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Ask Auntie Pinko

July 15, 2005
By Auntie Pinko

Dear Auntie Pinko,

I was having a debate at work recently with a right-wing colleague and he asked me to answer the following question.

He stated: five percent of Americans pay 54 percent of all personal income taxes. They do not use more government services than other Americans; they use fewer. Why is this fair?

How can I rebut this? Is it true and factual? If it is, does he have a point? What can I say? HELP! I need some talking points.

Thank you and keep up the good work.

Sincerely,

Michael
Palm Beach Gardens, FL


Dear Michael,

Auntie Pinko is sorry to tell you that I can't help you, because I don't "do" talking points. Talking points are rhetorical weapons in the propagandist's arsenal; like statistics, they can be factual and yet say whatever the user wants them to say. By selectively using information, presenting incomplete or irrelevant data, or focusing on marginal issues of high emotional impact rather than central issues of less "punch," talking points can be used to manipulate debate into dead ends and abstract backwaters that do nothing to enlighten or evoke thought.

However, I am happy to discuss the specific item you've raised, in the larger context of national tax and finance policy, which is where it belongs.

Let's start with national revenues: the money America needs to pay for all the things we expect of our government. Where do they come from? In 1934 (the first year we collected information like this) Federal revenues broke down like this:

  • 45.8% of all Federal revenue came from excise taxes

  • 26.7% came from a stew of "other" sources that included certain fees and licenses, as well as taxes on wealth or assets (inheritance, gift, and capital gains taxes, etc.) as opposed to income

  • 1% came from social insurance and retirement payments (not surprising, since Social Security hadn't gotten rolling yet)

  • 12.3% came from taxes on corporate revenues, and

  • 14.2% came from individual income taxes.

Fast forward to 1946:

  • 17.8% of the total Federal revenues came from excise taxes.

  • 3.1 % come from "Other" revenues

  • 7.9% of the revenues are now receipts on social insurance and retirement payments, but of that only 4.8% goes back out in payments, and 3.2% is held "off-budget" (that is, it cannot be spent.)

  • 30.2% of Federal revenues are taxes on corporate revenues; and

  • 41% is collected in individual income taxes

In 1946, Americans in the top tax bracket faced a marginal income tax rate of 86.45%. That was low, compared to the top marginal rates in the 1950s, when the top marginal rates reached 92%. Were those the "good old days" conservatives long for? Those top rates stayed in the 90% range until the mid-1960s, when they came down to the 70% range, where they stayed until Mr. Reagan was elected. In 1982, they dropped to 50%.

Let's check the Federal revenue distribution in 1986, just before the tax reforms enacted that year took effect:

  • 4.3% of all Federal revenues are excise taxes

  • 5.2% is now from "other" receipts

  • 36.9% from Social insurance and retirement fund payments, but only 10.9% is available for paying out in the budget, the other 26% is off-budget

  • 8.2% are now taxes on corporate revenue taxes are now 8.2%, and

  • 45.4% is collected in individual income taxes

How do the "top five" percent of Americans make out in 1986? Well, aside from that top marginal rate of 50%, they're paying an average tax rate of 25.68%. The "top five" makes 24% of all the income made by Americans, and they pay about 43% of all income taxes collected that year.

Descending from these rarefied heights, let's look at the bottom fifty percent of Americans. That year, their tax rate was between 9.6% and 16.35%, and they made almost 17% of all the income made by Americans.

No, that's not a typo. Half of all the people who filed income taxes in 1986 accounted for less than a fifth of all the money made that year. Of all the income taxes collected that year, they paid less than 6.5%. Of course, considering that the income of the bottom half, averaged from their tax returns, comes out at $8,239 per tax filer, it might be quite a stretch to make that percentage more "fair."

Now let's look at today. The Federal revenue distribution looks much the same. Corporate revenue taxes, excise taxes, and "other" revenue are down very slightly, and social insurance and individual income taxes are up very slightly, but the amounts are comparatively tiny.

But those unfortunate "top five" are getting hosed! Or are they?

Certainly, they're paying fifty-four percent of all the individual income taxes collected this year. But their average tax rate is now down to 22.9%, and the top marginal rate is now 38.6% (and due to drop next year to 35%.) And the "top five" are now making more than thirty percent of all the income earned by all Americans.

How about the bottom half? They must be making off like bandits! Their tax rate is now between 4.6% and 14.6%, and they made less than 15% of all the income made by Americans. They paid only 3.5% of all income taxes paid by Americans, so it would only be fair to make the bottom half pay a little more, right?

Except that in constant dollars (adjusted for the Consumer Price Index,) the average income per filed return of the bottom half of Americans is around $10,000 a year (that's $13,555 in current dollars.) So it might (again) be difficult to squeeze in more tax payments among the housing, health care, day care, and other items eating into those budgets. Your conservative colleague can try to make things "fairer" this way, of course, but there is the old saying about blood and stones to consider.

Oh, wait. Auntie forgot. There was another assertion as part of your colleague's talking point about the poor, much-abused top five. They "use fewer government services" than other Americans.

Really?

Last time I looked, Federal subsidies to homeowners benefited the "top five" way more than the bottom half. Ditto federal subsidies on wealth (capital gains tax deferrals, breaks, etc.), life insurance savings, certain types of bond income, accelerated depreciation on various types of property, fringe benefits, meal and entertainment deductions, etc.

Not to mention tax-free retirement subsidies (Social Security, Medicare, etc.) which accrue equally on a capitated basis to the "top five" as well as the bottom half, and which account for one of the largest items of Federal spending.

What about other "services" the "top five" don't use? Well, they have more to lose than the bottom half, so perhaps the amount they are paying for military protection, security, the maintenance of the legal system, etc., should indeed be proportionate to what is being protected.

Oh, that's right. They don't get food stamps. Considering that the overwhelming majority of food stamps recipients are children, disabled, or the elderly poor, and very few of them tend to be in the "top five," in that particular case your colleague is right on.

So, is our national tax and finance policy "fair?" Not according to anyone Auntie Pinko has asked on the left or the right. It doesn't seem to work for anyone, does it?

Thinking about that brings me back to why I included all of that apparently irrelevant data from way back when - the 1930s, 60s, etc. You might have noticed a couple of significant changes in that "overall profile" of Federal revenues. Did you? What was much higher back then? Gold stars to those who noticed the precipitous decline in taxation of corporate revenues and wealth/assets. In fact, a good case can be made (though not here, because Auntie's fingers are getting tired) that if you factor in the incredible decrease in corporate taxes with the enormous increase in corporate welfare and subsidies, you can account for the Federal deficit.

I realize this is all messy and complicated, Michael, but the question of how the government collects the money needed to deliver on its citizens' needs and expectations is enormously complicated. It doesn't reduce to talking points. And, in the words of the Dread Pirate Westley (Princess Bride is one of Auntie's all-time favorite films) "anyone who tells you otherwise is selling something." And it's probably something you don't want to buy. But thanks for asking Auntie Pinko!


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