Fact or Fiction: the presidents tax policy will shift the burden of taxes to the rich

Great Debates
1

Interesting “fact sheet” posted in the Dept of Treasury website:

http://www.ustreas.gov/press/releases/js1287.htm

<quote>The President’s tax cuts have shifted a larger share of the individual income taxes paid to higher income taxpayers. In 2004, when most of the tax cut provisions are fully in effect (e.g., lower tax rates, the $1,000 child credit, marriage penalty relief), the projected tax share for lower-income taxpayers will fall, while the tax share for higher-income taxpayers will rise.</quote>

This seems contrary to the general opinion I’ve heard. Part of me thinks it sounds a bit partisan when the cite “The President’s tax cuts” and the “projected share” in a “fact sheet?”

Any takers on this? Sounds to me that the Dept of Treasury is starting to sound more like the Dept of Health, which as of lately seems to be putting emphasis on more questionable scientific evidence to promote the current administrations policies.

2

I don’t know whether it’s true, but it probably is. But it talks about shares of taxes paid and ignores behavioural responses. This is important because (amongst other reasons) the amount of revenue being raised is not going to be the same and there are going to be substantial deficits.

To take an extreme example:

Suppose there are just two taxpayers, a high income person paying $900 and a low income person paying $100. Now cut tax revenue to $100, keep spending the same and give tax cuts of $809 and $91 respectively. The share of income tax paid by the high income person has risen, but you wouldn’t say the burden has shifted to the rich (and the fact sheet doesn’t say it will). Most of the burden has been spirited away by the magic deficit pixies.

3

I don’t doubt that the actual numbers in “fact sheet” are accurate, but it is undoubtedly the case that they are being interpreted to show the tax cuts in a positive light.

A criticism of the tax cuts is that the benefits of the tax cuts (the actual amount of money saved) mostly go to high income earners. Since the tax cuts reduced overall revenue, there is no contradiction with the Treasury Department data. High income earners are paying a larger share of a smaller pie.

4

Good point - I also noted to a friend how it did not discuss the per-capita tax burden for each group.

Another interesting thing - the page seems to be keen on advertising how the share of taxes has been gradually shifted to the rich over the 1991 - 2001 period, which was mostly the Clinton admin. It then goes on to suggest that the the “President’s” policy is responsible for this and will continue this trend, based on <i>projections</i>for 2004 (actual data won’t be in until 2007 to prove it).

It all seems a bit funny to me. I believe that the entire thing is pure spin - since when does a “fact sheet” based on projections appear on the Treasury web site? In that regard, its a bit unprecedented, and does not offer any real information (and the context of the info is does offer is a bit misleading).

Does anyone else have a problem with this? It just seems a bit “off” to me.

5

It’s kind of spinny, but I don’t think it’s necessarily false. (I’m assuming the numbers in the fact sheet are honest as far as they go and don’t actually misrepresent the subset of data that they’re talking about.) Nor does it contradict the claim that most of the tax-cut benefit goes to upper-income taxpayers. It’s a question of amount of change in tax rate vs. amount of change in actual taxes paid.

Here’s a vastly oversimplified example of how this seeming paradox works. Let’s say you and I constitute the nation’s taxpayers; I have a taxable income of $10,000 and you have one of $100,000. I’m taxed at the rate of 10% of my total income (let’s leave marginal rates and brackets out of it for now), and you’re taxed at 34%. That means I contribute $1000 to the total tax revenue while you contribute $34,000: out of the total tax revenue of $35,000, I’m paying a little under 3% (2.86%, if you care) while you’re paying a little over 97%.

Now let’s assume that we each get our tax rate cut by four percentage points. I now pay only 6% of $10,000 ($600) in taxes while you’re down to 30% of $100,000 ($30,000). My share of our combined tax revenue of $30,600 is now only 1.96%, while you’re paying over 98%.

Now, you got a tax savings of $4000 on this tax break while I saved only $400, so it’s undeniable that most of the benefit of the tax cut is going to you. But since my tax rate and my income are so much less to begin with, the identical rate cuts mean that the total revenue ends up being even more heavily weighted towards your contribution.

If we wanted to cut your rate by four percentage points and still have me end up paying the original 2.86% of the total tax revenue, my rate cut would have to go from the original 10% to 8.83%, which looks pretty measly and nets me a tax savings of only $117.

In short: the more income inequality we have and the more progressive our tax system is, then tax cuts for all tend to skew the percentage of total revenue burden ever further towards the higher-income taxpayers. Consider the outcome if we both got a seven-point rate cut: I’d be contributing a mere 1.09% of total revenue while you’d be forking out an astronomical 98.9%! What a lazy freeloading scum I am, huh?

