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Wednesday, January 18, 2012

Should We Feel Sorry for the Wealthy?

The editors at CBS asked me to respond to Ari Fleischer's tweets about how tax burdens have changed in recent years:

Are the wealthy paying to much in taxes?: Ari Fleischer, the former White House Press Secretary for U.S. President George W. Bush , has been trying to make the case on Twitter that the wealthy are taking on more of the tax burden than ever. Here's a sample of his tweets:

@AriFleischer The share of total federal tax paid by bottom 60% dropped from 22.5% in '79 to 14.4% today. Source: CBO     
@AriFleischer   The share of total federal tax paid by middle income dropped from 21% in '79 to 16.5% in '07.
@AriFleischer The share of total federal taxes paid by top 10% rose from 40.7% in '79 to 55% in '07.          
The share of total federal taxes paid by top 1% rose from 15.4% in '79 to 28.1% in '07          

Of course, the argument is incomplete without knowing how the share of income changed over these years. He uses the CBO as a source, so I'll use the same same data to respond to his claims:

CBO finds that, between 1979 and 2007, income grew by:

  • 275 percent for the top 1 percent of households,
  • 65 percent for the next 19 percent,
  • Just under 40 percent for the next 60 percent, and
  • 18 percent for the bottom 20 percent.

The share of income going to higher-income households rose, while the share going to lower-income households fell.

  • The top fifth of the population saw a 10-percentage-point increase in their share of after-tax income.
  • Most of that growth went to the top 1 percent of the population.
  • All other groups saw their shares decline by 2 to 3 percentage points.

Let's take the top 1% first. Between 1979 and 2007 income for this group grew by 275 percent, and the share of income doubled from around 10 percent to around 20 percent of total income. However, the share of taxes for this group less than doubled. Thus, a doubling of income resulted in less than a doubling of taxes. Given that income growth outpaced tax growth, it's hard to see how we can describe this as an increase in the tax burden for the top 1%.

What about the middle of the distribution? As noted above, the share of total federal tax paid by middle income taxpayers dropped from 21 percent in 1979 to 16.5 percent in 2007. However, over the same time period the share of income for this group went from 51.1 percent to 43.5 percent. When the fact that the share of income for the middle income group has fallen is accounted for, it's no surprise that the share of taxes has fallen as well. On net, the two roughly cancel -- the fall in income and the fall in taxes are roughly proportional. Thus, the notion that the rich are paying more, and middle income families are paying less -- that income is being redistributed from the rich to the middle -- does not hold up to further scrutiny. The rich are doing better than ever, tax rates are at historic lows for this group, and their share of taxes has not risen by as much as their share of income.

What about the bottom of the income distribution? First, it's highly misleading to just look at federal taxes for this group. The federal tax burden is relatively low for this group, but when state taxes, sales taxes, and the like are factored in the burden is relatively high. For example:

Data from the Institute on Taxation and Economic Policy show that the poorest fifth of households paid a stunning 12.3 percent of their incomes in state and local taxes in 2010
When all federal, state, and local taxes are taken into account, the bottom fifth of households paid 16.3 percent of their incomes in taxes, on average, in 2010.

Mitt Romney pays 15 percent, or thereabouts (probably a bit more when state and local taxes are accounted for), while this group pays more than 15 percent in taxes even though their incomes are very low. Enough said about who faces a larger tax burden.

Ari Fleischer is trying to make you believe that taxes on the wealthy have risen, and that the increase in taxes is being used to fund tax reductions for lower income classes. However, when income gains are factored in the numbers tell a different story. This graph shows what has actually happened to the tax rates for the wealthy:

The next time Ari Fleischer or any other political operative tries to make the case that the wealthy have experienced an increase in their tax burden, keep this graph in mind.

    Posted by on Wednesday, January 18, 2012 at 11:21 AM in Economics, Income Distribution, Politics, Taxes | Permalink  Comments (91)


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