Thursday, September 02, 2004

Who carries societies burdens?

How does society organize the lives of millions of people into a stronger whole? Well, we have a set of rules that we arrived at by a consensus of our representatives to create government for the people, by the people, of the people to make sure that our society is preserved and strenthened. This government costs money and it's said that taxes are the price we pay for civil society. Who pays? Everyone, to the extent that they can afford to do so. In reality, because of the way wealth is distributed in our country we all know that the wealthiest individuals contribute the largest chunk of governement tax revenue and the poorest contribute little to nothing.

I was reading Kerry's speech at Georgetown, entitled "A Return to Fiscal Responsibility" when I got to this part:
But that is not the reason for our own budget crisis. The independent, non-partisan Congressional Budget Office reported last month that 94 percent of the $500 billion deficit for next year is due to George Bush's excessive spending and ineffective tax giveaways for the wealthiest Americans. In fact, his tax cuts alone account for most of the long-term deficit increase.
Because the administration's own analysis where the economy was to blame for around 50% of the this year's deficit, I did some investigating and came across numerous accounts of an August Congressional Budgeting Office report providing analysis on how Bush's string of tax cuts are actually shifting more of the burden of funding our government off the backs of the upper classes (top 20% and up) and onto everyone else, namely the middle class. From the first article I read by Robert Novak (you know, the one who leaked the identity of Valarie Plame):
That study concluded that President Bush's cuts had shifted more of the tax burden from the nation's rich to the middle class, though everyone enjoyed an income tax reduction. That was the old-fashioned way of scoring consequences of tax legislation, an exercise of arithmetic rather than economics.

Kerry could not have been happier. ''This is the straw that will break the back of middle-class families,'' proclaimed a written statement by the senator.
I'm thinking, if this is such big news, how did I miss it? Then I realize that in following the whole Swift Boat distraction, this news went right over my head. The majority of news sources reported the same thing, that the richest were benefiting the most from Bush tax cuts. Some of the leads were quite inane, saying the richest received cuts 70 times larger than the average family. As the mantra meant to convey fairness and equity goes goes, the more you pay in taxes, the more you get back in tax cuts.

That all makes sense, right? If I paid 70 times more in taxes than you did, shouldn't my tax cut be 70 times larger than yours? Well, things started getting more complicated when you read different takes on the CBO report. What you'll see are a whole other set of analyses that seem to contradict the 'pessimistic' interpretation and say that in fact, Bush's tax cuts not only leave more money in peoples' pockets, they have made the tax system more progressive than before. National Review Contributing editor Donald Luskin writes a piece called Liberal Lies, CBO Truths lambasting the Wall Street Journal, Washington Post, and New York Times as misinterpretations that "completely distort the findings of the CBO report."

To substantiate his case, he charts two sets of information organized by income level/tax bracket:

Tax reduction from 2000 tax law,

and Share of income-tax burden,

We can see from the first graph that while the equitability of Bush's tax cuts sounds like a redeeming rationale, they are far from equitable. The WSJ headline actual makes a powerful point: "Budget Office Says Biggest Tax Cuts Go to Richest 1%." No one is making the inane complaint that the rich get "bigger" breaks in the sense that they're getting more dollars back, since that would be usually be equivalent to the statement, "the rich make more money." With a 4.8% cut in income-taxes, they get a significantly larger proportion, not just amount, of their taxable income returned. The average return any member in the top 20% bracket received a 3% return. The next quintile received even less at 1.8%, followed by 1.7%, 2.0% and 1.4%. This results in the vast majority of the taxes being given to the richest 1%, not simply by virtue of their contribution to the federal budget, but from the tax breaks being heavily weighted towards the rich.

This data begs the following questions: if Bush tax cuts could be weighted towards the rich, what caused them to weigh them this way? Couldn't they have increased the middle class tax cut, because these are the people who have the most pent up demand and are have a great deal to contribute to the economy? Giving the rich such relatively heavy tax cuts costs the government a proportionally great deal of money, whereas giving more substantial cuts to the middle class wouldn't be nearly so costly. Remember that even according to the Bush administration, tax cuts costed us a quarter of the highest budget deficit ever, not counting the money spent from the Social Security "surplus". I don't claim any expertise in understanding the economic effect of Bush's tax cuts, but according to 10 Nobel-prize winning economists who endorsed Senator Kerrry, Bush's 'fiscal policy' has mostly created low-paying jobs and is endangering our economy in the long run.

From the second chart, Luskin points out the almost magical effect of Bush's tax cuts in altering the income-tax burdens that made our system more progressive than under 2000 law. The share of total tax collected by the government afforded by the top quintile overtook 3.8% of the burden from the lower four quintiles. If you're wondering how that's possible considering how how much larger the cut's per dollar paid in taxes were for the top quintile than the lower four, I'm asked myself the same question.

This mysterious outcome moved me to check out the actual CBO report, Effective Federal Tax Rates Under Current Law, 2001 to 2014, to find out for myself who's headline was more accurate? Is it true that "the burden of taxes has shifted from the wealthy to the middle class"? Or are the liberals distoring the truth, as according to the National Review? How can the tax burden shift towards the middle class while the rich—who undeniably benefitted disproportionally from Bush's three tax cuts—are paying more taxes?

After reading the report, it became apparent that the evidence from both takes on Bush's tax cuts are accurate, but the analysis on the parts of those attacking liberal periodicals like the Wall Street Journal were lacking comprehension. As it turns out, all of the quantitative assertions were true. The rich did get higher tax cuts as Lusking charted. They did end up footing more of the individual income-tax burden. And, yes, the second and third highest quintiles (middle class?) together ended up with a .9% increase in Total Federal Tax Liability. In 2004, the first quintile together ended up with a smaller share of the total tax burden, namely with 1.8% of the overall tax burden being shifted to the rest of America from the top 1% of earners.

Here's a direct quote from the CBO concerning the trend going out to 2014:
The differential increase in effective tax rates among quintiles is reflected in a shift down the income distribution in shares of taxes paid (see the third and fourth panels of Table 2). The share of taxes paid by the top quintile falls from 65.3 percent in 2001 to 62.8 percent in 2014, even though that group's share of income does not change. Four-fifths of that decline occurs for the top 1% of taxpayers, whose share falls by 2 percentage points, to 20.7 percent of federal taxes in 2014. The share of taxes paid by each of the middle three quintiles climbs by about 0.7 percentage points.
Two questions came to mind. What is the difference between a share of the individual income-tax liability and the total federal tax liability? Also, how can these numbers be reconciled? From the wording of the report, the total federal tax liability of the two tax burdens, is clearly more significant. Income-tax represents a significant fraction of all the taxes Americans pay to the federal government, but is supplemented by other forms of taxes.

What Luskin did, was to consider a shift in a fraction of the total tax burden more significantly than the entire tax burden at large. He also doesn't recognize that it's illogical for the top 1% are getting disproportionately large tax cuts and still have them carry more of their shares of the tax burden (note in differences in referring to income-tax and total tax) than before the tax cuts. According to, census figures from August 23 suggest that the middle class didn't grow, but rather shrunk by 1.2 percentage points. Therefore, a growth in the middle class might not account for the larger share of the overall tax burden. Granted that the definition of the middle class is not set in stone, if considering the information laid out here, claims by Luskin and other contrarians that the liberal media is distoring the truth are ungrounded. In principle, everyone shoulder's societies burdens to the extent at which they can, but there should be no mistake. In principle, Bush's tax cuts disproportionately benefitted the wealthy.

UPDATE: For a great quantitative analysis of the tax burden shift, check out Chris's Boring Tax Stuff post on My Quiet Life.

No comments: