Progressive Taxation: Practical Pitfalls
Quiz: in 2001, according to the IRS, what percentage of the highest-earning Americans paid 50% of the individual income tax dollars collected by the federal government?
- The highest earning 5% of Americans paid half of all income tax dollars in 2001.
- The highest earning 10% of Americans paid half of all income tax dollars in 2001.
- The highest earning 25% of Americans paid half of all income tax dollars in 2001.
Sorry, it's a trick: the answer is "none of the above". The highest earning 4% of Americans as measured by adjusted gross income paid half of all the individual income tax in 2001 (IRS spreadsheet here). By the way, the cut-off income for the top 4% was $140,721. If we jump down to a cut-off income of $56,085, we find that the wealthiest 25% are covering 82.9% of individual income tax receipts.
So you're not going to run out and have a pity party for these high-earners, who are also probably among the wealthiest Americans. I understand. My point is actually about pragmatics rather than fairness.
I think that those who favor both progressive tax rates and redistributive government spending face a dilemma that is seldom, if ever, acknowledged. To the extent that a person
- favors progressive tax rates,
- doesn't want to cut government spending,
- doesn't want to finance government spending by borrowing, and
- doesn't want to increase the tax burden on the middle and lower classes,
that person is committed to hoping that the highest earners continue to earn at least as much in the future as they do now. If the highest earners fail to earn as much in the future as they have thus far, then at least one of the above points must be sacrificed. It seems counter-intuitive that "progressives" would have to root for the wealthy, doesn't it? But the unavoidable fact is that those who earn the most are the cash cow that gets milked to provide the butter and cheese for entitlements.
There's another way to look at this problem as well: by depending on the highest earning 4% of Americans for 50% of government revenues from income taxes, we make the federal government highly vulnerable to a downturn in the fortunes of the wealthiest people. I heard or read that a large part of California's fiscal woes stemmed from precisely this problem: steeply progressive state income tax rates made the state government dependent on the wealthiest individuals. The .COM bust hit this group of people extremely hard, such that they earned a good deal less and hence payed less in taxes. Thus, the state government suddenly had much lower revenues than they had been used to. I don't have a source for this assertion at hand, so I await confirmation or rebuttal from someone who knows the score (Walt?).
I'll be curious to see similar files for 2002 and forward, to see what impact the tax cuts had on these percentages. Of course, Bush has obviously sacrificed the point about avoiding not financing government spending with debt.