There has been a lot of talk about taxes lately, as in a desperate attempt to regain control in the election John McCain is accusing of Barack Obama of raising taxes on the middle class while simultaneously claiming that his tax cuts on the middle class, which he insists won’t exist, paid for by rolling back tax hikes of the Bush administration, which he was originally against, are some form of socialism.
Of course, the American tax system has been a progressive tax system since the passage of the 16th Amendment in 1913. There were two income taxes prior to that, during the Civil War and the 1880’s, which had flat rates. However, both of those taxes were only levied on the wealthiest of individuals in America, and therefore still adhered to the principle of the progressive tax which claims that those who make the most should shoulder the largest burden.
The historical battle between America and communist/socialist governments has made throwing around the terms “communist” and “socialist” very attractive. But I don’t know anybody in this country who is completely against any government program which dabbles in socialist ideology. I would have very little respect, and suspect very, very few Americans would oppose this view, of those who wanted to eliminate some of our programs which are quite socialist in operation, such as Social Security, Medicare, the postal service, the military, or Major League Baseball. But I digress . . .
There are two prevailing arguments against any sort of tax increase on the wealthy. The first is that the rich already pay far more than their fair share. You hear all sorts of statistics like “the wealthiest six Americans pay more in taxes than the rest of the US population, the crew of the Starship Enterprise, and every Chinese person since the beginning of time combined.” The part they leave out is that they make much more money than everybody else. So I set out to find some statistics which compare income distribution with tax burden. And I stumbled upon a very cool Excel spreadsheet (if there was ever a such thing) made up by the Congressional Budget Office. Check it out here. Unfortunately, it evidently takes two years to come up with this data (as a government employee, I should not have been as surprised as I was), because the most recent data was compiled in December 2007, but is only through 2005. Still, more recent data would actually prove my point better, because Bush helped push through another tax cut on the wealthy in 2006, as one of the Republican Congress’s last actions.
Instead of spouting a mountain of numbers, I decided to create some graphical evidence that our tax system is merely progressive and not some punishment for making money (click on the graphs to see a larger, more legible size):
I stumbled on another interesting little tidbit. Since the other popular argument among the right is that decreasing taxes for the rich increases wealth for all individuals, al la trickle down (I prefer the term “voodoo,” originated by someone whom I’m sure was ultra-liberal) economics, I decided to see how damaging increasing tax rates on the wealthiest individuals was for their earning power. Turns out, it’s not much damaging at all. In fact, their pre-tax income follows their tax rate much more proportionally than inversely:
And mean tax rates vs. mean income follows the same trend:
So it looks like demand side economics isn’t such a bad idea after all.
Of course, I’m not advocating for WWI tax rates, when the richest were taxed at about 70%. But it would appear that rolling back Bush’s tax cuts on the wealthiest while providing breaks for those who can least afford their taxes would hardly be the fatal mistake some would imply it would be.
Many argue for the flat tax as a way to eliminate the “redistribution of wealth.” But since we currently have a progressive tax system, doing so successfully could only result in one of two outcomes: either tax rates on the lower and middle classes would sharply increase, with the increase most severe on those making the least amount of money; or a drastic cut in government spending, inevitably targeting the most drastic cuts in programs designed to support the poorest individuals. Either way, it would also be a massive redistribution of wealth, this time from those most incapable of affording it to those who need it the least.