Tuesday, April 22, 2008

President Bush's "progressive" tax cuts

You may recall that I expressed some frustration at Neal Boortz and the NCPA attempting to revise reality to argue that the Bush tax cuts were progressive. It would seem that their economic gaslighting is a variation of a "consistent theme on the right in general and on the [Washington] Journal's editorial page in particular," according to Jonathan Chait in his exceptional The Big Con: The True Story of How Washington Got Hoodwinked and Hijacked by Crackpot Economics.

After mentioning a recent Journal editorial that had argued the tax code had grown more progressive from 1979 to 1999 and another which had stated that a study showed "the [tax] share of the lowest quintile was 1.6 percent, while the share of the highest quintile was 60.2 percent. Karl Marx, call your office," Chait responds

It is true that the very richest have been paying a higher share of the federal tax burden. But that is entirely because they have earned a larger share of the income. In 1979, the highest-earning 0.1 percent took home about 3 percent of the national income and paid about 5 percent of the taxes. In 1999, they earned about ten percent of the national income and paid about 11 percent of the taxes. What this means is that while the share of income held by the richest one thousandth tripled, their share of the tax burden only doubled. Why the discrepancy? Because the average tax rate faced by that grouped dropped from 32 to 23 percent. The reason they're paying more taxes is that their slice of the income pie has grown faster than their tax rate has fallen. The rich are earning a larger and larger share of the income base and paying a lower and lower tax rate on that base. If you have even a passing familiarity with Marx, you probably know that this is not what he had in mind.
What's more

The implication of the conservative argument, then, is that we must cut taxes for the rich as their share of the national income grows. As the economy becomes less equal, we must also make the tax code less equal to keep too large a share of the tax burden from falling on a small group, and they argue this as a matter of social justice.
Chait continues on to rebut the assertion that the tax cuts for the rich were merely a consequence of proportional cuts accross the board

Bush's tax cuts were not merely pared down tax rates in a proportional way up and down the income ladder. They have sharply cut the proportion of taxes paid by those at the top and therefore raised the proportion paid by those elsewhere. There is nothing indiscriminate about it. Let me briefly explain why. You can look at the federal tax code as a kind of layer cake. At the bottom is the payroll tax, used to finance Social Security and Medicare. This tax is a flat rate and covers wage income only up to about $100,000 a year, with all income above that level exempt. This is the most regressive tax imposed by Washington. Above the payroll tax sits the income -tax. The income tax is moderately progressive, exempting low-income workers and making high earners pay a higher rate. On top of that are taxes on capital gains and dividends. These taxes are even more concentrated at the top, since they affect only those who receive lots of income from accumulated wealth. The most progressive tax of all is the estate tax, the bulk of which is paid by a tiny handful of fabulously wealthy heirs.

Compare the layer cake to President Bush's policies. The tax at the bottom, the payroll tax, he has not touched at all. The tax above that, the income tax, he sliced by around a tenth. The taxes just above that, on capital gains and dividends, he cut in half. And the tax at the very top, the estate tax, he abolished altogether (though he has not mustered enough votes to abolish it permanently). Bush's opposition to any given tax is exactly proportional to the degree to which it affects the rich.

No comments: