The Myth of an Overtaxed U.S. Public

President Barack Obama yesterday opened a new campaign to eliminate the Bush tax cuts for those indivdiuals earning over $200,000 and households earning over $250,000. He is framing the proposal on the basis that 98 percent of the nation’s population will keep their cuts after they are due to expire at the end of 2012 and only two percent will see a tax increase. The current proposal is very similar to the one he was promoting two years ago and the result was the two-year extension of all the Bush tax cuts.

The Republican leadership has predictably responded that the only acceptable deal is an extension of all the Bush tax cuts. The GOP’s main argument is that the wealthy are the real job creators and taxing them more will lead to more unemployment. Furthermore, the GOP includes small businesses among those who will pay more taxes under Obama’s proposal. There are deep flaws in the GOP argument: 1) according to Department of Labor statistics, the average monthly job gain during the two terms of George W. Bush was 11,000; and 2) only about three percent of what are classified as small businesses have taxable income of over $250,000. The CBS reporter, Norah O’Donnell, obfuscated the issue when she said that three percent translates to 260,000 small businesses, but, assuming that her number of affected businesses is correct, it would mean that about 8.4 million small businesses would not be affected; also, a small business with a taxable income of $500,000 would have an additional tax burden of $14,000 under the Obama proposal, not enough to equal the cost of even one worker. 

Although the supporters of President Obama have rightly directed their fire at the Republican Party for its ironclad refusal to countenance any increase in taxes on the wealthiest few percent of Americans, these supporters need to turn a critical eye to President Obama. Contrary to a frequently reiterated campaign promise in 2008, he had already agreed to a two-year extension of the Bush tax cuts, ending on January 1, 2013. It is highly unlikely that the Republican majority in the House of Representatives will agree to eliminate the tax cuts for only those over the $200,000 and $250,000 thresholds. 

Assuming that Barack Obama’s pledge to not raise the taxes of middle class folks was crucial to his election, it has proven to be an albatross around his neck. He has allowed himself to be manuvered into a position in which ending all the Bush tax cuts is seen as a violation of his pledge not to raise taxes on those with taxable incomes of under $200,000 or $250,000; also, legislatively, he must agree to end all of the Bush tax cuts or extend them all.

When it comes to paying income taxes to the national government, President Obama has bought into the widespread assumption that U.S. citizens are being taxed to death. There are several reasons why this is not the case:

 1) The federal income tax as a percentage of gross national product is at the lowest level since the Truman administration.

 2) The Center on Budget and Policy Priorities has calculated that a family of four at the exact middle of the income tax spectrum pays only 4.6 percent of its income to the national government.

 3) Using 2007 data — the last year for which full data has been analyzed — the IRS has found that 47 percent of U.S. households pay no federal income tax. The argument that the 47 percent pay many other taxes is flawed, because the income tax-paying 53 percent also pay many other taxes.

 4) The period from the end of World War II to the deep recession of the early Reagan ’80s may have been the most economically prosperous period in U.S. history. Yet this approximately 35-year period was characterized by marginal top income tax rates that varied from a low of 70 percent to a high of 91 percent.

My own experience in paying income taxes is that last year our family paid 4.7 percent of adjusted gross income to the national government. In each of the past two years, our tax owed to the state of New Mexico was slightly over two-tenths of one percent. Yet in each of the last two years, the New Mexico legislature has refused to raise taxes to cover deficits of several hundred million dollars.

There are several ways we can measure how both individuals and corporations were taxed in the last half-century or so, and how concentrated the wealth has become at the top of the economic pyramid in the United States. First we will look at top and bottom marginal tax rates beginning in 1950: 1950 – 84.35 percent ($400,000 and over); 1960 – 91 percent ($400,000 and over); 1970 – 71.75 percent ($200,000 and over); 1980 – 70 percent ($215,400 and over). The lowest marginal tax rates were as follows: 1950 – 17.4 percent; 1960 – 20.0 percent; 1970 – 14.0 percent; 1980 – 14.0 percent.

There are a number of measurements to determine how much of their income do the wealthy pay in federal income tax:

 1) IRS data shows that the 400 wealthiest households paid 18.1 percent of their total income in federal tax in 2008; however, in 1955 they had paid 51.2 percent. By another IRS measure, after adjusting for inflation, the top 400 in 2008 reported incomes that were 20 times the income of the top 400 a half-century before.

 2) The Center on Budget and Policy Priorities found that the effective income tax rates for the top 400 taxpayers declined by nearly half in only a decade, even as their pre-tax incomes had grown five times larger. The top 400 households paid 16.6 percent of their incomes in federal income taxes in 2007, down from 30 percent in 1995.

 3) MIT economist Peter Diamond found that in 2007 the top one percent of taxpayers, on average, paid 22.4 percent of their incomes in federal income tax.

 4) According to the Congressional Budget Office, gaps in after-tax income between the richest one percent of Americans and the middle and poorest fifth of the country more than tripled between 1979 and 2007.

As for how wealth has become concentrated among the economic elite in the country, there are several measurements, which, although they have some variation due to how weights are assigned, paint a pretty clear picture of the situation. Economist Leon Friedman calculates that the top one percent of the U.S. population owns 35 percent of the nation’s wealth and the top five percent owns 62 percent. Economist Joseph Stiglitz says the nation’s top one percent takes in nearly a quarter of the income and controls 40 percent of the wealth. He further claims that their incomes have risen 18 percent since the year 2000. The Economic Policy Institute calculates that the richest five percent claim 35 percent of the nation’s wealth and the richest 20 percent claim 81 percent.

As a very dramatic illustration of how undertaxed are the individual households and corporations having $1 million or more in income each year, the Institute of Policy Studies has calculated that if the above were taxed at the same rates as they were in 1961, there would be an additional $716 billion in revenue each year.

Turning now to corporations, their contribution to the revenue of the national government and the state governments have declined significantly in the past six decades. In the 1950s, the corporate sector accounted for an average of 27.6 percent of all federal revenue; however, in 2010 it was 8.9 percent. Census Bureau data puts the corporate share of total state taxes at 10 percent in 1980 and 5.9 percent in 2010.

According to a 2008 Government Accountability Office report, two-thirds of corporations in the United States don’t pay any federal income tax.

While corporations are carrying an ever declining share of the cost of running the nation’s government, their profits are coming heavily from their own workers: writing in the Washington Post in July 2011, Harold Meyerson says 75 percent of corporate profits come from declines in wages and benefits. In the last two quarters of 2011, Corporate America is reported to have socked away nearly $2 trillion.

The ultimate economic royalists today, however, are the hedge fund managers. A single hedge fund manager earned $4.9 billion in 2010; also, the top 25 Wall Street hedge fund managers made a little over $22 billion, according to a survey by AR magazine.

The next blog will present a tax plan that combined with the enactment of a single payer health care plan, will create a financial windfall for millions of U.S. taxpayers.

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