Thursday, November 10, 2011

Percentiles

Trumwill and Web go back and forth on what counts as taxation.  The question comes up in the context of the response to the OWS slogan – “We are the 99%” – from the Right:  “We are the 53%,” i.e., the 53% of the population that pays federal income taxes, specifically those that have a positive number on line 60 of the IRS Form 1040.*

This number, of course, excludes payroll taxes:  social security, Medicare, and Medicaid “contributions”, as well as taxes on corporations from which a given taxpayer may receive dividends (which the government taxes again as income).  Not to mention state, local, sales and property taxes.  National Review’s Kevin Williamson makes this point in a bloggingheads.tv debate below:

On the other hand, social security, while technically a welfare program, is under current law a government pension:  paying social security taxes to the government creates a government liability payable directly to the individual taxpayer.  Likewise, Medicare taxes.

And state and local taxes are just that:  state and local.  Granted, some nonzero percentage of sub-national fiscal liabilities are created by federal fiat, and that is a shame irrespective of the particular spending on the merits.  But by and large, state and local spending of state and local taxes are spent on state and local priorities at the behest of state and local electorates .  Federal spending is a different question.

Corporate taxes are a little trickier:  they fall on the rich and poor alike in proportion, not to their overall income, but to the measure in which they own the companies being taxed.  For this reason, among others, corporate taxes should be abolished in favor of raising marginal rates.  But really:  given that wages and salaries are paid pre-tax, how much of the income of the 47% comes from already taxed dividends?  I’m thinking, not so much.

So really, federal discretionary spending is funded (not counting Red Chinese loans) by only 53% of the population.  National Review’s Rich Lowry (if you can put up with his interlocutor’s screeching interruptions) gives the best explanation yet for why this matters:

Rich is at pains to disagree with the application of this principle – that enlarging the class of non-federal-income-tax-paying citizens correspondingly enlarges the constituency for all-upside increases in federal spending – but he never gets to explain why.  He hints that his reasoning is similar to Kevin’s:  it’s a lousy way to build a political coalition.  I would add that this is especially true now that the relationship between spending and taxes is attenuated at best – remember those Red Chinese loans.

Actually closing the gap in the long term will requires painful cuts in federal spending and substantial income taxes running all the way through that 53%.  Unfortunately, the bulk of federal spending is supported by political coalitions sufficiently powerful that, with a few exceptions like Paul Ryan, neither political party has made any serious proposals to meaningfully cut it.  Similarly, neither political party has made any serious proposals to raise revenue, and of course both parties actively collaborate against shaping America’s population and economy into ones that would actually generate the wealth necessary to close this gap. 

* It could be even more technical than that.  I observe from my own 1040 that an additional $800, the “Making Work Pay” credit, was added to my return on line 63 as if it were tax that had been withheld.  (It was not.)

1 comment:

trumwill said...

Psychologically, I am not positive how much difference it makes if the withholding is due to payroll taxes that are put into a separate category or state and local versus federal. This applies not only to those who pay only S&L&P, but also for my wife and I at the upper end of the economic spectrum. Progressives can talk about how we "don't pay our fair share" of S&L&P taxes, but we're getting nailed elsewhere.

And so it is with those just getting started or low-income earners. The careful distinctions are lost. They see the money leave their paychecks. I don't think they truly believe that "taxes are for rich people" as the right claims, even if the 1040 line is.