COMMENTARY

The Taxpaying Minority

 

From the Wall Street Journal

By ARI FLEISCHER
April 16, 2007; Page A15
 

If the tax forms you're filing this year show Uncle Sam entitled to any income tax, you increasingly stand alone. The income tax system is so bad, and increasingly reliant on a shrinking number of Americans to pay the nation's bills, that 40% of the country's households -- more than 44 million adults -- pay no income taxes at all. Not a penny.

Think of it this way. After dropping off your tax forms at the Post Office, you find 100 people standing on the sidewalk. Forty of them will be excused from paying income taxes thanks to Congress. Twenty of them, the middle class, will pay barely a thing. The 40 people who remain, the upper middle class and the wealthy, will pay nearly all of the income taxes.

Look at that crowd again and find the richest person there. That individual will pay 37% of all the income taxes owed by those 100 people. The 10 richest people in the crowd will pay 71% of the income-tax bill. The 40 most successful people will pay 99% of everyone's income taxes. Yet for some lawmakers in Washington, these taxpayers aren't paying enough. Our tax system comes up short in a lot of areas. It doesn't foster economic growth. It isn't very simple. And it certainly isn't fair. The one place where it does excel is at redistributing income.

According to a recent study by the nonpartisan Congressional Budget Office, those who make more than $43,200 (the top 40%) pay 99.1% of all income taxes, the taxes that support our troops in Iraq and Afghanistan, and, for example, fund the federal portion of transportation, education, environmental and welfare spending.

Those who made more than $87,300 in 2004, the top 10%, paid 70.8% of all income taxes, an increase from their share of 48.1% in 1979. Think about it. Ten percent pay seven out of every 10 dollars and their share of the burden is rising.

And those super-rich one percenters? Their share of the nation's income has risen, but their tax burden has risen even faster.

In 1979, the first year of the study, these affluent individuals made 9.3% of the nation's income and they paid 18.3% of the country's income tax. In 2004, these fortunate few made 16.3% of the nation's income but their share of the income tax burden leaped to 36.7%. Think about that. One percent take in less than 17% of the country's income, but pay almost 37% of the country's income tax.

As for the middle class, CBO reports they make 13.9% of the nation's income and their share of the nation's income tax dropped to 4.7%. In 1979, they made 15.8% of the nation's income and paid 10.7% of the nation's income tax.

The combination of across the board marginal income tax rate cuts and repeated expansions of the earned income tax credit (EITC) for lower-income Americans has created this situation in which fewer people are responsible for paying more and more of the income tax. When President Bush in 2001 cut the lowest tax rate to 10% from 15%, several million additional workers were excused from paying any income tax. Raising top rates, as Presidents George H. W. Bush and Bill Clinton did in 1990 and 1993, also shifted the burden to a smaller group of Americans.

The EITC program redistributes money from those who pay income taxes to 22 million families and individuals with incomes less than $36,348. These workers not only don't have to pay any income tax, they're given a government check as a subsidy to help make ends meet. The EITC is also designed to relieve them of the cost of paying for their share of Social Security and Medicare.

If Republicans, including their presidential candidates, wonder why their calls for tax relief don't resonate like they used to, it's because there aren't that many income taxpayers left. They've been taken off the rolls.

As for the Democrats, they historically have raised taxes and redistributed income as a core philosophy. It doesn't matter to them how much money some people pay -- the argument is that the wealthy can always pay more. According to this point of view, it's immaterial that the tax code is highly progressive; it can always be made more progressive. While raising taxes on the few to benefit the many might be a political winner, it's an increasingly risky policy to pursue.

If, as now happens, 60% of the people in our democracy can force 40% to pay the bills, what's to stop 65% from making 35% pay it all? Since no one wants to pay taxes, what's to stop 90% of people in a democracy from making 10% pay it all? Or why not let 99% of the country off the hook, as long as the remaining 1% picks up the tab?

The problem is that there is a tipping point after which piling taxes onto the rich will leave the government unable to meet its obligations. And perhaps we're already reaching that point, where most people won't have a serious stake in what the government does because they don't pay for it. They want services and benefits, but they don't pay the price. That's a formula for runaway spending and no accountability. In other words, a system that looks a lot like the one we already have.

This can't last forever. When government revenues derive mostly from the wealthy, the fortunes of a few determine the fate of us all. Surpluses and deficits will be driven less by the economic strength of the country, and more by the gains made by the rich in hedge funds, mutual funds, equities and stock options. Like a spinning top that twirls on a narrow point, the top will stay up so long as it continues to go round. Once it slows down it falls, and the government's main source of tax revenue will plunge with it.

What a Catch-22. Members of Congress who want to fund antipoverty programs will have to hope the rich get richer, because the wealthy will need to make more to pay for all the federal programs.

The usual rebuttal made by those who support raising top rates is that lower income Americans pay Social Security and Medicare taxes and therefore need "relief." Of course they pay these taxes. But then, they alone get a good return on their money.

Top earners, on the other hand, pay payroll taxes so their money can be redistributed to others. According to the CBO study, the top 20% of workers, those with incomes over $64,300, pay 44.2% of the payroll tax while the bottom 20%, those who make less than $17,300, pay 4.2%. In return, when it's time to retire, lower-income workers typically receive more in Social Security benefits than they paid in, while the wealthy, who paid the most in taxes, simply can't live long enough to get back what they paid. For much of the middle class and the wealthy, Social Security isn't a retirement program -- it's another program that redistributes their income.

As for Medicare, it doesn't matter that the rich paid far more in taxes; all recipients receive the same benefits. Think of it this way. If Medicare were a car, its price for a low-income worker would be $145 and its price for a millionaire would be $14,500, even though it's the very same car.

Here's why. A taxpayer who makes $1 million a year pays $14,500 in Medicare taxes while a worker who makes $10,000 a year pays $145. But when they retire and visit their doctors or go to the hospital, Medicare reimburses both an equal amount of money. That's a pretty big redistribution of income and a pretty good deal for the low-income worker.

At the end of the day, everyone in this county is in it together. We have an obligation to help the neediest among us and the wealthy should pay more. But a system in which almost half the country pays no income taxes and 40% pay all the income tax has gone too far. Instead of raising taxes and punishing the successful by making them pay even more, it's time to junk the current system and start anew with a code that fosters economic growth for all, not increased redistribution of income for some.

Mr. Fleischer, a former White House press secretary, is president of Ari Fleischer Communications.