July 15, 2011

July 15, 2011 | Commentary on Taxes

Are the Rich Undertaxed?

Rarely has class-warfare rhetoric been so overwrought.

Last week, Senate Majority Leader Harry Reid (D., Nev.) “explained” the GOP’s motive in withdrawing from stalled debt-ceiling negotiations this way:

Why? To protect oil companies. To protect the owners of yachts and corporate jets. To protect corporations that ship jobs overseas. To protect millionaires and billionaires from paying their fair share.

Sen. Sheldon Whitehouse (D., R.I.) fleshed out this explanation with a few specifics:

When our Republican colleagues talk about defending against tax hikes, they are talking about . . . protecting the top 400 income earners in the country who, on average, pay [18.2 percent in] Federal taxes. . . . These are people who made on average more than a quarter-billion . . . in one year. And God bless them. What a wonderful thing it is to make more than a quarter-billion dollars in one year. But they pay taxes at a lower rate than a truck driver in Rhode Island does on average; the guy who wakes up every morning and gets into his clothes and puts on his boots and gets in the truck and goes out there and works all day, pays the same tax rate as the person earning over a quarter-billion dollars.

Putting it all in sober perspective, Sen. Barbara Boxer (D., Calif.) observed: “This is America. This isn’t pre-revolutionary France, where the king had everything.”

That’s right. Off with their heads!

To highlight the GOP’s intransigence, Reid offered a non-binding resolution. Dubbed the “Sense of the Senate on Shared Sacrifice,” it calls on “those earning $1,000,000 or more per year [to] make a more meaningful contribution to the deficit reduction effort.”

The Hill nailed the real reason Senator Reid interrupted all serious Senate business to debate this meaningless rhetorical exercise in class warfare. “The vote,” the newspaper reported, “will likely be used by Democrats as a way to show Republican resistance to new tax hikes.”

Republicans opposed to tax hikes? Now there’s a breaking news story!

But this is a debate worth having. Let’s review the data.

Our tax code already ranks among the most “progressive” in the industrialized world. While it’s true that the “rich” have been earning a steadily increasing share of all income over the last three decades, they have shouldered a disproportionate share of the overall tax burden. Today the wealthiest 1 percent of American households earn 20 percent of all income — more than twice the share they earned in 1980 and no doubt a class-warfare crime of the first magnitude. But they pay 38 percent of all income taxes, up from the 19 percent they paid in 1980. This, despite Congress’s halving top marginal tax rates since the Carter years.  

The lower marginal tax rates that have prevailed since Reagan’s time have resulted in a lower tax burden on not only rich, but also middle- and lower-income Americans. Back in 1981, the bottom half of wage earners paid 7.45 percent of all taxes; today, their share is barely a third of that (2.7 percent).

None of this, of course, comports with the liberal class-warfare narrative.

Liberals take solace from polls that show large majorities of Americans favor increased taxes on “millionaires and billionaires.” An April New York Times/CBS News poll, for example, found that 72 percent of Americans thought households earning over $250,000 a year should pay more taxes to lower the budget deficit.

But consider the context in which Americans hear questions like this. What, exactly, do they think the “rich” pay in taxes today? How many Americans appreciate the truly progressive nature of our current tax system? And, more important, do Americans believe there should be some sort of cap or limit on how much we send to Uncle Sam? If so, what might that limit be?

First, polling suggests that Americans see the rich as surrounded by legions of the best tax lawyers and accountants money can buy, who use arcane loopholes in the tax code to shelter their income from the taxes the rest of us must pay. Accordingly, they assume the rich pay little or no taxes. For example, one poll found that only 24 percent of Americans believe the rich pay “the highest percentage of their income in total federal taxes.” Over half see middle-income earners as bearing the heaviest load. In reality, the IRS reports that the wealthiest 10 percent of taxpayers, who account for fully 70 percent of all income-tax receipts, send Uncle Sam an average of 18.7 percent of their income. The next wealthiest 40 percent face an average tax rate of barely 8 percent. Finally, the average tax rate paid by the bottom half of Americans stands at a mere 2.6 percent.

So it is not surprising that, in the abstract, Americans feel that wealthy individuals can belly up to the bar and shoulder a heavier tax burden, all for the common good. That’s not asking too much, is it?

Okay, perception is reality. But what do Americans think a “fair” tax burden looks like? What’s the maximum proportion of an individual’s income — even someone who meets the definition of being rich — that government should take in taxes?

The answers will surprise, and disappoint, the class warriors.

Between 2005 and 2009, the Tax Foundation commissioned a series of polls asking voters to assess the “maximum percentage of a person’s income that should go to taxes — that is, all taxes, state, federal, and local?” The mean response, between 14.7 percent and 16.0 percent, was well below today’s actual total tax burden.

Similarly, in 2009 Fox/Opinion Dynamics asked: “Out of every dollar, what’s the highest percentage anybody should have to pay?” Over half said the total tax burden should be less than 20 percent; another quarter thought it should top out at between 20 percent and 30 percent. Only one in ten saw a top rate of over 30 percent as acceptable.

Finally, yet another 2009 poll, this one commissioned by Resurgent Republic, asked voters to pinpoint “the maximum percentage that the federal government should take from any individual’s income — 10 percent, 15 percent, 20 percent, 30 percent, 40 percent, 50 percent or more?” One-third took the biblical view and said the government’s claim should be no greater than 10 percent of our incomes. Another third of voters would tolerate a total tax burden of somewhere between 10 and 20 percent. In all, 69 percent of registered voters — including 62 percent of registered Democrats — want to keep at least 80 percent of what they earn and will grudgingly concede the remaining 20 percent to the government. A tax system that crosses this line in the sand garners little support, a mere 7 percent of registered voters and only 11 percent of registered Democrats.

It’s rare to find such consistency in polls conducted by a wide array of polling organizations. And serendipitously for conservatives, this sentiment comports with current reality. The average federal tax rate tops out at 18.7 percent for the wealthiest tenth of Americans and registers below 10 percent for everyone else.

Liberals, we know, want to push an unprecedented tax burden on Americans that could exceed 25 percent of gross domestic product, and they envision federal spending trending even higher. The good news as we enter the final stages of the negotiations over the debt ceiling is that Americans will not tolerate this new normal.

Michael G. Franc is vice president of government studies at the Heritage Foundation.

About the Author

Michael Franc Distinguished Fellow
Government Studies

First appeared in National Review Online