Tipsheet

Busting a Liberal Myth: Yes, 'The Rich' Are Paying Their 'Fair Share' in Taxes...And Then Some

Guy Benson
Guy Benson  |  April 28, 2017 4:25 PM

Top Trump administration officials rolled out the president's tax reform plan this week, offering more details than were previously available -- but remaining silent on others, including important answers to thorny questions on pay-fors and deficits. The overall outline calls for lower, flatter income tax rates across the board, a big cut to the US corporate tax (which is the highest in the developed world), and a significant simplification of the byzantine federal tax code. It has been hailed as pro-growth and pro-jobs by supply-side economists and fiscal conservatives, earning a strong review from the Wall Street Journal's editorial board. A few key passages:

Many voters heard Mr. Trump's make-America-great-again slogan as a promise to raise their incomes and improve economic opportunities after a long stagnation. Eight years of 2% growth since the recession ended in 2009 is the weakest recovery in the postwar era, and the result has been rising anxiety and diminished expectations for millions of Americans. Faster growth of 3% a year or more is possible, but it will take better policies, and tax reform is an indispensable lever. Mr. Trump's modernization would be a huge improvement on the current tax code that would give the economy a big lift, especially on the corporate side. The reform would sharply cut the business income rate to 15% from 35%, while simplifying the code for individuals and cutting some marginal rates. Though Mr. Trump's proposal dabbles in some politically fashionable tax redistribution, at its core it is an exercise in growth economics. The cuts would be permanent and immediate, and the rates are low enough to enhance the incentives to work and invest...One reason for [US businesses'] underinvestment-even though corporations have about $2.5 trillion parked overseas-is the uncompetitive and complex American tax system.

The 35% statutory rate is the developed world's highest, and an archipelago of credits, exclusions and deductions means the tax collects only about 11% of federal revenue, or roughly a meager 2% of GDP. Slashing the headline rate to 15% would instantly lead to a surge in capital investment. Mr. Trump would make small businesses like S corporations and other pass-throughs that now pay through the individual tax code eligible for the 15% rate. Tax parity among all companies is a useful goal, not least because owner-operated companies are an engine of hiring and growth...The economic literature conservatively suggests that about half of the corporate tax burden is carried by workers in the form of lower wages. In other words, moving to 15% is a national pay raise. Another benefit is that the Trump plan would move to a territorial tax system, where U.S. companies pay taxes on income only in countries where it is earned...On the personal side, the Trump plan would make the code more efficient by collapsing the current seven brackets down to three of 10%, 25% and 35%. The White House is still debating at which income levels these rates would apply. The plan would also double the standard deduction to $24,000, so fewer taxpayers would need to itemize.

Democrats predictably pilloried the proposal as a "giveaway" to "the rich" and "big business," their go-to talking points whenever insisting that the federal government continue to confiscate higher amounts of other people's earnings.  While other major newspapers managed more ideologically neutral headlines, the New York Times chose to emphasize the element of Trump's plan that Democrats were likeliest to seize upon and attack.  As I joked on Twitter, the Times' preferred political party couldn't have asked for more helpful front-page, large font framing -- jabbing at the new Democratic Chairman with some deserved ridicule, for good measure:


Scores of liberals immediately responded to this with some variation of, it is absolutely accurate and you stupid conservatives are allergic to facts!  I replied that my point was that while it's obviously true that many high-income earners will benefit from the proposed reforms, the plan also helps millions of non-rich people -- a reality that the tendentious Times headline ignores, in favor of landing a partisan hit.  Lower tax brackets would be reduced and rates would be slashed, the standard deduction would be doubled, and a hugely simplified system could empower many Americans to file their taxes without feeling forced to pay experts to help them navigate and comply with the Kafkaesque existing code -- to say nothing of across-the-board benefits that flow from a growing economy and turbo-charged job creation.  One liberal blogger inveighed that that discussing the very real benefits of tax cuts to small businesses, which are America's economic engine, amounts to "spin:"


A flurry of small businesses owners jumped into his timeline to correct him on this silly and naive point.  It is an empirical fact that many small businesses are currently taxed as high-income individuals, paying an income tax rate of nearly 40 percent.  The notion that reducing that burden on those business owners would not incentivize increased hiring and investment is preposterous.  Another critic of my tweet asserted that the rich "don't pay the most [in taxes] percentage wise."  I informed him that this is incorrect.  As others joined the conversation, this persistent liberal myth -- that "the rich" don't pay their "fair share" in taxes -- was dismantled by data.  Two useful charts:


These numbers, compiled from Congressional Budget Office reports over the past few years, demonstrate that: (1) The top one percent of US wage-earners make less than one-fifth of the total income in the United States, yet pay close to 40 percent of all federal income taxes, and more than one-quarter of all federal taxes. (2) The top 20 percent of US wage-earners ("the rich," broadly defined), make just over half of total US income, yet pay close to 90 percent of all federal income taxes, and approximately 70 percent of the total federal tax bill.  It is flat-out wrong to say that the wealthy aren't paying their fair share; they're statistically paying a disproportionately high percentage of federal taxes.  Of course a plan that lowers taxes and simplifies the code is likely to benefit these people (though absolutely not exclusively, as discussed above) because they're already paying thevast, vast majority of all taxes.  One of the reasons that Democrats manage to succeed in their "tax the rich more!" demagoguery is that, in addition to the political appeal of letting other people pay for a more generous government, most Americans are ignorant of the facts we've just laid out.  

To reinforce this point, Donovan links to more data that lay bare the enormous disconnect between what Americans believe rich people pay in taxes, what they actually pay, and what most people think would be fair.  In short, the public massively underestimates the percentage of federal taxes shouldered by the top quintile of earners (about 80 percent of those polled estimated that the top 20 percent pays somewhere between one-third and one-half of the taxes, when the real figure is roughly 90 percent).  Asked how much more the top 20 percent pays in federal taxes compared to the bottom 20 percent, roughly 70 percent of Americans said that the ratio was between 3-to-1 and 8-to-1.  The correct answer is 22-to-1.  And as for defining "fairness," we addressed this in a post several years ago, but it bears repeating -- especially as the Left spouts its autopilot outrage:

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Between federal, state and local tax rates, government entities seek to extract more than half of some wealthy Americans' earned income. Only 16 percent of Americans think this is fair, and 60 percent think the top end rate should be substantially lower than it is today.  Regardless of what one thinks about the particulars of the president's new plan (and I'd like to see many more details before rendering a full judgment), liberals should not be able to get away with their cheap, lazy arguments that demonize the rich and mislead the American people on fairness. I'll leave you with this oldie but goodie from Reason, reminding us that Uncle Sam doesn't have a tax revenue problem. He has a big, fat spending problem: