Alan Reynolds

The fifth in a series of Washington Post editorials lauding the political reshuffling of income begins on the wrong foot. "The quest for ways to reduce inequality," the editors wrote, "begins with taxation. Unlike spending programs, redistribution through taxation is administratively simple."

But collecting taxes is not as easy as it sounds. And taxes don't redistribute income -- they just reduce income. Means-tested federal transfer payments account for little more than 10 percent of federal spending, and more taxes won't change that because the poor don't lobby or contribute to campaigns and rarely vote.

The editorial opines that "it would almost certainly be safe to increase taxes on the top 1 percent by 5 percentage points, restoring the level of the mid-1990s -- hardly a period of lethargic chief executives. ... To remedy stagnant middle-class living standards, more radical tax hikes would be necessary."

More radical did not mean toying with unsafe tax rates on 1 percent -- it meant casting a wider net. As Washington Post columnist Stephen Pearlstein wrote in March, "The classic redistribution scheme would be to raise taxes on the top 10 percent of income earners, roughly those with household incomes above $125,000."

The top 10 percent already pays two-thirds of the income tax, so a smart salesman begins with a foot in the door. The editorial started with that opening bid for adding 5 percentage points to the 33 and 35 percent tax brackets, yet quickly changed the subject to just the top 0.01 percent. That is one one-hundredth of one percent -- 13,359 taxpayers in 2000 who earned more than $5.3 million. The editorial, by contrast, proposes a 15 percent higher marginal tax rate on couples earning just a bit more than $200,000.

"According to Thomas Piketty of the École Normale Superieure in Paris and Emmanuel Saez of the University of California at Berkeley," says The Washington Post, "the top 0.01 percent of households has seen its tax bite fall by 6 percentage points since 2000 and by an astonishing 25 percentage points since 1980."

Whatever that astonishing diversion was all about, it was not about the individual income tax. The Congressional Budget Office (CB0) estimates that the average individual income tax rate of the top 1 percent was 22.3 percent in 1980 and 24.2 percent in 2000. The tax could hardly have fallen by 25 percentage points since 1980, when it was about 22 percent, unless we could imagine the top 0.01 percent paid twice as high a rate as the top 1 percent as a whole.


Alan Reynolds

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