Now, if we stop and think about it, we probably all agree that in the present economic climate, a tax burden of $27,000 on someone with an income of $100,000 doesn’t actually entail nearly ninety-nine times the financial hardship of a tax burden of $300 on someone with an income of $10,000. That’s why progressive taxation exists: because rates and shares and percentages aren’t very meaningful if considered in isolation from the absolute numbers of basic financial survival.

But for the hard-line anti-tax crowd, cherry-picking the numbers that way is pure PR gold: basically, it means that the more you cut taxes, the bigger the burden on the richest taxpayers appears to be. Makes you feel kinda sorry for them, doesn’t it? I know I feel a little guilty looking at my lame-ass 1.09% donation and thinking about your staggering along under the remaining 98.9%. Hey, I know: why don’t we raise tax rates for all a couple of percentage points instead of cutting them, so that I pay 12% of income and you pay 36%? That way I’ll be bearing a much more responsible 3.22% of the total tax burden! Don’t you feel happier? :smiley:

(Then there is the question of the “spinniness” of comparing share of total tax burden based only on federal income taxes rather than including payroll taxes, which are much more heavily weighted towards the lower-income taxpayers, but let’s not get into that now.)

6

Well, hawthorne and zimaane said basically what I said but more quickly, clearly, and concisely. Phphphphbbbbt, I mean kudos, to them.

7

It’s absolutely a spin of the data. Kimstu said it much better than I could have. I’d only like to point out, that it may be that it “seems contrary to the general opinion I’ve heard” because that opinion is also spun to some degree. Perhaps the truth (if there is such a thing in tax law) lies somewhere in the middle?

8

Maybe I’m not reading this right, but I see it as shifting the tax burden to middle classes. I’m comparing 2000 (Clinton’s last year) actual and 2004 (Bush el Segundo) with the tax cuts. I have no idea why the numbers work out the way that they do.

To compare all numbers from 2000 vs 2004:


  
    **               2000:            2004:           Net Change:   **
Top 1%              37.4%            32.3%          - 13.6%
Next 4%             19.1%            20.5%          +  7.3%
Next 6%             10.8%            12.0%          + 11.1%
Next 15%            16.7%            18.2%          +  9.0%
Next 25%            12.1%            13.4%          + 10.7%
Bottom 50%           3.9%             3.6%          -  7.7%
9

I’ve got two suggestions to make more sense out of the discussion:

  1. Looking at what’s happening with only one tax, rather than the aggregate effect of all taxes, will distort things. The individual income tax (which includes the taxes on dividends and capital gains) taxes the wealthier more than most other taxes; taxes like the payroll tax and sales taxes hit people at the bottom end of the income scale the hardest, and property taxes principally hit the middle class.

So what you’ve got to do to get an idea of whether Group A is being taxed unfairly or unreasonably, no matter how you define such terms, is to look at the whole picture, rather than at just one tax.

  1. The next thing you’ve got to do is compare a group’s share of the total tax burden to their shares of wealth and income. (How much one should be considered relative to the other depends on one’s POV, so I’ll stay out of that.) But just to make up an example, if the share of taxes paid by the richest 20% goes from 40% to 50% of the total tax burden over an interval of time, that doesn’t mean anything until you know what happened to their share of income, at the very least: was it 43% the whole time? Did it go from 35% to 48%? Until you have that info to compare to, the proportion of taxes paid is meaningless.
10

All very good points - I ran a spreadsheet with some numbers to firm up my understanding. In my example, you could offer a tax break of 5% to Ritchie Rich and a tax cut of 2% to Joe Poor, and still be able to claim that the % contribution of the rich person increased over the poor person (have to include the lower overall tax revenue collected as a whole).

So, undoubtably the analysis that you have all contributed is fair (as is the website, from a factual basis). The question is: - spin, or no spin? Does something like this belong on a “fact sheet” by a supposedly non-partisan government entity? This is what is bothering me.

Innocent analysis, or deliberately misleading? Based on the wording, I’m leaning to the latter. This kinda irritates me, as it’s the kind of discourse from this administration that seems to get the country in trouble. Yes, I am left-leaning, and more-so when our gov’t officials try to push an agenda through an official website.

11

I’m not sure that you can assume the Dept of Treasury is an unbiased organization, regardless of the administration. At the top it’s run by political appointees. And it’s not the GAO, it’s not really required to be impartial. Is it spin? I think so, and my numbers support my opinion. Is it fair? Who said politics is fair. But I also believe that the people who issued these numbers (a) believe most or all of what they say. They have a different perspective, which is why politics, debates, etc., aren’t all one sided. And (b) they’re probably smart enough to know and acknowledge, at least in private, that others can look at their same numbers and come away believing something else.

