The Times is still wrong on taxation

Bruce Bartlett

10/11/2005 12:05:00 AM - Bruce Bartlett

In its corporate wisdom, the New York Times recently decided to hide its most influential columnists behind a subscription wall.  Now, those who have been accustomed to reading the likes of Paul Krugman and Maureen Dowd for free on the Internet will have to pay $50 per year for the privilege.

 To make this proposition more attractive, the Times promised that it would provide a little something extra for subscribers.  Apparently, this involves publishing articles by its editorial writers that are not good enough to appear in the print edition of the paper.

The first of these deals with taxation and appeared on Oct. 4.  It was written by Times editorial board member Teresa Tritch, who writes most of its economic editorials.  She lists her qualifications as having degrees in German and journalism, as well as years writing about personal finance for Money magazine—explaining why people should shop around for the lowest price before buying soap and things of that sort.

 What really qualifies Ms. Tritch to lecture the rest of us about tax policy is an absolute conviction that our tax system is tilted too much toward the rich.  To read her diatribe, one would think that the wealthy pay no taxes at all and that the tax burden falls almost entirely on the poor and middle class.  One would also come away thinking that taxes do not affect economic growth in any way.

According to Ms. Tritch, our tax system should serve one purpose and one purpose only—to soak the rich.  Any reduction in tax rates, especially on saving and investment, has nothing to do with raising growth, but is nothing but a give-away to the ultra-wealthy.  One can see now why she was hired by the Times despite a paucity of knowledge or experience in the field of economics.

The reality is that the wealthy pay almost all of the federal income tax and there is clear and compelling evidence that our tax system—especially its misguided redistributive elements—impose a heavy cost in terms of growth that is ultimately paid by the non-wealthy in the form of lower productivity and, hence, lower wages and incomes.

Interestingly, the latest Internal Revenue Service data on distribution of the tax burden were released the same day Ms. Tritch’s tirade appeared.  They show that the top one percent of taxpayers paid 34.3 percent of all federal income taxes in 2003, although they earned just 16.8 percent of the adjusted gross income.  The top five percent of taxpayers paid more than half of all federal income taxes, the top 10 percent paid two-thirds, and the top half of taxpayers paid 96.5 percent, meaning that the bottom half paid just 3.5 percent.

Another IRS report decomposed the top one percent and found that the top ten percent of the top one percent (the top 0.1 percent) increased their share of all federal income taxes from seven percent in 1980 to 15.3 percent in 2003.  These 129,000 tax filers earned 7.6 percent of the income and paid an average tax rate of 23.6 percent.  This came to $114.6 billion—four times more than all the taxes paid by the 64 million taxpayers in the bottom 50 percent—who paid an average tax rate of 2.9 percent.

I would be curious to know just how much more Ms. Tritch thinks the wealthy ought to be paying?  Back in the good old days (from her point of view) when Jimmy Carter was president and the top statutory tax rate was 70 percent (versus 35 percent today), the top one percent of taxpayers paid only 19.7 percent of all federal income taxes.  In other words, although their marginal tax rate has fallen by 50 percent, their tax share has almost doubled.

I assume that Ms. Tritch would be happier with the British tax system, where the top income tax rate is 40 percent.  But according to British tax data, the top one percent of taxpayers there pay just 21 percent of income taxes.  The top five percent pay 40 percent and the top 10 percent pay 52 percent.  The bottom 50 percent pay 11 percent of all income taxes.  In other words, wealthy British pay higher rates—as Ms. Tritch would have here—but pay less of the overall tax burden.

According to a new report from the U.S. Government Accountability Office, we pay a very heavy price for the heavy taxation of saving, investment, corporations and estates that Ms. Tritch strongly favors.  It found that the efficiency cost of the tax system—the output that is lost over and above the tax itself—is between two percent and five percent of the gross domestic product.  In short, we lose between $240 billion and $600 billion every year just because of the way we raise taxes.