Can anyone disentangle this for ecomonically illiterate among us?
Jacob Segal
REVIEW & OUTLOOK
Speaking of 1% Guess who's the candidate of the fat cats? Tuesday, October 10, 2000 12:01 a.m. EDT
Warning: This is a trick question.
You see nearby a graph illustrating the share that three income groups will have in generating total federal income tax revenue in 2004. The bars represent the tax plans of two individuals now running for the Presidency of the United States. We'll call them Candidate Fat Cat and Candidate Working Dog. Candidate Fat Cat's plan is easier on the rich and Candidate Working Dog's plan is easiest on the poorest.
Under Candidate Fat Cat's plan, those earning less than $100,000 pay more of the total tax burden than they do under Candidate Working Dog's plan. And those earning more than $200,000, the "wealthiest," have a heavier burden under Candidate Working Dog's plan than they do under Candidate Fat Cat's plan.
More pointedly, with Candidate Fat Cat, workers with incomes below $100,000 pay 38% of total taxes and workers with incomes above $200,000 pay 39%. Compare that with the Working Dog candidate's plan, in which workers with incomes below $100,000 pay less--36% of total federal taxes--and workers with income above $200,000 pay more--41%. Thus, Fat Cat is more friendly to rich people than Working Dog. For five points credit, identify the Fat Cat's Presidential candidate, and the Working Dog's candidate.
Well, if you were tracking this subject during last week's debates and the journalistic gala of tax numbers that followed, you have answered that Candidate Fat Cat is George Bush of Midland, Texas, and Candidate Working Dog is Al Gore of Carthage, Tennessee.
You are wrong.
Mr. Working Dog's bars represents the Bush plan. The weight of Mr. Bush's tax proposals falls more heavily on the rich, including those cavorting in the top 1% of adjusted gross income. We know that's hard to believe after the past week's worth of confusing data and silly arithmetic that started with Mr. Gore's charge that the Bush tax plan gives nearly half of the tax cut to the "wealthiest 1%." And it's also hard to believe that a total policy wonk like Mr. Gore could be so mistaken.
But the fact is that, according to the nonpartisan Joint Committee on Taxation (also cited approvingly by Mr. Gore), the top 1% will get about one-fifth--not "nearly half"--of the benefit under Mr. Bush's tax proposal.
Mr. Gore's mistake rests on two confusions. First, he confused the notion of wealth with the notion of income--two entirely different categories. Wealth is a stock figure (it consists of "stuff" or net assets) and income is a flow figure (it is what has come to you in 12 months). Thus, for example, those earning $250,736 (the bottom cutoff for the top 1%, according to most recent IRS statistics) are not necessarily wealthy. Likewise, wealthy people do not necessarily earn enough income to place them in the top 1% of taxpayers; for example, many seniors are plenty wealthy, but have modest incomes or none at all in the taxable sense.
Second, Mr. Gore included estate taxes in his calculation. Estate taxes show up in the year that the heirs receive their bequest. Not only does that mean that many of them make the top 1% category for only one year, but the bequest itself is most usually the result of a lifetime of accumulation. For example, the heir of an estate could be earning $50,000 a year and receive, as a bequest, a house, farm, small business or Aunt Mopsie's collection of Impressionists.
We doubt that these were honest mistakes. Mr. Gore was using figures generated by the left-leaning Citizens for Tax Justice, not figures provided by the source of choice, the IRS Statistics of Income Bulletin or data provided by the Joint Committee on Taxation. Indeed, we suspect that these were not mistakes at all, but part of Mr. Gore's unremitting rhetoric of class warfare.
But his rhetoric doesn't fit the facts. Mr. Bush's tax plan would result in a larger redistribution of the income tax burden: less burden for those earning under $100,000 and more burden for those earning over $200,000. Moreover, if one adds Mr. Bush's plan for a 2% cut in the payroll tax--obviously a bigger deal for the working dog--the result is more redistributive away from the rich than Mr. Gore's tax cut, and even more redistributive period.
This is, in fact, the direction the tax code has been trending for the past two decades. Twenty years ago, the top 1% paid 19% of all federal income taxes. Now they pay almost 33%. Then, the top 5% paid 36% of all federal taxes; now they pay more than 52%.
What happened? Lower-income workers have been freed from tax liabilities by the Earned Income Tax Credit; indeed, one third of all filers pay no tax at all, while upper-income workers felt the addition of three higher brackets at 31%, 36% and 39.6%, the proud Clinton tax increase, which sharply raised tax liabilities.
Now, one might question the fairness of a tax system in which 5% of workers pay half of the income taxes, or in which half of all taxpayers ante up 96% of the revenue. And if one were in the top 1%, one might be aggrieved at earning 17% of total income but paying 33% of federal income taxes. Surely one would be entitled to feel aggrieved at Mr. Gore's attempt to demonize one. But if you believe that the tax code ought to be clearly redistributive--burdening the wealthy further while freeing the working dogs from taxation--then Mr. Bush is your candidate. Chew on that.