WingRight

Following a series of cuts in the marginal tax rate that began in the Reagan era, tax rates were further decreased when the Republicans took over congress in 1994 and still further decreased with the Bush II cuts. The result of these cuts is that a very small portion of Americans pay a very large portion of the total income taxes. Unacknowledged by most Democrats, the Bush tax cuts removed millions of people from the income tax rolls.

In 2006, the top 1% of all taxpayers (those who earn above $388,806) paid 40% of all income taxes. This top 1% earned 22% of all reported income, so, even with lower top rates, the income tax system is strongly progressive.

The top 10% in income, those earning more than $108,904, paid 71% of all income taxes. It is clear that a small group of people support the large majority of all federal government expenditures.

In speaking of the “rich,” liberals imply that this is a reasonably fixed group that doesn’t change. Treasury statistics show this is not true. As the Wall Street Journal editorial board pointed out:

We also know from income mobility data that a very large percentage in the top 1% are “new rich,” not inheritors of fortunes. There is rapid turnover in the ranks of the highest income earners, so much so that people who started in the top 1% of income in the 1980s and 1990s suffered the largest declines in earnings of any income group over the subsequent decade, according to Treasury Department studies of actual tax returns. It’s hard to stay king of the hill in America for long.

What I take from this is that the top 1% is an inherently unstable base upon which to build a system of government finance. Instead of the Forbes 400, we have the family that worked for years to build up a small business, then sold it and got hit with big taxes, the farmer who died after forty years of drought and hail and left his heirs with a big estate tax bill in a single year. Years spent at lower tax brackets were followed by a single top 1% tax return. After that good year, a lot of top 1% taxpayers fall back down the income scale, suffering “the largest declines in earnings of any income group.”

The Obama tax plan would load an even heavier income tax burden on the top 5% of taxpayers ($157,000 and above) plus signficantly increase their payroll taxes, hitting this group with a double-whammy. Remembering that the top taxpayers are mostly moving in and out of the most prosperous group, a small disruption of that flow of income realization or recognition will have an enormous impact on federal tax revenues. What could disrupt the income flow of that group? An economic slowdown would do it. A deferral of retirement among small business owners would significantly reduce the gains that occur in a single tax year when the business is sold because the business wouldn’t be sold until later. Tax planning (aggressive or not) by people who aren’t doing much right now would impact revenues. Simply deferring the sale of capital assets from an average holding period of 1 year to an average of 2 years would substantially reduce tax revenues.

I would contend that the income of the middle 40% of the population, primarily wages, is much less likely to vary from year to year. If you add the well-documented supply-side impacts on income when tax rates rise, an Obama tax regime makes overall tax revenues much more risky and susceptible to a significant collapse.

After the 2003 Bush tax cuts, the number of Americans who declared an adjusted gross income of more than $1 million nearly doubled to 354,000 in 2006 from 181,000 in 2003 - just three years. If the Bush tax cuts are reversed for this group, will the number of millionaires decrease by 50%? If there is any significant decrease in the income of the top 1%, federal deficits will skyrocket.

Tags: Economy, Liberal "Solutions", Taxes //