It would be interesting to get former Bush Sec. of Treasury Paul O’Neill’s take on this. I suspect his position would be that who pays the taxes is fairly irrelevant (or at least a political decision), it’s the budget deficit itself that is dangerous to the economy.

12

Is it spun? Sure. I’m not convinced, however, that there is any way to state these sorts of facts without spin. There are so many different ways to describe the impact of taxes, that anyone with an agenda can pick out a way to support themselves. They can also point at any other description and call it spun, because they consider their own point of view to be the only unspun variety.

Unless you’re just raising the top bracket, or just lowering the bottom bracket, the effect will be easily and almost unavoidably spinnable.

13

RTFirefly has identified the two major sources of spin here.

Yes…This is the issue. The point is that those near the bottom of the income ladder pay way more in payroll taxes (not to mention the state & local taxes) than they do in federal income taxes. In fact, some of them actually pay “negative” income tax in the sense that they get an earned income tax credit that effectively refunds some part of their payroll taxes.

So, the point is that you can make the tax system as a whole more regressive by cutting a progressive tax, even if you cut that tax progressively.

Let’s give you a concrete example: An earlier treasury department “spin” sheet for the first Bush tax cut showed that the rich got about a 10% cut on average in their federal income tax burden whereas the poor got about a 15% cut on average in their federal income tax burden. (These numbers are from rough recollection.) So, let’s consider Joe Moneybags who is wealthy and pays 80% of his federal taxes through the income tax and 20% through the payroll and other taxes. Then, the 10% cut in income tax burden will translate into an 8% cut in total federal tax burden. Now, let’s consider John Workingman who is fairly poor (although not poor enough to pay no income tax at all) and pays 10% of his federal taxes through the income tax and 90% through the payroll and other taxes. Then, his 15% cut in income tax burden will translate into a 1.5% cut in total federal tax burden.

Thus, we see how one can cut the income tax somewhat progressively (i.e., reducing the income tax burden on the poor by a somewhat greater percentage than on the rich) and yet still make the federal tax system as a whole less progressive. In particular, in this example, the rich man has seen his total federal tax burden reduced by 8% whereas the poor man has seen only a 1.5% reduction. (Of course, in absolute dollar amounts, the disparity in how large a tax cut they receive is much greater.)

[Of course, all of this would be more obvious if we were talking about a tax that is extremely progressive like the estate tax. If I told you I was going to cut the tax rates for the estate tax but I was going to cut the lowest bracket by a larger fraction than the highest bracket, you would know right away that the net effect would a tax system as a whole that is more regressive because no matter how I cut the estate tax, I am not cutting most people’s taxes at all…I am only cutting taxes for the wealthiest few percent.]

Yes…and if you look at what happened, for example, between like 1979 and 2000, you saw the share of the federal income tax paid by the top 1% nearly double. However, this had nothing to do with the tax system becoming more progressive and everything to do with an explosion in income inequality. In particular, their share of the income went up by a larger factor (almost 2.5).

Again, the problem here is that by looking at share of taxes paid without also looking at share of income, your numbers may not be telling you quite what you think. Remember that income tax share data depends not only on the nature of the tax code but also on the distribution of the income.

14

I wonder if you would be so kind as to eliminate a little of my ignorance. Precisely what is the difference between the income tax and the payroll tax? Income is income, is it not? So Joe Moneybags gets a lot of income that isn’t from his payroll, but his tax is based on his total income regardless of source. Similarly, John Workingman gets nearly all of his money from payroll and has little if any income from investments, etc. Each will fill in the boxes on his 1040 in different proportions, but in the end they both get down to the Adjusted Gross Income as the basis for their tax burden. What difference does it make how they pay their federal taxes? At the end of the year, the tax burden is computed the same. Or am I missing something painfully obvious to everyone else?

15

Bob, “payroll taxes” are FICA taxes, the taxes dedicated to Social Security and Medicare that come only from individual worker’s salaries and mandatory employer contributions to match the individuals’ taxed amount.

And these taxes are levied only on the first $88K or so of salary. So you can see how high-income workers, whose income over $88K is totally free of FICA tax, have an effective lower rate on this particular type of tax than low-income workers do.

16

And under that $88K cap, the payroll tax rate is flat (about 7.7% of salary for both employee and employer), as opposed to the progressive income tax where the marginal rate gets higher with each successive chunk of income.

17

Btw, joemama, what a great thread for early April! I didn’t notice that before. :slight_smile:

18

Yes…And, since FICA is a tax on wage income, it doesn’t apply to non-wage income such as dividends and capital gains…another aspect that contributes to its regressivity. (And, of course, under the new tax policies that dividends and capital gains income is now also taxed at a lower rate than other income under the federal income tax.)

19

Ok, but lets be complete. What happened to the relationship between the percentage of earned income and the percentage of tax burden to the other income groups?