the treasury (just ask the state of Michigan) -- but rather create a quieting effect on the kinds of investment that is necessary to create jobs and fuel market growth. The "dreaded" Bush tax cuts did not fall on the backs of the middle class -- but rather have disproportionately hit the wealthy instead. And the cuts in dividend and capital gains taxes have been shown to be a tremendous engine for economic growth -- leading to more treasury dollars, not less.

It may not make good political theater, but the cry should be "tax cuts for the rich" -- because the old adage that "a rising tide lifts all boats" is true.