Taxation Myths

To hear many a commenter talk or write one would believe that over the last thirty years, and especially the last seven, the tax burden has become increasingly tilted in favor of the wealthy. Greg Mankiw begs to differ, and here is the data:

The first number below is for 2005, the most recent year available. For comparison, I computed, and present in parentheses below, the average effective tax rate from 1979 to 2005, the time span covered in the report.

All households: 20.5 (21.6)

Lowest quintile: 4.3 (7.2)
Second quintile: 9.9 (13.2)
Middle quintile: 14.2 (17.1)
Fourth quintile: 17.4 (20.1)
Highest quintile: 25.5 (26.1)

Top 10 percent: 27.4 (27.6)
Top 5 percent: 28.9 (29.0)
Top 1 percent: 31.2 (31.7)

Notice that all groups are paying lower tax rates than the historical average. But in contrast to some popular perceptions, the change is not concentrated among the upper income groups. In fact, the opposite is true.

This data includes social security and most other federal taxes:

In its analysis, CBO estimates effective tax rates for the four largest sources of federal revenues—individual income taxes, social insurance (payroll) taxes, corporate income taxes, and excise taxes—as well as the total effective rate for the four taxes combined. Those taxes account for over 95 percent of total federal revenues. The analysis does not include federal estate and gift taxes, customs duties, and other miscellaneous receipts. Nor does it include state and local taxes.

An interesting point is that it includes the employers contribution in the employees tax rate, rather than the employers, which raises the effective tax rate on employees, and thus the lower income groups. That makes the numbers all the more impressive, because many supporters of Social Security would argue that the employer contribution is not a tax on the employee. I agree with the CBO, but I am curious if anyone will argue the numbers are skewed to make the burden on the wealthy smaller, and the burden on the poor and middle class higher, than it should be. I doubt it, but if they were intellectually consistent they would.

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7 Responses to “Taxation Myths”

  1. on 16 Dec 2007 at 5:37 pm glasnost

    We go over and over the same ground, the same misconceptions…

    I’m not going to bother digging the links out of Q and O unless you *really* don’t believe it at all, but Mankiw is frankly misleading, if you’re using this number to describe what actually happens to actual US citizens.

    He mentions this:

    Nor does it include state and local taxes.

    When you add in state and local taxes, taxation becomes essentially revenue neutral. Which is, non-progressive. So, the main policy driver of the creation of a middle class in America’s golden age has basically evaporated.

    Corrections in comments don’t solve the problem of the perpetuation of wrong information, or - even harder to fight - accurate information used to draw inaccurate conclusions.

  2. on 16 Dec 2007 at 5:51 pm Lance

    Given that I am speaking of federal taxes, I don’t consider your criticism of myself or Mankiw very accurate. If you have a problem with your own states method of taxation, please write your congressman.

    Nor is this an argument about progressive taxation. The claim made which is being disputed is that the federal tax burden has become more skewed toward the wealthy. In fact it hasn’t. As proof I would point out I am not a big fan of the fact that the tax burden has moved toward the wealthy, and more importantly off the lower and middle classes. So why would I be arguing as if this is a good thing? I wouldn’t. I am just getting the facts correct.

    If you have the data to back up your claim by the way, please provide it. I’ll post it right up on the front page if it holds water, but do not expect me to decry it.

    Also, I vehemently disagree with the idea that the primary driver of a middle class has been progressive taxation. State level taxation was more regressive in the past, and the effective tax burden during that golden age was not significantly different as regards to progressivity anyway. Marginal rates were higher, but the lower middle and lower classes paid a higher percentage of the total effective burden. That golden age had far fewer government programs to benefit the poor and middle class as well, so that seems a pretty good argument for ratcheting them back if that logic is to be used.

