One of the benefits of George W. Bush's effort to cut tax rates is that it is stimulating a useful debate on whether the tax system should be used to redistribute income. Although many Democrats say they are opposed to redistribution, nevertheless they persist in fighting the tax cut precisely because they want to continue soaking the rich with high marginal income tax rates. Bush should not be shy about driving a wedge between this contradiction.
In a very interesting article in The Washington Post on March 11, prominent Democrats virtually fell all over themselves denouncing income redistribution. Following are a few relevant quotes from that article:
Mark Penn, former pollster for Bill Clinton: "People don't want to see policies whose primary purpose is to redistribute income. ... The more government tries to monkey with income distribution, the more people dislike it."
Wendell Primus, economist at the liberal Center on Budget and Policy Priorities: "This country isn't really in favor of redistribution."
Ruy Teixeira, senior fellow at the liberal Century Foundation: "It's an article of faith in the Democratic Party now that to talk about income redistribution is political suicide."
Sen. Evan Bayh, D-Ind., chairman of the Democratic Leadership Council: "We're for distributing opportunities, not incomes."
Yet contrary to this stated distaste for income redistribution, practically every Democratic politician and liberal think tank is adamantly opposed to Bush's proposed tax cut primarily for distributional reasons. We have heard them all say over and over again that the tax cut is tilted too much to the rich and that insufficient benefits are given to those with low incomes. Implicitly, what they are saying is that the tax system should redistribute income. Like Robin Hood, it should take from the rich and give to the poor.
The implicit redistributionism of the Democrat attack would be more readily apparent if some facts about the current tax system were better known. Two recent reports from the U.S. Treasury Department and Congress' Joint Committee on Taxation illustrate just how radically redistributionist the tax system is.
First, it is important to know that a very large percentage of Americans pay no income taxes whatsoever, owing to various features of the tax code such as the standard deduction and the Earned Income Tax Credit. According to the JCT, this year 48.6 million Americans will file tax returns, meaning that they had income, but pay no income taxes. This constitutes 34 percent of the 142 million returns that will be filed. Although the bulk of these people have incomes below $20,000, almost 10 percent of all nontaxable returns reported incomes between $30,000 and $50,000.
Second, our tax system is very steeply progressive. In the aggregate, all those with incomes below $20,000 have a negative tax liability, meaning that they receive tax refunds even though they pay no income taxes. Those with incomes between $20,000 and $30,000 pay just 1.9 percent in income taxes. From there, effective tax rates rise sharply to 23.9 percent on those with incomes over $200,000.
Looking at incomes in percentage terms, the top 10 percent of tax filers pay 20 percent of their income in federal income taxes, the top 5 percent pay 22.3 percent, and the top 1 percent pay 25.7 percent.
Third, as a consequence of these high tax rates, the share of total income taxes paid by those with upper incomes is overwhelming. The top 10 percent of tax filers pay 68.2 percent of all federal income taxes, the top 5 percent pay more than half, and the top 1 percent pay 35.9 percent of the total income-tax burden. For reference, it should be noted that the top 1 percent of tax filers reported only 17.2 percent of total income.
These figures explain why just about any tax cut benefits the rich more than the poor. The poor don't pay income taxes, while the rich pay a lot. It is impossible to give any kind of income tax cut to those not currently paying income taxes, except by having some sort of spending program for such people that is simply called a tax cut. That is what the EITC is. And it is equally impossible to have a tax-rate reduction for all taxpayers without a considerable share of the benefits going to the rich, because they pay such a large share of all income taxes.
Nevertheless, tax-cut opponents continue to push to make the tax system even more redistributionist than it already is. They want no reduction in the top tax rate and more "refunds" for those with no tax liability. Judging by their rhetoric, it would seem that there is no level of taxation on the wealthy that would be deemed as unfair.
Ironically, the Bush tax plan would actually raise the total share of federal income taxes paid by the rich. That is because more of the total tax cut goes to those with lower incomes. Therefore, after the tax cut is complete, those with upper incomes will necessarily pay more of the income-tax total than they do now. According to a Treasury Department study, those with incomes between $100,000 and $200,000 will increase their share of the income tax burden from 27.1 percent now to 28.3 percent after that tax cut. And those with incomes over $200,000 will raise their share from 42.9 percent to 45.9 percent.
Clearly, if the Bush tax cut were as tilted to the rich as its critics charge, the wealthy ought to be paying a lower share of federal income taxes after the tax cut. So it is hard to see how it will make the distribution of income worse. In any case, the Census Bureau's official income distribution figures are based on before-tax income, so changes in taxes never affect the distribution of income in the United States.
Polls show that most Americans don't think anyone ought to have to pay more than 25 percent of their income to the federal government. Bush doesn't even go this far, saying only that a third is the most that anyone should pay. This suggests that he should not only not back away from reducing the top tax rate, but he can even gain support by emphasizing the point. And he should not be shy about calling his critics what they are: redistributionists.