Friday, August 26, 2011

EDITORIAL >>Tax rich less, poor more?

Republicans—well, everyone else, too—ought to be alarmed about the course of the Republican presidential race, where the debate is increasingly controlled by the zaniest element of the moment.

The nation has been consumed all year about how to wrestle the federal budget deficit under control again after a 10-year binge of spending and tax cutting. The growing and shrinking field of candidates for the GOP nomination has been drawn into the battle, some of them reluctantly. The party’s position, down almost to the last person, has been that no one’s and no corporation’s taxes should be raised to help get the budget back into balance. President Obama has proposed repeatedly that those earning more than $250,000 a year—in Arkansas, that is about 20,000 of the 1.3 million tax filers—go back to paying the same top marginal rate that they were paying in 2001, when taxes were cut and the budget careened out of control. He would also close a few loopholes that allow major corporations to avoid paying taxes on billions of dollars in annual profits.

Suddenly, Rep. Michele Bachmann broke out of the field of tax opponents. She favored making one group of Americans pay higher taxes: the poorest half of the people. Before the week was out, Texas Gov. Rick Perry and Jon Huntsman Jr., the one moderate in the field, said they, too, favored a tax on those people. We expect the others to jump aboard, too. We wonder how our congressmen, who have embraced every proposition from the conservative budget camp, will weigh in on the idea.

It happened this way. Rep. Eric Cantor, R-Va., the Republican leader of the House, happened to point out that 53 percent of individuals paid all U.S. federal income taxes, and he thought that was unfair. The 47 percent who had no income tax liability last year are getting the benefits of citizenship without making a contribution, he said. He stopped short of saying that Congress should actually raise tax rates and remove enough deductions and exemptions until they all paid some federal income taxes.

But Bachmann did. She said that everyone—every person who is out of work or on low wages and seniors, including those in nursing homes, should be required to pay some federal taxes. Perry has been saying the same thing and he also favors replacing the federal income tax with a national sales tax of some kind that would require people of low and modest incomes to pick up a much larger share of the national tax burden.

Everyone paying something has the sound of elemental fairness. The idea that nearly half the country are freeloaders is, indeed, repellent. But Bachmann, Perry, Cantor and the rest grievously misstate the case for tax fairness.

It is true that 47 percent of individuals and families had no federal income tax liability last year. Even the Bush tax cut of 2001 increased the numbers who do not owe federal income taxes when it adjusted the rate on the lowest incomes and increased some credits. When low- and moderate-income families claim the same deductions, credits and the personal exemption that all taxpayers claim, nearly half wind up owing no tax. The earned income-tax credit for people who work for very low wages relieves millions of the small tax liability they ordinarily would owe.

But they are not tax scofflaws and freeloaders. Most of that 47 percent pay a larger share of their income in taxes than the richest Americans do. The income tax bears only a little more than half of the burden of paying for federal services. Social insurance taxes—employment taxes that are recorded for social insurance programs like old-age and survivors insurance, Medicare hospitalization and disability insurance—and excise taxes on gasoline, cigarettes and a variety of other products and services account for more than 40 percent of all the government revenues. Those taxes land more heavily on the poorest half of the population than on the better-off half.

While the poorest 47 percent of Americans owe no income tax, they effectively pay a rate of 15.3 percent of their incomes, every dollar of that income, in payroll taxes. That includes the employer share, but the economic impact is that the employer share of FICA taxes is an employee benefit that otherwise would be direct income if the government did not require the contribution on the worker’s behalf. Put excise taxes on top of that. And, of course, people of low and moderate incomes pay the lion’s share of state and local taxes, which are mainly sales, excise and property taxes. Most payroll taxes—all but the Medicare tax—are levied on only the first $106,800 of income. The taxes are not collected on unearned income such as interest, dividends and capital gains, but the average worker pays the taxes on every dime of his income. That is why Warren Buffett, the billionaire investor, said his secretaries and clerks paid a larger share of their incomes to support the government than he did.

When the politicians tell you how unfair it is that the richest 1, 2 or 5 percent pay such a large share of federal income taxes, consider these figures: If you divide the country into fifths, from the poorest fifth to the richest fifth, the share of the nation’s personal wealth breaks down this way: The poorest fifth of Americans own one-tenth of one percent of the wealth, the next poorest fifth have two-tenths of one percent, the middle fifth own 3 percent of it, the next-to-richest fifth own 13 percent and the richest fifth own 83 percent. The average annual family income of the poorest fifth is $18,000, and of the richest fifth $200,000.

What Bachmann, Perry, Cantor and the rest should be lamenting is not the amount of taxes that the poorest 47 percent of Americans pay, but the pitiful share of the nation’s great wealth that they own. That share has been sinking for 30 years and more dramatically the past decade. There is an issue for a presidential candidate. —Ernie Dumas