We’ll hear plenty of ideas about taxes during this big election year. Many of them will be based on misunderstanding of the facts. Far too many will fail to account for potential negative unintended consequences.
Two recent articles helped highlight both problems. Fans of higher taxes for “the rich” ought to spend time acquainting themselves with both pieces.
The February issue of Reason magazine features David Henderson’s examination of “The Truth About Income Inequality.” Henderson is a research fellow at Stanford’s Hoover Institution and editor of The Concise Encyclopedia of Economics.
Among the truths he highlights: “[O]ne thing that is clear from the data is that the higher your income, the higher the percent of your income you pay to Washington. In 2015, according to a recent study from the Tax Foundation, people in the lowest quintile paid 1.5 percent of their income in federal taxes, on average; the second quintile paid 9.2 percent; the middle quintile, 14 percent; the fourth quintile, 17.9 percent; and the highest quintile, 26.7 percent. Those in the top 1 percent paid a whopping 33.3 percent. This includes all federal taxes: income taxes, taxes for Social Security and Medicare, corporate income taxes, and excise taxes.”
Those with the most income pay the largest share of the federal government’s bills. Unless you believe government programs are geared toward the highest income earners, you might want to question politicians who gripe about “the rich” not paying their “fair share.”
Henderson’s data lead him to an unsurprising conclusion: “[W]henever there is a large federal tax cut, those in the top quintile will almost certainly get a much bigger benefit, both in dollars and as a percentage of their income, than other quintiles.” In other words, when you cut taxes, you’re most likely to cut them for those who actually pay taxes.
That’s not the end of the story. Henderson asks whether those in the highest income category enjoy bigger tax cuts “as a percentage of their federal tax burden.” When it comes to cuts enacted during the administrations of Presidents George W. Bush and Donald Trump, his answer is no.
After three rounds of tax cuts under Bush, those in the second-lowest quintile saw the largest cut in their 2004 income taxes: 17.6%. The middle quintile (12.6%) also saw a larger cut than the top quintile (11%).
Trump’s 2017 cuts also helped the second-lowest quintile the most percentage-wise: 10.3%. The lowest quintile saw taxes cut by 7.3%. Among all five quintiles, the top income earners saw the smallest cut (6.7%). As for the vilified top 1% of income earners? Their tax burden dropped by a relatively modest 4.6%.
Those who call for reversing tax cuts enacted during the most recent Republican presidential administrations might want to reconsider these facts.
Beyond taxes on income, one of the most highly publicized proposals in the Democratic presidential campaign focuses on a proposed new tax on wealth. Writing in a recent issue of Foreign Affairs, Catholic University history professor Jerry Muller details some unintended consequences of that idea.
“The main effect of a wealth tax would be to discourage wealthy individuals from holding demonstrable assets,” Muller explains. “Any individual or household within shouting distance of the threshold would have to get its assets valued annually, imposing costs and creating a permanent jobs program for tax lawyers and accountants, whose chief responsibility would be to figure out ways around the law, including moving assets abroad.”
“A wealth tax would dramatically curtail private investment,” Muller adds. “A wealth tax would upend the incentive structure for rich people, causing many to stop funding productive economic activity and focus instead on reducing their tax exposure and hiding their assets.”
Not only would the tax “discourage investment, reduce innovation, and encourage short-term thinking,” in Muller’s view. It also would prove a dubious source of revenue to fund big-ticket items on the Democrats’ presidential agendas.
Beyond impact on the economy and the federal treasury, Muller points out concerns for those who value individual freedom. Those subject to the tax would face a “full accounting” to Washington of all “homes, furniture, vehicles, heirlooms, bank accounts, investments and liabilities, and more.”
“The result would be a huge expansion of the reach of government into citizens’ lives, a corresponding reduction in citizens’ privacy, and the accumulation and storage of vast amounts of highly sensitive data with few safeguards to prevent their misuse,” Muller warns.
Perhaps these outcomes mean little to those who want government to target people’s wealth. But advocates of the new tax ought to acknowledge the potential side effects.
In general, this year’s highly charged political debates about tax policy will benefit from an increased focus on facts and consequences.
Mitch Kokai is senior political analyst for the John Locke Foundation.