4 Myths About Taxes, Debunked

How to balance a budget? Through taxes and fees, of course: a new sales tax, property taxes, public transit charges, gas taxes, cigarette taxes, utility costs, license fees and parking meter rates. And through cutbacks: reductions in after-school tutoring programs in low-income areas, assistance for college students, library or park services, and the essential services of police protection and firefighting.

We accept this because there is no alternative. Few people want a tax increase. Few are even willing to tax the very rich, because they believe 1) that is a form of socialism; 2) the very rich already pay most of the taxes; 3) we all benefit from investment by the rich; and 4) the very rich have suffered the most in these trying times.

Here are the facts.

Myth #1: Taxing the Rich Amounts to Socialism

According to IRS figures, from 1980 to 2006 the richest 1 percent of Americans nearly tripled their after-tax percentage of our nation's total income, while the bottom 90 percent has seen their share drop over 20 percent.

They tripled their share of total national income in 25 years. After taxes. The richest 1 percent took in about 6.5 percent of America's total income in 1980. In 2006 it was about 19.5 percent.

This redistribution of wealth from the poor to the rich over the past 30 years occurred at a rate last seen just before the Great Depression.

Here's another way to look at it. Since 1980 our country's productivity has steadily risen, with total income doubling approximately every 10 years. According to Internal Revenue Service figures, total adjusted gross income (AGI) for the U.S. in 1980 was $1.6 trillion. By 1991 it was $3.5 trillion, and by 2006 $8.1 trillion. If the bottom 90 percent of America had shared in this prosperity at a level consistent with 1980 incomes, they would be making $45,000 a year instead of $35,000. Most of that shortfall was taken by the richest 1 percent of Americans.

In other words, based on a fair share of our country's productivity, each middle-income American family should be earning an extra $10,000 per year.

Myth #2: The Very Rich Already Pay Most of the Taxes

The top-earning 1 percent of Americans pay 23 percent of their incomes in federal income taxes, while the lowest-earning half of Americans pay only 3 percent. But top earners pay 5 percent of their incomes in state and local taxes (sales, property, and income taxes); low earners pay 10 percent. Top earners pay 2 percent of their incomes toward Social Security, compared to 9 percent for low earners. Top earners pay 0 percent (i.e., a negligible portion) of their incomes in federal excise taxes (e.g., tobacco, alcohol and gasoline), while low earners pay 2 percent. And top earners save another 1 percent through the Bush tax cuts, but low earners see little benefit.

So at this point total taxes (federal, state, local, payroll, excise) for top earners are 29 percent of their incomes (23 percent + 5 percent + 2 percent - 1 percent). Total taxes for low earners are 24 percent of their incomes (3 percent + 10 percent + 9 percent + 2 percent).

But there's more. Few of us would disagree with the Leadership Conference on Civil Rights that home heating and water are essential services, or at the very least necessary expenses. The U.S. Department of Housing and Urban Development and the American Gas Association concur that low-income households pay over 20 percent of their incomes for utilities, while high-income households pay less than 4 percent.

As a result, total taxes and utilities for the rich consume 33 percent of their incomes. Total taxes and utilities for the poor consume 44 percent of their incomes. The conclusion is similar to that reached by the National Bureau of Economic Research.

It may even be worse, if one considers the high-interest mortgage loans, auto loans, payday loans, refund anticipation loans and medical debt loans that primarily target low-income families.

And there's even more. A study based on unpublished IRS data estimates that taxpayers with incomes between $500,000 and $1 million a year understated their adjusted gross incomes by 21 percent overall in 2001. This compares to an 8 percent underreporting rate for taxpayers earning $50,000 to $100,000, and just 1 percent for individual tax filers.

Myth #3: We All Benefit From Investment by the Rich

It is widely believed that the vast sums acquired by the rich re-enter the economy through their investment and spending, which provide a strong stimulus for growth. According to the Center for Tax and Budget Accountability, "Marginal Propensity to Consume" (MPC) is a measurement that shows "the likelihood that a particular individual, given his or her overall income level, will choose to save or spend when they receive additional income." Low-income earners have a higher MPC, which means that they spend a greater percentage of their overall income on consumption. High-income earners, on the other hand, will save more.

Thus raising taxes on the very rich will cause them to save less money while having little effect on their consumption patterns.

Myth #4: The Very Rich Have Suffered the Most in These Trying Times

It is argued that in the past two years the very rich have lost massive amounts of their fortunes. But they've lost no more, percentage-wise, than average mid-level earners. As reported by the Associated Press in September 2009, Census Bureau figures show that the top 5 percent of households have increased their median incomes relative to other earners since 2006.

So what's the solution? It isn't socialism. But we can't tolerate much more of the greed and excessive inequality. President Obama is right to seek a progressive tax structure in which the very rich will return some of the money derived from financial strategies refined over the years to give them an advantage. We need Congress, business leaders and the media to take the responsibility to do this.

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