The new French president’s plan for a top income tax rate of 75 percent has raised many eyebrows on this side of the Atlantic. The uncomfortable truth, however, is that presently no developed nation’s income taxation disproportionately burdens wealthy residents more than that of the United States. The United States’ corporate income tax is also the highest among countries in the Organization for Economic Cooperation and Development.
The Tax Foundation has gone so far as to conclude that “federal tax and spending policies are very regressive and very redistributive.” They highlight a Congressional Budget Office finding that in 2008 and 2009, 60 percent of households received more in transfer income than they paid in federal taxes. In fact, even the second quintile — those in the 60th to 79th percentiles — are on near parity and may soon become net receivers as well. The transfers include cash payments such as Social Security, unemployment insurance, and Supplemental Security Income and in-kind transfers such as food stamps and Medicare.
The disproportionate burden on wealthy people, however, appears to remain relatively unreported. A 2011 Civitas Institute poll, for example, asked North Carolina voters whether government should or should not redistribute wealth by increasing taxes on wealthy earners. A majority said it should, which is indicative of the attitudes that cause so many politicians to play on class warfare.
One particularly misleading form of persuasion that fuels this desire for redistribution is the way various outlets present tax burdens. So often we hear about the “tax rate,” or percentage of income, that a certain wealthy individual may pay. Not only does this ignore the taxes already paid on corporate income or income taxes paid prior to investment dividends, it tilts the dialogue in favor of a graduated income tax — as though the second plank of The Communist Manifesto ought to be just assumed.
One such claim is that presidential candidate Mitt Romney pays a lower tax rate than the average American. If these outlets were honest enough to present tax burdens in straight dollar terms — around $2 million in the case of Romney versus less than $4,000 for the average household — they would have to acknowledge the enormous disparity of tax payments (or nonpayments) across the income and wealth spectrum. By the way, even in rate terms, the claim about Romney is not true, since the percentage of income he paid was higher than that paid by 97 percent of Americans.
Not only is such rhetoric based on an illusion, it is counterproductive. It suggests that higher tax burdens on the wealthy can solve the prevailing fiscal shortfalls, when this is simply not possible. If, for example, the federal government were to confiscate all profits from every Fortune 500 company — ignoring the destruction to market incentives — that would raise less than $500 billion. Even a one-time confiscation of every penny of income from households that earn $250,000 or more would only just cover the deficit and amount to less than half of the federal government’s total reported budget.
As people clamor for a larger share of the economy via political means and ignore who earned the output, one unfortunate outcome is that the pie becomes smaller — and we all lose. The United States is already on course for substantially lower growth rates in the future, and some of the world’s most top-heavy and burdensome taxes on both residential income and corporate income are a major part of the problem.
Fergus Hodgson (@FergHodgson) is Director of Fiscal Policy Studies for the John Locke Foundation.