There's been a fair amount of talk of late about tax policy in America, with
bonddad publishing a diary on a related topic which hinted at coming discussions of the tax burden in America, and kicked off a lively discussion about tax efficiency and fairness issues, among other things, while
dkmin diaried on the subject in a more explicitly progressive fashion.
It's a discussion we need to have. Why? Because low-income folks, the folks getting the least out of our federal, state and local governments and the services they increasingly refuse to provide to poor folks, are getting a proportionately bigger share of the burden of that government foisted upon their backs.
Don't believe me? Take it from
Warren Buffet. And tax progressivity is a moral issue, because it is a fairness issue. And it is a fairness issue because the wealthy profit disproportionately from the things government tends to limit itself to doing here in the US: transportation and communications infrastructure, public security, the justice system, the armed forces and damn near everything else the government does with infrastructure. And those things which government does do for poor, middle-class and rich alike, like Social Security, are funded with and explicitly regressive payroll tax.
Now, you've probably heard the GOP, and even some Democrats of late, prefer to hew to Reagan's famous "welfare queen" framing of the issue of taxing and spending. You know the line: government dishes out your hard earned money to a lazy miscreant, probably a minority, and it just ain't fair.
Problem is, it ain't true either. Fact is, that the lion's share of discretionary spending goes to corporate welfare, pork and largely middle-class-oriented entitlements like Social Security and Medicare. And let's not forget military spending, the fastest growing part of the federal budget in dollar terms (with pork growing fastest in percentage terms). All the while, those parts of the federal budget oriented to the poor are systematically reduced, beginning with the bi-partisan Welfare "Reform" bill passed a decade ago and on through the present administrations less than benign neglect of everything from the food stamp program to Head Start and all places in between.
The poor are getting less, the middle class holding their own and the rich are doing quite well thank you, via earmarks and increased spending on things disproportionately benefiting them, like defense spending, or simple things like building roads.
How do the rich get richer when lanes are added to the freeway? It makes transportation firms more efficient, which hits their bottom line. So, you and I might use the freeway twice a day to go to work and go back home in our little 1/2 ton car for the benefit of a salary which is taxed, ultimately, at over 40%. The transportation firm runs rigs over that freeway infrastructure damn near 24/7, for the benefit of its shareholders whose dividends are taxed at a rate under 20%. You and I pay proportionately double, and get far less out of the bargain. And the poor, who ride on woefully underfunded public transport? Even less.
Now let's talk about who pays taxes in America. In a recent study Picketty and Saez found that:
Over the last 40 years, the U.S. federal tax system has undergone very large changes. Perhaps the three most striking changes have been the dramatic decrease in top marginal individual income tax rates, the large relative decline in corporate income taxes, and the substantial increase in payroll tax rates financing Social Security retirement benefits and health care for the elderly. In the early 1960s, the statutory top marginal individual income tax rate was 91%. This top rate had declined to 28% by 1988. The top rate was increased significantly to 39.6% in 1993 and has been reduced again down to 35% as of 2003. From the early 1960s to the early 2000s, corporate income taxes as a fraction of Gross Domestic Product have fallen by half from around 3.5 to 4% to less than 2%... Corporate profits as a share of GDP, however, have not declined during this period, suggesting that capital owners get to earn relatively more net of taxes today than in the 1960s. The combined employee-employer payroll tax rate on labor income has increased from 6% in the early 1960s to over 15% in the 1990s and 2000s. Moreover, the payroll tax applies only up to a cap-equal to $90,000 of annual earnings in 2005-and is therefore a relatively smaller tax burden for very high income earners. The combined reduction in top individual tax rates and corporate income taxes on profits, and the increase in the payroll tax all suggest that there has been a dramatic decline in the progressivity of the federal tax system over the last 40 years. The recent dividend tax cut enacted in 2003 and the scheduled phasing out of the federal estate tax from 2002 to 2011 are two additional factors widely perceived as potentially further undermining the progressivity of the federal tax system in the future.
While there's a bit more to the picture (which the study handles in great detail), progressivity in US federal tax policy is increasingly a thing of the past. Why is this important? Because, on average, state and local tax burdens are regressive, borne disproportionately by the poor. This is particularly the case for folks living in states with high sales and excise tax rates and no income tax rate, as the former are generally quite regressive while the latter, progressive. So when the federal tax burden shifts from progressivity to neutral, the overall tax burden shifts to regressive. The poor are getting less, but they're paying more for it. Corporations and their shareholders? Exact opposite:
...the progressivity of the federal tax system has declined dramatically since the 1960s. The top 0.01% earners paid over 70% of their income in federal taxes in 1960 while they pay only about 35% of their income in 2005. Federal tax rates for the middle class have remained roughly constant overtime. This dramatic drop in progressivity is due primarily to a drop in corporate taxes and to a lesser extent estate and gift taxes which fall on capital income combined with a sharp change in the composition of top incomes away from capital income and toward labor income. Because of the existence of deductions and favored treatment for capital gains throughout the history of the federal individual tax system, the reduction in the nominal progressivity of the individual income tax rate has only marginally contributed to the decline of progressivity of the federal tax system. Our analysis has shown that since the 1960s, the large reductions in tax progressivity took place during the Republican Reagan administrations in the 1980s and during the Republican Bush administrations in the early 2000s. The only significant increase in tax progressivity since 1960 took place in the early 1990s during the Democratic first Clinton Administration. Thus, there is a very clear link between changes in tax progressivity and the party in power.
And we should keep it that way, and bear this in mind in our intra-party discussions of tax policy.
It is also striking to note that the most dramatic changes in the federal tax system progressivity almost always take place within the top 1% income earners (with relatively small changes below the top percentile). For example, many of the recent tax cut provisions that are currently hotly debated in Congress, such as the permanent reduction in tax rates for capital gains and dividends, as well as the repeal of the estate tax, affect primarily the top percentile of the distribution. This strongly suggests that, in contrast to the standard political economy model, the current tax system does not seem to be shaped by the tastes of the median voter.
In other words, tax policy tends to be made with the interests and concerns of wealthy people in mind, and not you and I and Joe Sixpack.
...pre-tax income concentration has sharply increased since the
1970s. Thus, the decline in federal tax progressivity has led to an even more
dramatic increase in post-tax income concentration: while the pre-tax share of
the top 0.1% has been multiplied by 3.5 from 1970 to 2000, the corresponding
post-tax share has been multiplied by 6.1.
In other words, the tilting of the tax burden from wealthy folks to the poor and to you and I has made them even more filthy rich than they would have been had no changes been made to the tax code since the `60's.
When we start talking about balancing the budget, I believe it is our moral duty to consider the impact of what we propose on the least of our brothers. It is incumbent upon us to consider that they deserve every bit as much value for their tax dollar as rich folks do. It's time to deliver.