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Saturday, August 20, 2011

“The Top 1% Pays...” and Other Tax Myths

You often read claims along the lines of “The top 1% of taxpayers pays 38% of all income taxes.” The implication, of course, is that the poor people whose returns showed incomes over $380,354 per year in 2008 are grossly overburdened, and we can't possibly consider closing tax loopholes, fighting tax havens or, God forbid, raising actual income tax rates on high incomes.

When someone tries to get you to focus on only one part of a complicated picture, it's a safe assumption they are trying to mislead you. In the area of individual income tax, that is an even safer bet when they don't tell you what share of income the top 1% earns. Exhibit A is the National Taxpayers Union. Under the category of “Tax Basics,” NTU gives ten years of tables showing “Who pays income taxes and how much?” 

Who Pays Income Taxes and how much?


Tax Year 2008

Percentiles Ranked by AGI
AGI Threshold on Percentiles
Percentage of Federal Personal Income Tax Paid
Top 1%
Top 5%
Top 10%
Top 25%
Top 50%
Bottom 50%
Note: AGI is Adjusted Gross Income
Source: Internal Revenue Service

As you can see, the table shows percentiles of adjusted gross income (AGI), the AGI cutoff for that percentile, and how much that percentile paid in income taxes. No mention at all of what, say, the top 1% of returns actually earned in income. Even the conservative Tax Foundation is willing to tell you how much of all income the top 1% earned, and what their average tax rate was (20.00% and 23.27%, respectively), but not NTU.

Lately, the top Republican presidential candidates have complained that almost half of Americans do not pay income taxes  (h/t Greg Sargent). Again, we see that old misdirection ploy: focus only on one of the major taxes. What Michele Bachmann, Rick Perry, and Mitt Romney have all left out most prominently (see Weisman's article for more detail) is the payroll tax which all wage earners pay, but only up to $106,800 on the Social Security portion. Thus, as earnings rise above $106,800, the tax takes a smaller and smaller percentage of one's income, the very definition of a regressive tax.

The National Taxpayers Union takes this misleading misdirection to the limit, however. Take another look at the link, but this time look at the menu on the left under “Taxes.” Payroll taxes, which accounted for 36% of federal government revenue in fiscal 2008, don't even rate a category, while the excise tax (3% of federal revenue) and the estate tax (smaller still), do. NTU tries to make over 1/3 of federal taxes disappear as an issue!

Another myth you often hear, that taxing the rich doesn't raise much revenue, was recently refuted by Chuck Marr of the Center on Budget and Policy Priorities. Using the same IRS figures cited by the Tax Foundation, he shows that in 2008 the top 1% had $1.7 trillion in income. His analysis is simple: if, instead of the 23.27% tax rate the top 1% paid in 2008, they paid at the highest recent rate (1996's 29%), that would generate about $100 billion a year, or $1 trillion over 10 years. To raise the actual rate paid, it would take some combination of loophole closing and tax rate increases. Since $1.2 trillion over 10 years was considered a big number in the debt ceiling negotiations, I'm going to go out on a limb here and say that $1 trillion over ten years is also a big number.

We see, then, that to evaluate the fairness of the tax system, it's necessary to look at all of its elements, not just take one of them in isolation. It's also necessary to have many years worth of hard data to see what the parameters of tax reality really look like.

Thursday, August 18, 2011

The Massachusetts Miracle

With Rick Perry's entrance into the Republican Presidential race, there has already been a lot of debunking of the so-called Texas Miracle he allegedly presided over. Taking a cue from Paul Krugman's column Monday, I want to point out how liberal “Taxachusetts” has outperformed Texas on a whole host of measures of economic and social well-being.

As Krugman points out, Texas has a significantly higher unemployment rate than Massachusetts (8.2% vs. 7.6% in June 2011) and the percentage of people without health insurance in Texas is the country's highest (26% of the total population) while Massachusetts has the lowest uninsured rate at 5%

We can further note that Texas suffered worse unemployment from the recession than Massachusetts did: in 2008 it had a lower unemployment rate than Massachusetts, while today it is higher. Its full-year unemployment rate for 2008 was 4.9%, while that of Massachusetts was 5.3%.

In 2008, only 10.0% of Massachusetts residents lived in poverty, whereas for Texas the rate was 15.8%.

Median household income in 2008 was $65,401 for Massachusetts, but only $50,043 for Texas.
Similarly, personal per capita income in Massachusetts in 2008 was $51,254, but only $37,774 in Texas.

Despite Texas' low home prices, Massachusetts had a marginally higher homeownership rate in 2008, 65.7% vs. 65.5%.

The infant mortality rate for Massachusetts in 2008 was 4.8 per 1000 live births, compared to 6.2 in Texas.

Massachusetts had more than twice as many doctors per 100,000 population in 2007 than did Texas, 469.0 vs. 214.2.

Violent crimes per 100,000 population in 2009: 457.1 in Massachusetts, 490.9 in Texas.
Massachusetts led the country in 2008 on the percentage of people over 25 years of age with a bachelor's degree or better: 38.1% compared to Texas' 25.3%. This means in Texas you are slightly more likely to lack health insurance than to have a bachelor's degree.

9.6% of workers in Texas were paid at or below the minimum wage in 2010, compared to 3.0% in Massachusetts (h/t Patrick Brendel and Pat Garofolo).

For good measure, the divorce rate in Massachusetts in 2004 was 2.2 per 1,000 residents compared to 3.6 in Texas.

To sum up, in Texas you are five times more likely to be uninsured than in “Taxachusetts,” 50% more likely to live in poverty, three times as likely to make the minimum wage or below, 1/3 less likely to have a bachelor's degree, and household median income is $15,000 lower.

Sign me up!