Commentary

Looking High and Low for Taxes

A year-end AP-AOL News Poll found 89 percent of Americans optimistic about their own family’s living standards, but less so about the fate of strangers. That is perfectly understandable. It is hard to read a newspaper without being told that only the top 1 percent are doing well, while the rest of us have either seen our jobs exported to China or have suffered years of unexplained “wage stagnation.” Putting together all the downbeat news with the upbeat poll, what it shows is that 89 percent of Americans must think they’re in the top 1 percent.

The purpose of the media’s obsession with high incomes is to soften us up for a rerun of the “millionaire’s surtax” of 1992, which soon proved to be rhetorical camouflage for tax hikes on pensioners, drivers and two-earner suburban families. Yet the top tax rate is already too high, and believe it or not, the lowest tax rate is also too low.

A couple of weeks ago, The Wall Street Journal’s Hot Topic was “Can Bush’s Tax Cuts Survive?” The article noted that “Democrats have said they would keep … increased child credits ($204 billion over 10 years), some marriage penalty relief ($62 billion) and the new 10 percent income-tax bracket ($433 billion).”

Yet that is precisely where the lion’s share of projected revenue loss is expected to occur. House Speaker Nancy Pelosi has been threatening to rehash a 39.6 percent tax rate for earnings above $500,000. But that would at best bring in barely one-tenth as much loot as getting rid of the 10 percent tax and the other two sacred cows.

The CBO’s long-term budget projections, due soon, are likely to show that federal revenues will total nearly $35 trillion over the next 10 years. When you hear about Pelosi’s grandiose impulse to squeeze another $70 billion or so out of her affluent neighbors over 10 years, that’s about two-tenths of one percent of the revenue Congress will be collecting and wasting in any case.

This has nothing to do with the budget. It’s about rich politicians posing as populists. Anyone serious about raising significant revenue without “killing the goose” would scrap that 10 percent rate.

Making a common yet serious mistake, the Wall Street Journal piece said, “Low-income earners must pay 10 percent of their income in taxes, instead of the 15 percent previously required.”

Actually, it has nothing to do with low-income earners. The bottom 40 percent faces income tax rates below zero because of refundable tax credits. In 2005, 22.2 million taxpayers received $41.5 billion in Treasury checks as large as $4,536 (in 2006) from the earned income tax credit (EITC). Single working parents with two children qualify for the EITC with an adjusted income below $37,783 and get additional cash (none of which shows up in most income distribution statistics) from Bush’s child tax credit. Even those in the 25 percent tax bracket on the next dollar earned rarely face an average rate as high as 10 percent on total earnings, thanks to generous but cumbersome deductions, adjustments, credits and exemptions.

The Tax Policy Center estimated that extending the 10 percent tax bracket for $43 billion a year would do nothing for the poorest fifth, save $15 a year for the second fifth, $38 for the middle fifth and $83 for the richest one-tenth of one percent (like Pelosi). Since the 10 percent tax bracket has no effect on marginal tax rates on the next dollar earned, it has no beneficial impact on incentives to work or save. The sizable revenue involved would be much better spent shaving a few points off the corporate tax and highest individual tax (because businesses file under both).

Fellow columnist Bruce Bartlett was a top tax economist at the Treasury Department under the first President Bush. Yet he ended up writing “Imposter” — a reasoned and reasonable critique of the current president. His critical chapter on taxes quotes me as saying, in 2001, that “the primary objective of the $1.35 trillion cut … seems to have been to maximize revenue loss rather than to minimize tax distortions and disincentives.”

I recently asked a couple of bravely loyal readers if they recall a time when I supported making all the Bush tax cuts permanent. I never did. Now you know why.

Alan Reynolds is a senior fellow at the Cato Institute and author of Income and Wealth (Greenwood Press, 2006).