Making Baloney Out of Lemons

The IRS issued the SOI Tax Stats - Individual Income Tax Rates and Tax Shares for the years 1985 through 2003. Upon reviewing the statistics, Representative Jim Saxton, Chair of the Joint Economic Committee declared, "These IRS data show the steeply progressive nature of the Federal income tax."

It is difficult these days to determine where any Republican official falls on the knave/fool continuum, but you can be certain that, depending on your perspective, Saxton likely ranks either very high or very low.

Table 5 of the report shows that in 1985, the top 1% of all taxpayers had only 10.03% of the adjusted gross income reported to the IRS. In that year, the top 5% of all taxpayers had 22.67% of AGI.

By 2003, the percentages had grown to 16.77% and 31.18%, respectively. In other words, the top 1% of all taxpayers increased their share of the personal income by an astonishing 60% and the top 5% increased their share by almost 43%. Yet, over the same period, the personal income tax burden shouldered by the top 1% increased by only about 54% and that borne by the top 5% increased by about 38%.

In other words, over the last 18 years, the rich not only got richer, but paid a lower percentage of the total personal income tax burden. But wait, that doesn't tell the whole story.

In 1985, the ratio of income taxes to social security taxes, which is to say the ratio of personal taxes paid by everyone and those paid only by working Americans, was 1.265 to 1. By 2003, the ratio had narrowed to 1.106 to 1. Thus, personal income taxes contributed a lower proportion of the income that funded the federal government. This means, of course, that, taken as a whole, the decline in progressivity was even more pronounced than the figures for the income tax burden would indicate.

TaxProf has a great roundup of tax news from the non-technical media. Among the articles cited is David Cay Johnson's NYT article on the IRS statistics, At the Very Top, a Surge in Income in '03, which got the stats right:

After falling for two years, the share of income going to the richest slice of Americans - the top tenth of 1 percent - grew significantly in 2003 while the share going to 99 percent of Americans fell, tax data released yesterday showed.

At the same time, the effective income tax rates paid by the top tenth of 1 percent fell sharply, declining at more than 10 times the rate reduction for middle-class taxpayers, the new report, by the Internal Revenue Service, showed.

Johnson notes that the IRS "data tend to understate incomes for those at the very top because of different rules for reporting wages and capital gains, meaning the actual disparity was larger than the official data show." He then points out that:

Other data show that among major world economies, the United States in recent years has had the third-greatest disparity in incomes between the very top and everyone else. Only Mexico and Russia, among major economies, have greater disparity.

Johnson was well on his way to an "A" in tax policy, but blew honors by quoting Bruce Bartlett "a fiscally conservative Republican tax expert" to the effect that "the tax code remains effectively progressive." Of course, to reach that conclusion Bartlett simply ignored social security taxes. In other words, to Bartlett, an elephant is like a rope.

To get the top grade, Johnson should have made it clear to his readers that all taxes on personal income have to be taken into account in order to determine the degree to which the tax system is progressive.

This brings us back to Rep. Saxton. Is he a knave or a fool?