The wealthy should pay their fair share
By Dean Baker
According to their acolytes, the rich are great innovators and job creators. But they haven’t lived up to that billing in this century as both job growth and overall economic growth have been extraordinarily weak since 2000.
If their benefit to the economy is in doubt, no one can dispute that the wealthy are world-class tax avoiders.
The New York Times recently reported that the country’s 400 wealthiest families paid an average of just 17 percent of their income in taxes. This is a smaller share of their income than many middle income families pay, especially if we add in Social Security and Medicare taxes.
The fact the wealthy manage to pay so little in taxes is not by design, or at least not the explicit design of the tax code.
In principle the tax code is supposed to be progressive. The tax rate for income above $465,000 is 39.6 percent, compared to a rate of 25 percent for income above $75,000 and under $150,000. It’s just 15 percent for income between $18,000 and $75,000.
This should mean that the wealthy would pay a larger share of their income in taxes than the rest of us. But according to data from the IRS, it doesn’t turn out this way.
The rich are able to hire top notch tax accountants and lawyers, as well as politicians, in order to secure loopholes that shield much of their income from taxation. As a result, they largely manage to circumvent the progressive structure of the tax code.
While there is not a single cure for tax avoidance by the rich, there are some policies that will help to stop the bleeding.
The first and most obvious is to increase funding for IRS enforcement. This is a complete free lunch since the additional money we spend on enforcement will be more than offset by the additional revenue collected.
Since spending on enforcement more than pays for itself, the opponents of IRS funding effectively want to tax the rest of us more in order to allow the rich to avoid their taxes.
We can debate whether items like spending on medical research, college education or infrastructure are worth the tax revenue, but it’s hard to make the case that supporting tax avoidance by the rich is a good use of our tax dollars.
The carried interest tax deduction is one specific tax break that should be on everyone’s radar screen since it is a completely unjustifiable giveaway to the extremely rich.
This is the provision that allows much of the earnings of hedge fund and private equity fund managers (think Mitt Romney) to be taxed at the 20 percent capital gains rate, instead of the 39.6 percent rate they would ordinarily pay on their income.
The basis for this break is that these fund managers are paid partly on commission, just like realtors, car salespeople and millions of other workers in the U.S. economy.
While these more ordinary workers get taxed on their commissions at the same rate as the rest of their wages, the fund managers get a special lower rate — because they are rich.
The corporate income tax brings a whole other set of games for the rich. The most visible has been the offshoring of corporate headquarters to escape U.S. taxes, but that is just the tip of the iceberg.
It’s also important to recognize that many people have gotten very rich by developing these schemes. This is largely the story of the private equity industry, which has created many billionaires in the last three decades.
So let’s make 2016 the year we end tax gaming by the rich. That would be something worth celebrating on New Year’s Day 2017.
Dean Baker is a leading macroeconomist and co-founder of the Center for Economic Policy and Research (cepr.org). He earned a doctorate in economics from the University of Michigan in 1988.
Don’t believe the ‘loopholes’ hype
By Alan D. Viard
Recent media coverage has prompted impassioned calls for Congress to close the “loopholes” that supposedly explain why the 400 richest taxpayers paid an average federal individual income tax rate of 16.7 percent in 2012.
Unfortunately, these calls are based on outdated numbers and an incomplete picture of the tax system.
A few weeks ago, the IRS released new data showing that the average federal individual income tax rate on the richest 400 jumped more than a third, to 22.9 percent, in 2013.
The increase in their tax burden is no mystery. Top income tax rates on both ordinary income and capital gains rose in 2013, at the same time that a new 3.8 percent tax on investment income earned by high-income households took effect.
If the 16.7 percent tax burden was the problem, it’s been solved.
Of course, 22.9 percent may still seem too low a tax burden for our society’s wealthiest members.
And, many find it troubling that capital gains and dividends face lower individual income tax rates than other types of income.
But, that’s only part of the story. Although stockholders pay lower individual taxes on their dividends and capital gains, that income is also taxed at the business level — corporate income tax is taken out before the money reaches the stockholders.
Relieving double taxation is no loophole. Recent computations by the Congressional Budget Office add up the total federal taxes, including corporate income taxes and payroll taxes, paid by different income groups.
Although CBO doesn’t break out the taxes paid by the top 400, it computes the tax burdens on the top 1 percent and other groups, ranked by the market income they earn before paying taxes and receiving government benefits.
In case you’re wondering, CBO counts the entire payroll tax, including the employer’s half, as part of workers’ tax burdens — that’s the right approach because the employer tax drives down workers’ wages.
CBO’s most recent data, for 2011, show that the average household in the middle 20 percent paid $8,100 in federal taxes, less than 15 percent of its $55,400 market income. The average household in the top 1 percent paid $422,700 in federal taxes, more than 29 percent of its $1,447,500 market income. Even before the 2013 high-income tax hikes, the rich bore a much higher total federal tax burden than the middle class.
Of course, including federal benefits would further reinforce the tilt toward the middle class. CBO found that the average household in the middle group received $10,700 in federal benefits, $2,600 more than the taxes it paid. The average household in the top 1 percent received $9,600 in federal benefits, a tiny fraction of its tax payment.
Expecting those at the top to pay a bigger percentage than those in the middle makes perfect sense. And, when we finally take steps to address our country’s severe long-term budget imbalance, we’ll probably end up asking more from both groups.
But, let’s base those decisions on a clear understanding of the federal tax system, not on myths about the rich using loopholes to pay less than the middle class.
Alan D. Viard is a resident scholar at the American Enterprise Institute. Before joining AEI, Viard was a senior economist at the Federal Reserve Bank of Dallas and an assistant professor of economics at Ohio State University.