The Congressional Budget Office has looked at the tax data for 2007 and found, once again, that “the rich” already pay far more in taxes than everyone else.
The comparison here is between the blue bars, representing the share of all income reported, and the purple bars, representing the share of all federal taxes paid. The bottom four quintiles all have a high share of income relative to taxes paid; the opposite is true for the top 20 percent.
The progressivity of our tax code is also apparent in this graph of average federal tax rates by income quintile:
The average effective tax rate for the bottom 20 percent is below the trend line you’d expect from looking at the middle three groups; the average effective rate for the top group is above that trend line. So, tax rates are already skewed in favor of the bottom group and against the top group.
Here’s the eternal question for all those who want to skew rates even more, to raise taxes on “the rich” to pay for this or that government program: How much higher do you think the purple bar in the first graph can get, relative to the blue bar? I’d argue that every time the gap between those bars grows, the more people decide not to take the risk of making that investment or growing their business. And that’s a bad thing for the rest of us.
Now, separately, but relatedly:
Some people will look at these graphs and counter, That’s because the rich are getting richer while the rest of us are stuck! Just for them, here’s a graph depicting the change in inflation-adjusted, after-tax income:
First, on a very basic level: What does that top trend line loosely resemble? How about the Dow Jones Industrial Average, 1979 to 2007?
Percentiles 96-99 also reflect that DJIA trend line in a more muted way. Everyone in the 95th percentile and below has a much shallower, albeit steadier, trend line upward.
What does that tell us? Yes, it suggests that labor earnings have grown more slowly than investment earnings. But when was that not the case? And why would we want to change that? Of course we want to reward labor, but we also want to reward the investment in our economy that creates opportunity for labor — and the rewards are necessarily higher because the risks involved in investing are far greater.
Politicians who claim they can bridge this gap without collateral economic damage are selling the worst kind of populist snake oil. It simply isn’t possible.
What’s more, since about half of U.S. households have equity investments due to participation in things like 401(k) plans, the people in the sub-95 percentiles probably have unrealized gains that have risen in a way similar to the top two lines of graph No. 3. (I’d guess that the blue line would be a closer approximation of that, but it’s just a guess.) Increasing taxes on capital gains doesn’t hit only “the rich”; it will eventually hit about half of us.
What these figures don’t show us is how purchasing power and thus standards of living have changed. The cost of consumer goods has been falling over time, and inflation from the mid-1980s onward has been unusually tame — meaning standards of living have increased faster than income has. Jonah Goldberg recently wrote an excellent column about the growth in living standards, which you can read here.
These data won’t end the calls for taxing “the rich.” But they ought to shed some light on the wisdom of such a policy.
(H/t: Power Line)