Thursday, August 18, 2011

The Big Lie About Deficit Reduction and Taxing the Rich

Following up on my post about Health Insurance Companies and Executive pay, I thought I would take a look at another liberal meme related to “the rich” and the budget deficit. This takes one of three forms: the rich are tax dodgers who use loopholes and other “tricks” to get out of paying taxes, the rich do not pay their “fair share” and can afford to pay more, or the Bush tax cuts, especially for the rich, are what are causing our large deficits. I’ll tackle each of these in turn.

Refer to the chart below. It gives revenue data from the IRS for 2009 (the most current year available). I have broken the data up into three income classes: poor, middle, and rich. The “rich” are classified as making $200k and above in adjusted gross income (AGI). The poor are classified as making $25k or less and the middle making everything in between. (Click on the chart to see it full size.)

The first complaint about “the rich” is that they use accounting tricks, loopholes, and down right criminal actions to dodge paying their taxes. Actual IRS reporting of the taxes paid by people making over $200k AGI shows this to be completely false. Let’s look at two concrete proofs.

Look at the column under Income Tax labeled “As Percent of AGI”. This is the actual tax paid as a percent of AGI. Note that EVERY income bracket pays less in actual tax percent of AGI than the tax bracket they are in. But “the rich” pay far more than any other class overall. Moreover, when looking at the gap between actual percent of tax paid versus tax bracket, “the rich” are much less “tricky” in reducing their tax liability than any other income group. Clearly, “the rich” are not evading paying taxes.

Even more conclusive is the column under Taxable Returns labeled “As Percent of Returns in AGI Category”. This is the actual returns that had payable tax as a percent of all returns filed in the income bracket. EVERY “rich” income bracket has payable tax on greater than 99% of the tax returns filed. The percentages drop dramatically from there. Clearly, the rich are not using accounting tricks to avoid having any tax on their income.

So, it is a lie to say that “the rich” are avoiding paying their taxes. But are they paying their fair share of taxes? We turn to that charge next.

As noted above, “the rich” pay between 19 and 26% of their AIG in taxes – far more than any other income bracket. But what is their overall contribution? Just because they pay a “larger” share of income doesn’t mean it is a proportional share compared to the revenue burden carried by the other classes?

Look at the following columns. Under Total Returns, look at “As Percent of Total Returns”. Under Income Tax, look at “As Percent of Total Revenue”.

The first column shows what percent the tax filers are in a particular income bracket or class of the total tax filing population. “The rich” make up roughly 3% of all tax filers.

The second column shows what percent the taxes paid are of total revenue. “The rich” paid roughly 50% of all taxes (actually, just over 50%).

The standard way of putting this is “the rich” make up only 3% of the tax payers but pay over 50% of the taxes. Put another way, a very small minority of tax payers bear more than 50% of the tax burden. Is that fair? It is a very subjective question. But by any measure, it is very clear that “the rich” pay a significant “share” of taxes. Their “share” of the tax burden is enormous. In fact, their “share” constitutes “most” of the taxes paid.

Conversely, the poor make up 42% of tax payers but their “share” of the tax burden is only 1%. Is that fair? Again, it is a subjective question.

Moving on to those evil Bush tax cuts. Another claim is that the ballooning deficit is due primarily to these reductions in tax rates for middle and upper income tax payers. We will see in a moment exactly what that impact is, but let’s deal with the cuts first.

The tax cuts provided a 5% reduction for most low income earners, a 3% reduction for most middle income earners, and a 4.6% reduction for most upper income earners. In theory, these cuts were to be offset by increased economic activity and therefore, essentially, they would pay for themselves. This is classic supply side economics. There is no direct way to really measure if they did in fact pay for themselves, although general income tax revenues went up each year from 2003-2007. At best, we can probably say only that the impact, if negative at all, was only slightly so.

In general, it is at best unfair and at worst a complete lie to say that “the rich” are avoiding paying taxes, don’t pay their fair share of taxes, or benefited to the detriment of the country from the Bush tax cuts. Even still, our annual budget deficits are out of control. Surely if the rich (and to a lesser extent all other tax payers) were taxed more we would be able to bring our budget into balance, wouldn’t we? Let’s see. Please refer to the last three columns in the chart where I analyze the impact of two revenue increase scenarios on the budget deficit.

The column labeled “Eliminate Bush Tax Cuts” looks at the revenue increase if we adopted Presidents Obama’s approach during the budget debates of 2010 and eliminated the bush tax cuts for the middle and upper income brackets. What I have done is increased revenue in the “middle” class by 3% and the “rich” class by 4.6% to approximate the effect. The total reduction in the deficit brought about by this increase in revenue would be $400B. That is a pretty big number, until you realize the deficit in 2009 was $1.41T. So, the Presidents proposal would only cut the deficit by apx. 28%.

The next column labeled “All Pay ‘Fair Share’” takes an even more drastic approach, at least for the lower and upper classes.

For the lower class, I increased their tax rate another 1%. Considering the majority of “the poor” pay zero in taxes (only 25% percent of filers have any tax payable) and the most any of them pay of AGI is about 1%, I think this is only fair. After all, how can $0 be considered a “share” of anything, let alone a fair share.

For “the rich”, I doubled what they pay. That means that most people earning over $200k AGI would be paying just under HALF of every dollar they make to the government (and getting little to nothing in return for it). Is that fair? I certainly don’t think so, but, after all, they can afford it so why not.

What is the impact of this “fair” revenue collection? The total reduction in the deficit brought about by this increase in revenue would be $758B. Now we’re talking! Yet that still only reduces the deficit by a little more than half. In fact, in order to eliminate the deficit through revenues, you would have to increase tax rates on the rich by more than 3 times their current level to roughly 77% of AGI, a level that even socialist, nanny state Sweden would be ashamed of.

What is the moral of this story? Our deficit is NOT A REVENUE PROBLEM. The reason the deficit is out of control is we are spending way too much. Eliminating the Bush tax cuts won’t solve it. Heck, even imposing ridiculous tax rates on “the rich” and making “the poor” pay way more than they ever have won’t do it. Unless we significantly reduce our spending, we will never have a balanced budget in this country and each year we will get closer and closer to being the Greece of the Western Hemisphere.

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