Economic Opinion Astray
by Bruce Bartlett
New York Times editorial board member Teresa Tritch writes most of its economic editorials. What really qualifies Ms. Tritch to lecture the rest of us [Oct. 4] about tax policy is an absolute conviction our tax system is tilted too much toward the rich. To read her diatribe, one would think 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 taxes do not affect economic growth at all.
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 giveaway to the ultrawealthy. 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 the wealthy pay almost all the federal income tax and there is clear and compelling evidence our tax system — especially its misguided redistributive elements — impose a heavy cost in growth terms ultimately paid by the nonwealthy via 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 the top 1 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 5 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 the bottom half paid just 3.5 percent.
Another IRS report decomposed the top 1 percent and found the top 10 percent of the top 1 percent (the top 0.1 percent) increased their share of all federal income taxes from 7 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 — 4 times more than all the taxes paid by the 64 million taxpayers in the bottom 50 percent, who paid an average 2.9 percent rate.
I would be curious to know just how much more Ms. Tritch thinks the wealthy should pay? 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 1 percent of taxpayers paid only 19.7 percent of all federal income taxes: Though their marginal tax rate has fallen 50 percent, their tax share has almost doubled.
I assume 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 1 percent of taxpayers there pay just 21 percent of income taxes. The top 5 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 the tax system’s efficiency cost — output lost over and above the tax itself — is between 2 percent and 5 percent of the gross domestic product. In short, we lose between $240 billion and $600 billion every year just because of how we levy taxes.
(Bruce Bartlett is a nationally syndicated columnist. This article was first published October 12, 2005.)
