Conservative Chicanery

There are lies, damned lies, and statistics. In the current debate on the "Buffett Tax", some conservatives are perpetrating a statistic more mendacious than Mephistopheles himself. A great example is John Steele Gordon, writing a pompous editorial with the attitude of a pedant.

Mr. Gordon is playing at Mythbusters, but he's neither entertaining nor enlightening. He writes to correct five misconceptions, some of which are more germane than others. The Mephistophelean "myth" is that "Millionaires pay proportionately less income tax than poorer people." What's so insidious about this "myth" is that it is, in fact, a myth: Millionaires pay proportionately more income tax than the rest of us, and - in fact - some 50% of all taxpayers pay no Federal Income Tax. Note the qualifiers.

Left out of this narrow definition of income tax are the FICA ("payroll") taxes that supposedly fund Social Security and Medicare*. These usually amount to 15.3%** (13.3% in 2011 with the stimulus tax break) of all income earned up to $102,800. According to Gordon, families with incomes above $1 million payed 23.3% in income tax. Adding in FICA, they would have paid at most 24.8%. Families earning between $50,000 and $100,000 would see their average tax rate jump from 8.9% (if Mr. Gordon is to be trusted) to 24.2%, which is very, very similar. Those earning less than $50,000 pay substantially less.

Now, President Obama is still wrong in saying that millionaires pay "less taxes than the rest of us". He's also wrong in defining earners who make $250,000 a year or more as "millionaires", a puzzling stretch of nomenclature. A family earning $250,000 in straight earned income (say, a successful doctor) might be chipping in about 35% of their income to the Federal till. That's a lot.

Mr. Gordon goes on to perpetrate another fallacy: he says that "dividends are paid out of corporate profits that have already been taxed. So Buffet's [sic] equity earnings are doubly taxed: He pays 35 percent at the corporate level and 15 percent on his own return." This is also specious. First, it applies only to dividends, not capital gains, and the latter amount to 70% of taxed income on investments***. A back-of-the-envelope calculation tells us that the total tax on investment profits might be about 15% + 0.3*35% = 25.5%. That's a marginal difference at best. Taking into account that high-rolling investors are likely to do a lot more trading and earn from capital gains, while dividends go disproportionately to cautious folks with retirement accounts, the "dividends are taxed twice" argument is a poor defense of the very rich.

Second, few companies pay the full 35% rate; they have tax shelters, rebates, and gimmicks just like wage earners. Third, the corporate profits tax is taken into account by investors when they purchase stocks. They decrease their investment in American firms concomitantly, lowering the marginal product and thus the wage of American workers. So workers suffer (although somewhat less) from the high corporate profits tax too.

In summary, let's look at the average tax rates we've calculated.

• Millionaires pay less than 24.8% of all income on average
• Middle-class families pay about 24.2% of all income on average
• Investments by the affluent are taxed at something less than 25.5%, taking corporate profits tax into account.

This tax structure looks pretty flat, but only on its surface. The myriad loopholes, breaks, progressivities and regressivities make it a moonscape of craters and ridges. More important than raising or lowering taxes on any large, average group is true tax reform: making the code transparent and boring. Whether the tax code is flat or progressive, it ought to be smooth. Could somebody in Washington pick up that phrase?

Footnotes
* FICA taxes were instituted to fund Medicare and Social Security, but in practice are tossed into the same Federal till out of which all the government's obligations are paid. It makes no sense to consider these separately from income taxes.
** Half of this 15.3% comes out of workers' paychecks, half comes from their employer. As my Intro to Econ students can tell you, this doesn't make a dime's worth of difference: no matter who writes the checks, relative elasticities determine who bears the cost of the tax.
*** Calculated from IRS data for tax years 1980-2005, from this IRS spreadsheet.