James Piereson of the Manhattan Institute produced a piece for The Weekly Standard recently (redistributed in TAC’s “Of Note” web section) that lays bare the folly of the great tax debate that has been raging in America for the past quarter-century. The mantra of both parties has been that tax relief should be directed at the middle class while the rich need to pay “their fair share.” But, in terms of the personal income tax, that mantra already has been realized. The middle class pays hardly any tax at all, while the preponderance of the burden falls to the rich.
This has many implications—one of which, the emigration of wealthy Americans for purposes of tax avoidance, was explored in these spaces by TAC Executive Editor Pratik Chougule. Beyond that, when the political rhetoric on such matters distorts fundamental realities, the result is likely to be bad policymaking. Ronald Reagan reduced the top rate on personal income to 28 percent in 1986, while Donald Trump doesn’t seem to possess the political leeway to get the top rate below 35 percent. His fear is that the left will pillory him for coddling the rich.
Reagan himself, it must be said, contributed to the current situation in which nearly half of tax-filers don’t pay income tax. Back in the 1980s, the president proudly bragged about getting large numbers of Americans off the tax rolls, largely by expanding personal exemptions, the standard deduction, and the Earned Income Tax Credit, which is refundable, meaning those who don’t pay taxes against which to apply the credit get the money in cash payments.
That set the direction of policymaking toward more and more actions designed to remove people from the tax rolls. Piereson, in his Weekly Standard piece, tells the story through numbers. In 2014, he notes, the top 50 percent of income earners paid 97 percent of the total income taxes paid. The top 10 percent paid 71 percent, while the upper 1 percent forked over nearly 40 percent.
What about that middle class that lawmakers are always talking about as particularly needing and deserving of tax relief? Piereson says that in 2013 the middle quintile—“those making 10 percent above and below the mean household income of $69,700”—paid only 4 percent of all federal income taxes.
All this represents a big shift from 1980, before the so-called Reagan Revolution, when the top marginal rate on unearned income (largely from investments) was 70 percent and the top rate on earned income (salaries and wages) was 50 percent. Then the middle quintile paid 11 percent of all income taxes collected, compared to today’s 4 percent. The top quintile paid 65 percent of all income-tax collections in 1980, compared to 84 percent today. And the government got just 18 percent of its income-tax revenue from the top 1 percent in 1980, while that segment today gives up nearly 40 percent.
Some may wonder how it is possible for the government to collect a substantially larger proportion of tax revenue from the rich after tax rates for the rich have been slashed so deeply. As Piereson points out, factors contributing to these shifts include a redistribution in the relative shares of national income. Since 1980, the top 1 percent has doubled its share of national income, to 20 percent in 2014 from 9 percent in 1980. The top quintile increased its share to 38 percent in 2013 from 30 percent in 1980. This has increased the taxable earnings accumulated by the wealthy in comparison to less well-off Americans. Explains Piereson: “Much like state governments that have developed a financial interest in smoking due to the revenues they receive from tobacco sales, the federal government has developed a perverse interest in income inequality because of the greater revenues it generates due to the progressive income tax.”
But it isn’t really possible to address income inequality to any significant extent through the income-tax system, in part because the federal government receives only about 47 percent of its revenues through the income tax, compared to 34 percent from payroll taxes and 11 percent from corporate taxes, with the rest from estate and excise taxes (per 2015 numbers). Piereson notes that the income tax, as progressive as it is, “plays only a modest role in smoothing out the distribution of income.” He points out that since 1980 the top 1 percent of the income distribution lost only between 1 and 2 percent of its share of national income due to taxes.
Another factor is that the progressive nature of the income tax is offset by the regressive nature of Social Security payroll taxes.
Thus can we see that the call to use the income-tax system for income redistribution is a hoax. First, it already does that—at least, to the extent that it can in any feasible way. We might ask: what number, above the current 84 percent of income tax revenue provided by the top quintile, should that quintile be providing? And what proportion of tax filers should be eliminated from the income-tax rolls in the interest of redistribution?
Another question is: what do middle-income Americans, or even low-income Americans, owe their government and their society in the form of at least modest taxes designed to sustain the governance that all citizens count on? Leave aside income redistribution. What about the military defense of the nation? What about federal infrastructure? What about law enforcement? What about immigration enforcement? These are things that all Americans need. Shouldn’t all Americans make at least some contribution, even if it is nominal, to supporting them?
It isn’t healthy from a civic standpoint when half the population pays for the governmental needs of the other half.
Some note, inevitably, that those who don’t pay income tax still pay Social Security payroll taxes. True. But those are taxes collected specifically for their own later Social Security payments (though the taxes collected never come close to covering the cost of the benefits). When Franklin Roosevelt created Social Security in 1935, he made clear he would not allow any general-revenue funds to be used to sustain the program. “No dole,” he said. “No money out of the Treasury.”
No, it is the income tax that is designed to sustain the federal government in its mandate to maintain the general welfare of the broad mass of Americans. That many Americans don’t contribute to that is a far more serious civic lapse than the current contribution of the rich.
But don’t expect any tax proposals emanating from Washington to address this sad situation. Democrats will scream that the rich need to pay their “fair share.” Republicans will shrink from anything approaching the top rate of 28 percent created by the landmark 1986 compromise tax-reform legislation. And congressional tax writers will accept the limitation on their flexibility necessitated by the legal tax avoidance afforded so many Americans.
Robert W. Merry, longtime Washington, D.C., journalist and publishing executive, is editor of The American Conservative. His next book, President McKinley: Architect of the American Century, is due out from Simon & Schuster in September.