President Donald Trump has again hinted that another tax cut may be on the way. It does not appear he has any actual plan to provide one, which is fortunate given that any revenue proposal from this administration would be engineered to solve a problem that does not exist — the over-taxation of the rich.
Anyone who tells you this is a real problem is either misinformed or dishonest. Emmanuel Saez and Gabriel Zucman, economists from the University of California, Berkeley and who are famous for exposing growing inequality in America, have a new book debunking this myth. While the wonks have responded by debating the finer points of how we should measure income and taxes, their book — "The Triumph of Injustice: How the Rich Dodge Taxes and How to Make Them Pay" — provides undeniable proof that the rich are taking home more and more of the former without paying a Draconian amount of the latter.
So why is it that some people claim that the rich are paying far more than their share of taxes? When you read their claims more carefully, you realize they are talking about only federal taxes, or only federal income taxes.
A barely progressive tax code
Looking at the big picture, Saez and Zucman confirm findings by my organization, the Institute on on Taxation and Economic Policy, that the nation’s tax code overall is just barely progressive — meaning the rich pay a slightly larger share of their income in taxes than everyone else. Certain federal taxes (like the federal income tax) are progressive, but other taxes that Americans pay are regressive, meaning they take a larger share of income from a poor family than from a rich family. This is true of federal payroll taxes and many state and local taxes.
The combination of all these progressive and regressive parts of our revenue system results in the rich being asked to pay just a bit more than everyone else, relative to their incomes. For example, ITEP projects that this year, the richest 1% will take home about 21% of the total income in America and pay about 24% of the total taxes. That means the share of taxes paid by the top 1% is a little bigger than the share of income they receive, but this is hardly what we'd call soaking the rich.
At the bottom of the income ladder, the same ITEP study finds that the poorest 20% of people living and working in America will take home about 3% of the nation’s income and will pay 2% of the total taxes.
While the share of taxes paid by those at the bottom is slightly less than their share of income, the magnitude of the difference hardly suggests a tax system verging on socialism.
Saez and Zucman use methods that are different from ITEP’s but that are perfectly reasonable. Like us, they find that the tax system overall is much flatter than people realize. They also have several innovations, such as breaking down the top 1% into different groups, including the very richest 400 Americans. They find that the effective tax rate paid by this tiny group of uber-rich people is actually lower than the effective tax rate paid by the middle class.
This is not surprising because much of the income received by the very rich is capital gains and stock dividends that are taxed at lower rates and other forms of income from wealth that are not taxed at all.
Sales, payroll and property taxes
When you fail to assess the U.S. tax system as a whole, you encounter misguided comments like Mitt Romney’s statement that 47% of people don’t pay income taxes. His statement was criticized for many reasons, including the fact that he blithely ignored all the types of taxes that even the poorest Americans must pay.
For example, sales taxes are particularly regressive, applying to most of the necessities that we all buy. Sales taxes take up a small fraction of income for the rich, who can afford to save and invest most of their income. But they eat up a larger share of income for the poor, who have little income left over after they purchase necessities.
Or take property taxes. You probably pay them if you are a homeowner and even if you are a renter because landlords pass them onto tenants by raising rents to cover them.
Everyone pays taxes, and our tax system overall is much flatter than most people realize. You might ask what about any of this is a problem? Why is it so important that the rich pay more?
The most obvious answer is that those at the top benefit much more from all the public investments we finance with our tax dollars.
Who benefits from federal highways more, you or Amazon owner Jeff Bezos? You use highways to get to work every day, but his company makes billions each year shipping products over those highways. Of course he benefits more, and so it seems logical that he should pay a higher share of his income to finance those highways than you do.
To most Americans, this is not a controversial point. The only hope for those who oppose higher taxes on the rich is to argue about the statistics and claim that the rich already pay more than their share. This is an argument that should be put to rest.
Steve Wamhoff is the director of federal tax policy for the Institute on Taxation and Economic Policy.