Billionaires are paying not much more taxes, proportionately, than those Americans
who are merely prosperous.
It's a sign that, even without the formal adoption of a so-called "flat
tax," America's tax system is getting flatter.
Ever since the introduction of the modern income tax in 1913, US policy has
been guided by the notion that the rich should pay a larger of their income
in federal taxes, since they arguably owe something extra to a government that
protects their greater wealth, and to a society that has helped them prosper.
But a debate has long waged over just where to draw the line, with populists
pushing to "soak the rich" and conservatives arguing that a too-progressive
tax structure creates a disincentive for the creation of jobs and wealth that
benefit the whole nation.
Chalk up President Bush as not just a tax cutter but also a tax flattener.
Under Mr. Bush and a Republican Congress, big tax cuts since 2001 have given
major tax reductions to those wealthy individuals presumed, up to now, to be
able to afford paying a bigger chunk of their income in taxes. By one measure
of the federal, state, and local tax burden, just 3.4 percentage points separate
the effective tax rate paid by the top 1 percent of earners from the other 99
percent of American households.
"That's the goal of the president and Congress - to shift the tax and
debt burden to middle-income Americans," charges Bob McIntyre, director
of Citizens for Tax Justice (CTJ), a liberal Washington think tank that crunched
The comment may be unfair to a president who has cut taxes for all income groups,
and has not publicly espoused such a goal. But his policies could have the effect
of shifting greater tax burdens to the middle class.
If the Bush tax cuts are made permanent by Congress, by 2010 billionaires and
millionaires will be paying a smaller percentage of their income in federal
taxes than those in the upper middle class, according to a calculation by Brian
Roach, an economist at Tufts University, in Medford, Mass.
In his second term, Bush has identified further tax reform as a top goal. This
could include a push for a flat tax, one in which all income groups are asked
to pay the same rate.
Two tax cuts currently before Congress would flatten taxes further - if their
proponents overcome objections to measures that would add to the already large
Many conservatives see the shift to a flatter system as progress. It leaves
more money of the well-to-do untaxed, and thus available for the investment
that creates jobs and prosperity. Eventually, a truly flat tax system could
be simpler than the current one, encrusted by years of detailed congressional
changes in the law to please various constituents.
Simpler tax filing would be welcome to most Americans. A new AP-Ipsos poll
finds that most Americans think federal income taxes are too complicated, but
they're not eager to get rid of some deductions and tax credits. And when asked
about instituting a flat tax, a majority doesn't like the idea. Some 57 percent
of those surveyed say people with higher incomes should pay a higher tax rate,
while 40 percent thought tax rates should be the same for everyone.
In 1913, only 0.5 percent of the population paid the tax, and rates rose from
1 percent to 7 percent as income increased. That income tax level has risen,
of course, but progressivity remained an important element.
The system still has progressivity, but that element is shrinking.
When the top 1 percent of taxpayers, those making an average $978,000 last
year, sent in their tax forms for 2004 to the Internal Revenue Service in recent
weeks, on average they paid 24.6 percent of their income in federal taxes. That
rate is down 4.3 percentage points from pre-Bush tax law.
All income brackets have got tax cuts under Bush. But the reductions for less
affluent Americans are smaller, proportionally, than those for the millionaires
The "effective" tax rate is that which taxpayers actually pay. It
isn't the higher marginal tax rate paid on their last dollar of income.
The poor, the near-poor, and the lower middle class do pay a lower effective
federal tax rate. The bottom 20 percent, for instance, pay 7.9 percent - basically
just payroll taxes for Social Security and Medicare.
When less progressive state and local taxes are added, the nation's tax system
becomes even flatter. CTJ's analysis finds the top 1 percent were paying at
a 32.8 percent rate, with the bottom 20 percent paying at a 19.7 percent rate.
A study last summer by the nonpartisan Congressional Budget Office (CBO) of
effective tax rates basically confirms the flattening pattern shown in the CTJ
analysis. Because the CBO uses modestly different assumptions - for instance,
it ignores the estate tax - its numbers are slightly different.
Several factors explain the flattening in the federal tax code. Under Bush,
the tax on dividends and capital gains has been cut - although not eliminated,
as flat-tax proponent Steve Forbes proposed in his 1996 presidential bid. The
wealthy own the bulk of stocks and other financial assets.
Under Bush tax-cut legislation, the estate tax shrinks and then expires in
2010. But it is slated to return to a 55 percent level on large estates in 2011.
Permanent repeal, under consideration in the House this week, would flatten
federal taxes further in the next decade.
The other tax legislation now under review is a budget resolution in the Senate
that would eliminate income taxes on Social Security payments. This would primarily
benefit affluent seniors. The rich would also gain, but it would be a drop in
their bigger buckets.
The fate of both tax provisions is uncertain. The budget process will likely
continue until the fall.
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