A Rich Tax Debate

 

BY: The Wall Street Journal, staff editorial
TITLE: A Rich Debate
DATE: January 22, 2002
SECTION: Editorial Page
LENGTH: 798 words

The sage of Hyannisport, Senator Ted Kennedy, has received media hosannas for daring last week to propose a tax increase, especially on "the rich." And we
have to admit his timing was perfect, because his proposal arrived along with
the latest Internal Revenue Service data on who actually pays taxes.

This offers what Teddy\’s Harvard tutors would have called a teaching moment
— maybe even for the Senator, if he cared to learn, but at least for American
taxpayers who are too busy making a living to follow the details. So here are
the taxing facts, courtesy of Congress\’s Joint Economic Committee, which coaxed the data for 1999 out of the IRS.

Start with the richest of the rich, the top 1% of all earners. In 1999 they
earned 19.5% of all adjusted gross income reported to the IRS. Yet they paid
36.2% of all federal income taxes that year. You read that correctly: The
superrich pay in taxes nearly double their proportion of national income.

It gets even richer. The top 1% of tax filers are also paying a much higher
share than they used to: About 20 years ago they paid only 19% of all federal
income taxes. By 1991, thanks to the progressive impact of the Reagan tax cuts,
that share had climbed to 24.8%, and by 1999 it was above 36%. The story is the same for the merely filthy rich, the top 5% of filers, who paid 43.4% of all
taxes in 1991 but by 1999 paid 55.5%.

Who\’s Paying Taxes

In 1999 Percentiles* Total Share of AGI % of Federal Personal Income Tax
Top 1% 19.5% 36.2%
Top 5% 34.0% 55.5%
Top 10% 44.9% 66.5%
Top 25% 66.5% 83.5%
Top 50% 86.8% 96.0%
Bottom 50% 13.2% 4.0%
Source: IRS
*Ranked by adjusted gross income (AGI)

There\’s a word for this kind of tax system (see the nearby chart). It\’s
called progressive, not to mention confiscatory. What more do liberals like
Teddy want? He already has a tax system in which a mere 5% of all earners pay
more than half of all taxes, and he wants to soak them some more? This is
progressive pig heaven.

And it is getting more confiscatory all the time. From 1989 to 1999, the
share of total taxes paid by the entire top 50% was largely unchanged. But the
share paid by the top 10% of filers jumped by 19%, the share paid by the top 5%
leapt by 26%, and the share paid by the top 1% soared by more than 43%.

The Kennedy and Tom Daschle Democrats describe President Bush\’s tax cuts as a huge drain on the Treasury. But in reality they were so modest — cutting the
top income tax rate to 35% from 39.6% but not until 2006 — that they\’ll barely
make a dent in Teddy\’s soak-the-rich paradise. The Bush cuts are the minimum
needed to offset the economic forces and tax policies that have been raising
American tax burdens to record levels. The last time we looked, the federal tax
share of GDP was 20.7%, the highest since World War II.

It starts with economic growth kicking more and more taxpayers into higher
and higher tax brackets. This is known as bracket creep, and all the Bush tax
cut does is offset its inexorable grip on ever more taxpayers. Targeted tax
breaks — the personal exemption or itemized deductions — are also phased out
as income grows. This is a double-whammy: Each new dollar of income is taxed by the ruling marginal rate and taxed again by the reduction of credits, exemptions and deductions. The result is even higher marginal rates. (The Bush tax cuts don\’t eliminate these phase-outs until 2009.)

And, by the way, what does Mr. Kennedy mean by "wealthy"? According to the
1999 IRS numbers, all you had to earn to be among the top 25% of all tax filers
was a whopping $52,965. (And your reward as an income class for working that
hard was to pay 83.5% of all taxes.) To be among the top 50%, you had to earn
only $26,415. The 27% marginal tax rate kicks in for single taxpayers at only
$27,050 of income.

Many of those average Joes and Janes are tomorrow\’s "wealthy." According to
an analysis of the University of Michigan\’s Panel Study of Income Dynamics, from 1975 to 1991 more than 80% of the families who started at the lowest one-fifth of the earning population had moved to middle-class incomes (earning an average in 1991 of $22,304) or above. About 30% had increased their income to become the top one-fifth of all earners.

Kennedy liberals prefer to ignore this truth about income mobility because it
means their main political claim is false. They want voters to believe that the
only people being taxed at these rates are the Trumps and Rockefellers. But what really happens is that the higher rates end up soaking essentially middle class people whose incomes rise during their careers until they end up paying the same tax rate as the Kennedys, though they still can\’t afford to sail off Cape Cod.

Mr. Kennedy knows what he\’s doing, of course. By calling for a tax hike, he
hopes to shift the national debate to the left and make it that much harder to
cut taxes any further. Which is all the more reason for tax cutters to point out
how much the government soaks both rich and middle class alike.