Ari Fleisher: The tax system isn’t fair because the 1% pay too much

by pdxblake

Bush’s former press secretary Ari Fleischer is out with an op-ed in the Wall Street Journal showing he has lost none of the skill at lying that he displayed while working for Bush.  His op-ed concludes with the idea that:

[Obama]’s right that the system isn’t fair, but not because the top 1% pay too little. It is because they pay too much.

His evidence?  Congressional Budget Office data that he describes:

There’s also another way of looking at fairness, and that’s the tax burden. Here, consider the top 20% of income earners (over $74,000). They make 50% of the nation’s income but pay nearly 70% of all federal taxes.

The remaining 30% of the tax burden is borne by 80% of the taxpayers, those who make less than $74,000. In short, this group’s share of taxes paid, 30%, is lower than the share of income they earn, 50%.

This is a frequent conservative dodge to say that the rich pay too much in taxes and if the rest of America wants government programs, well, we should dig into our pockets to pay for it instead of asking the rich to bail us out (oh, yes, the irony with the response to the financial crisis is rich).

Let’s start with an easy bogey about who we are talking here.  Let’s for a moment look at how much the top 1% of income earners make (they represent the area with the most outsized growth in income over the past 30 years).  The chart below shows that the top 1% have more income than the bottom 50%.

Source: CBPP

Breaking this down by share of total income:

Top 1: 20%
2-20th percentiles: 30%
21-50th percentile: 37%
51-100th percentile: 13%

Even within the top 20% of income earners, the bulk of the income is at the top: the top 1% are even richer than the rest of the top quintile (top 20%).  And it turns out that the growth of the 1% is the largest driver of inequality in the US over the past 30 years.  The chart shows the share of income going to the top 1%, compared with the Gini index, which is a measure of inequality (where at 0 everyone’s income is equal and at 1, one person has all of the income).  If anything this chart understates the rise in inequality since it only measures income, not wealth.

What does this have to do with the top 20% paying most of the the income taxes?  The role of the system of progressive taxation we have is that it is supposed to reduce before-tax inequality by providing assistance to the poorest, funded by everyone, but with a higher marginal tax rates for higher incomes (higher tax rates on every dollar above a certain threshold).  You can measure the progressivity of the tax code by looking at the percentage decrease in the Gini index from the before-tax income distribution to the after-tax income distribution.  The higher the reduction, the more progressive the tax code is.

The tax system was pretty good at narrowing the income distribution in 1980 when it lowered the Gini index by 10%.  The progressivity was decreased significantly from the application of supply side policies at the beginning of Reagan’s first term.  It declined all the way to the tax reform in 1986 (signed by the Socialist Ronald Reagan), which reversed the trend.  The Center for American Progress describes:

The 1986 reforms lowered the top marginal tax rate but also removed or reformed a host of provisions that allowed rich households to reduce their tax bills, and raised the tax rate on investment income. The combined effect was an increase in the effective tax rate for the richest 1 percent from 25.5 percent in 1986 to 31.2 percent in 1987, and small tax cuts for the bottom 60 percent of households.

Clinton added by raising taxes on the wealthy in his first term, but began the trend reversal by lowering the tax rate on capital gains (which mainly go to the wealthy) and the progressivity of the tax system began to suffer.  This of course was continued under Bush, and the full extension of the tax cuts in 2010 until the end of 2012 continued to chip away at the progressivity of the tax system as many wealthy people had tax losses from 2008 that significantly reduced their tax burden in 2009 (and could be carried forward into 2010).

So now here we are, with a tax system that is at its least progressive since 1992, when the country had just gone through 12 years of Reagan and Bush and we are at a crossroads.  Conservatives are complaining about the taxes on the rich (even as the 1% has its highest share of income; see this CAP report for further debunking of the “the rich are taxed too much”).  We have a choice about whether a progressive tax system where people pay higher tax rates as their income increases, or an alternate reality where the rich see their tax burden go down as social programs that help those with the lowest incomes get slashed.  I know which direction I want to go in.