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Wednesday, October 31, 2007

"Truth About Taxes"

David Leonhardt lists "basic facts" about taxes "that ideology can’t change":

Plain Truth About Taxes and Cuts, by David Leonhardt, NY Times: You’re going to hear a lot about taxes over the next two years. ... There are big philosophical questions about taxes that facts alone can’t answer. ... But there are also some basic facts that ideology can’t change. If you keep these five in mind, you will have an easier time keeping up with the debate:

As a group, the rich pay a greater share of taxes than in the past. The top 1 percent of taxpayers — those with adjustable gross income of at least $267,000 in 2004 — paid more than 25 percent of all federal taxes that year, according to the Congressional Budget Office. That was up from 15 percent in 1979. People sometimes pick nits with these statistics... But don’t get bogged down in all this. The big picture is clear enough. The main reason for the trend is also clear.

The affluent are paying more of the taxes because they’re making so much more money. ...A family in that top 1 percent of earners paid a total federal tax rate — including everything from payroll taxes to income taxes to capital gains taxes — of 30 percent in 2004. That was down from 41 percent a decade before. Since the 1950s, tax rates on high-income families have generally been falling.

The top earners pay a bigger share of the government tab than in the past because their incomes have risen so sharply — even more sharply than their tax bills. ... The affluent, in short, are paying less in taxes on every dollar they earn but earning many more dollars.

Corporate taxes have dropped significantly in recent decades. ...Everyone from Mr. Rangel on the left to Fred Thompson on the right is saying that high corporate taxes are hurting American companies. But the effective corporate tax rate isn’t any higher than it has been on average over the last 25 years, and it’s far lower than it was in the 1960s and ’70s.

“A dirty little secret is that the corporate income tax used to raise a fair amount of revenue,” says Richard Clarida, a Columbia University economist and former Treasury Department official under Mr. Bush.

What’s going on here? This country really does have a high corporate tax rate, but it also has so many loopholes that companies can often avoid paying the tax. A much smarter policy, economists say, would include a lower rate with fewer loopholes. ...

The nation’s total tax bill hasn’t changed much over the years. Put it all together — less corporate tax collection and lower individual tax rates, combined with more income for the people who face the highest tax rates — and the trends mostly cancel each other out. The taxes that the federal government took in last year equaled 18.4 percent of the gross domestic product, almost exactly the average since 1980. ...

The obvious conclusion is that moderate shifts in taxes don’t dictate economic growth. Mr. Bush’s father and Bill Clinton raised taxes — and the economy grew for almost the entire decade of the 1990s. The current administration has cut taxes — and the economy has grown for almost all of this decade.

So if short-term economic growth were the only thing to worry about, you could make a good argument either for cutting taxes or for raising them.  Unfortunately, there is another problem out there.

The budget deficit is worse than either party says it is. ...White House officials are absolutely correct when they note that the current budget deficit isn’t especially large. But it will soar in coming years, as baby boomers ... move onto the Social Security and Medicare rolls

If nothing changes over the next couple of decades, the United States will build up a debt burden... There are several ways to prevent that. Taxes could be raised across the board, or they could be raised on the affluent. Or the Medicare budget — a much bigger problem than Social Security — could be held in check if the government figured out how to say no to some expensive medical procedures. Or all of the above could happen. But something has to give. No amount of clever argument can pay the bills.

Just one complaint: There is no direct attempt in this set of "truths" to debunk the supply-side myth that tax cuts have paid for themselves, a myth that will survive so long as those making the claim are not revealed as hacks pushing falsehoods. [Note: That tax increases increase revenues is implied in the last paragraph where raising taxes across the board fixes the deficit, but there's no direct challenge to this pervasive myth. Since the topic is "basic facts that ideology can’t change," and given the prominence of this myth among supply-side advocates, it seems to me the myth ought to be addressed directly.]

    Posted by on Wednesday, October 31, 2007 at 02:34 AM in Budget Deficit, Economics, Taxes | Permalink  TrackBack (0)  Comments (132)

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