Time To Shift The Tax Debate
This year, as every year at tax time, we're supposed to feel sympathy for all the rich people who bear the the bulk of the U.S. tax burden. Indeed, according to Rush Limbaugh, "Only the rich pay taxes!"
Well, not really, Rush. Any person of modest means would be happy to show you her 1040 form, or her pay stub with Social Security tax withheld, or the sales tax line on her receipt from the hardware store, or maybe a property-tax bill.
In demanding even more "relief" for taxpayers at the top of the economic pyramid (and claiming, inexplicably, to make that demand on behalf of all working Americans), the Right is hacking away at one of the most important pillars of our democracy: progressive income taxes.
Here's what they dislike so much. These are actual rates paid at different income levels in 2000, as reported by the Internal Revenue Service:
7.6% on a $20,000 adjusted gross income
10% on $40,000
17% on $150,000
29% on $1,000,000 to $5,000,000
Those are progressive tax rates all right, but not as steeply progressive as they were throughout most of the income tax's 90-year history.
And the precise tax rates that apply to rich, middle income, and poor households are not nearly as important as the income that remains once we've all paid up. Look at the bar graph below. After-tax incomes of low- and middle-income Americans have increased only slightly since 1979 (mainly by virtue of longer work weeks), while households in the top-20% income group have done pretty well. But it's the richest of the rich -- the top 1% -- who have watched their incomes shoot up like a Texas gusher.
Wealth naturally flows upward through the economy, unless the government takes strong countermeasures like shifting taxes onto the rich. The towering blue bar at the right end of the graph has a clear message: A government that really wants to improve the progressivity of the tax system can find plenty of money at the top. If anything is in short supply, it's political will.
The income tax's progressivity is partly canceled out by the most regressive tax of all: Social Security. Rates levied on employees (and matched by their employers) are
6.2% on a $20,000 wage or salary
6.2% on $40,000
3.6% on $150,000
0.5% on $1,000,000
0.1% on $5,000,000
And after-tax income disparities are even worse than they appear in the graph above. Those bars don't take into account state and local taxes, which always hit low incomes the hardest. In my state of Kansas, which is typical, non-federal taxes claim 11.5% of a low-income family's budget but only 5.7% from the top-1% income group. As federal tax cuts send shock waves through state budgets, we're seeing further increases in property, excise and sales taxes -- all of them regressive.
Suppose that in 2000, we'd had all the federal tax cuts that President Bush and the Republicans want in place by 2010. In the graph, the red bars on top of the blue bars show how much those cuts would add to after-tax income. Don't strain your eyes looking for red bars that might show some tax benefits for people at the low-income end of the graph. They're shorter than a pixel.
This year, the tax cuts enacted in 2001 and 2003 will add a whopping $7.50 to the monthly paycheck of an average family in the bottom-20% group. The benefits will amount to $72 for a middle-income family and $4,940 for a top-1% family -- every month.
Mention shifting more of the tax load onto the rich, where it has been historically, and you'll hear shrieks of "Class warfare!" from the halls of Congress and the radio airwaves. But, judging from the numbers, it's not so much a war as a quagmire well into its third decade, with 60 to 80% of us in full retreat.
Any pundit will tell you that tax cuts are supposed to provide an incentive for innovation, which will create good, solid jobs. But, having been handed unprecedented economic and political power since the 1980s, this country's elites seem to have expressed their creativity mainly through self-enrichment.
It's time to try a new incentive, one that might build character and teach greater personal responsibility. Maybe if we put a mild brake on their accumulation of excess wealth, it will encourage hard work and thrift among those folks at the top (much of whose income is labeled by the IRS, with uncharacteristic directness, as "unearned").
As a first step, all of the Bush tax cuts will have to go. But that's not enough. Remember, the blue bars on this page depict a distribution of after-tax income that was badly distorted even before Bush backed his way into the Oval Office.
A smart politician would have a campaign platform that would not only repeal all of Bush's tax cuts but also raise income taxes an average of $60,000 a year on the top-1% income bracket, while giving a tax credit of $1,000 for every family in the bottom 60% -- that is, every household with an income between $0 and $53,000.
A campaign promise that would take from one person and give to 60? That's a sure winner for any politician with more interest in counting voters than in courting donors.
Unlike Bush's tax cuts, this one would add nothing to the deficit. And a $1,000 break for a single Wal-Mart employee with two kids would actually mean something, while for a top-bracket tycoon, paying $60,000 more in taxes would have less impact on his fortune than donating blood would have on his circulatory system.
Such a modest change in tax policy would hardly shake the foundations of the economic order. But simply shifting the debate about taxes away from the question "Do we want them?" to "Who's going to pay them?" would help cure the nationwide tax-phobia on which the Republicans rely for their strength in the way Popeye relies on spinach.
In this election year, promises to make taxes more progressive, push for living wages, and defend workers' right to organize would sure be more exciting than the usual, pro forma pledges from both sides to "create jobs" -- pledges that leave hanging the question of what happens to the wealth that the people in those jobs generate.
By asking that question every day between April 15 and November 2 this year, Democratic candidates could give the majority of Americans an opportunity to vote for, not just against something.
Stan Cox lives in Salina, Kansas, where he is a plant breeder and writer.