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January
17, 2003, 8:00 a.m.
Taxing
the Minority
Forty percent
of tax payers may pay all federal income tax.
By A. Tappen
Soper
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 he
federal income-tax system has long been progressive, structured so that
those with higher incomes are taxed at higher rates than their fellow
citizens at the other end of the scale. This structure is almost universally
accepted as fair, so much so that every time the system has been altered
it has usually been made more progressive. President Bush’s first tax-cut
program, enacted in 2001, continued this trend (contrary to what his political
opponents said at the time). His current proposal does the same. The result
is a classic example of a good idea carried to a ridiculous extreme.
Progressiveness is
fine, up to a point. Unfortunately, we have passed that point and reached
a critical juncture in the system. Simply put, the taxpayers at the upper
end of the scale now pay essentially all of the tax. The numbers are stark:
the most recent IRS data show that the top 50% of earners pay 96% of the
total burden, leaving only 4% to be paid by the entire remaining half
of the incoming-earning population. Remarkably, the top 5% of taxpayers
pay over 56% of the total. These numbers have changed significantly over
the past decade. In 1986 the top 5% paid only 42% of the total. At the
bottom of the scale the lowest 20% pay no income tax at all. In fact they
get a refund from the system through the earned income-tax credit.
Some who find these
facts inconvenient claim that the so called payroll tax, which is not
progressive, is a burden on low-income earners and should be considered
part of the overall tax system. This overlooks the fact that those payments
are in many cases offset by the earned income credit. Furthermore, they
are not taxes but rather contributions to fund Social Security which,
flawed as it may be, is primarily a compulsory pension plan.
It is remarkable
indeed that commentators and politicians alike continue to complain that
proposed tax cuts favor the rich, and plead for more cuts for those with
lower incomes when there is no longer anything there left to cut. White
House spokesmen claim that the current program will all but eliminate
the income tax for a family of four earning $40,000. Sixty percent of
returns show adjusted gross income of that amount or less — prospectively,
that means only 40% of tax payers may pay practically all the federal
income tax.
It should be obvious
that this structure has pernicious consequences. This country was founded
on the notion that taxation requires the consent of its citizens. Consent
implies approval of the majority, but if the majority is no longer impacted
by the income tax it is less and less likely to be concerned with how
those taxes are collected and spent. If the need for periodic tax reductions
has only a minority constituency federal spending as a share of GNP is
likely to follow the line of least resistance: up. Such an outcome would
be welcome in some quarters, but a look at European economies where that
has happened shows that it leads to stagnation, low growth, and persistently
high levels of unemployment.
Lost in all the
current discussion is the fact that past tax reductions have led to more
tax revenue, not less, as accelerated growth has led to more wealth for
everyone, including the federal government. It is rumored that the president
would like to completely overhaul the tax system, possibly during a second
term. Let’s hope so.
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