  3. on 16 Dec 2007 at 6:41 pm Thomas Collins

    http://www.freerepublic.com/focus/news/819936/posts

    Individuals arguing for higher marginal tax rates on the wealthy in the name of fairness should always keep in mind the circumstances surrounding the repeal of the federal tax on luxury items (see above link for a short summary of those circumstances). Many liberal Democrats supported this repeal because bread and butter working folks (such as boat builders) were losing business as the wealthy cut back on their luxury purchases. The negative impact of the luxury tax is obvious because one can get a visceral sense of which industries are being hurt without being an econometrics expert. The negative impact of a general increase in marginal tax rates is more insidious because the drag on the economy is not as obvious.

    The truly wealthy will always be able to live off their trust funds no matter what the marginal tax rates might be. It is the entrepreneurs whose activities are dampened by marginal tax rate increases. And unless one thinks the US economy should be primarily a government jobs economy, one should be hesitant to support measures that dampen entrepreneurial activity.

  4. on 17 Dec 2007 at 5:50 am glasnost

    If you have the data to back up your claim by the way, please provide it. I’ll post it right up on the front page if it holds water,

    That’s a fair and generous offer. Allow me to oblige.

    but do not expect me to decry it.

    You’re a libertarian, and to my knowledge you don’t believe in a progressive tax system. So I don’t expect you to advocate for one. However, I don’t think you have to, or should, overstate the actual progressivity of the current system to make your case. I’m sure you’d say that you have no interest in doing that either.

    So, here you go. . Graph, halfway down, second column from right.

    The real range is roughly 20% to 30%. Not completely flat - yet.

  5. on 17 Dec 2007 at 2:59 pm MichaelW

    When you add in state and local taxes, taxation becomes essentially revenue neutral.

    What do you mean by this? Are you referring to the source of the government’s revenue?

    Also, you do understand that the federal government has nothing to do with state and local taxation right? So how is it any answer to point out the effect of such taxes with respect to the Bush tax cuts?

    It is the entrepreneurs whose activities are dampened by marginal tax rate increases.

    It never ceases to amaze me that very people who think taxing activities they want less of (e.g. a carbon tax), can’t seem to grasp this very simple concept. If you tax wealth creating activities, you will see less of them.

  6. on 17 Dec 2007 at 6:19 pm glasnost

    What do you mean by this? Are you referring to the source of the government’s revenue?

    A better way to say it would have been income-neutral. And that’s probably an overstatement. Nevertheless, a range of effective total tax rates between a 20% average for the bottom decile and a 30% average for the top decile and/or 1%, is a lot flatter than the Mankiw data, where the range is 4% to 31%.

    Thus, returning to this:

    and especially the last seven, the tax burden has become increasingly tilted in favor of the wealthy.

    I just noticed that Mankiw provides calculations of the effective tax rates for the upper-bracket from 1979 to 2005. I noticed that the upper-income brackets suggest that the tax rate has stayed the same, and I thought to myself “but what about all those upper-bracket cuts made by Reagan? Then I realized that Reagan’s first year in office is the second year of the sample.

    If you made an actual thirty-year sample - 1975 to 2005 - you’d see decreases in rates for the upper class comparable to those for everyone else. If you added another decade back, you’d see even more drastic decline from the overall average to now. The endpoints of the data have been manipulated here.

    The tax burden hasn’t gotten any worse - at least, not in any way obvious to these measurements - for lower-income folks, in terms of federal taxes, over the past eight years. I admit, Mankiw - and the CBO’s - numbers surprise me, now that I’ve been pondering them in response to this thread. Anyway, the point is that overall tax rates on the American people as a whole are rather flatter than Mankiw’s data suggests.

  7. on 17 Dec 2007 at 6:35 pm MichaelW

    Anyway, the point is that overall tax rates on the American people as a whole are rather flatter than Mankiw’s data suggests.

    It’s not Mankiw’s data, first off, and the tax rates are only “flatter” if you apply a blended state and local tax rate, which is a meaningless number. State and local taxes vary so widely and are applied to so many different targets that creating an average rate makes absolutely no sense. That goes doubly so when discussing Bush tax cuts and/or federal taxes, which affect the whole country. State and local taxes only affect the state or locality.

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