How Knaves Fool Fools

The weekend WSJ has an editorial, Incomes and Politics: Comparing the Current Decade to the Sainted 1990s, that, when read closely, demonstrates one method used by knaves to fool fools.

The overarching thesis of the editorial is that, thanks to massive tax cuts, we're doing fine, thank you. The editorial goes so far as to contend that the tax cuts have actually made the tax code more progressive:

[T]he new data show that the bottom 50% of Americans in income--U.S. households with an income below the median of $44,389--paid a smaller share of total income taxes in 2004 (3.3%) than in Bill Clinton's last year in office (3.9%). That 3.3% is the lowest share of total income taxes paid by the bottom half of earners in at least 30 years, and probably ever. The majority of American families with an income below $40,000 pay no income tax at all today, and many of them also get a welfare subsidy from the Earned Income Tax Credit that effectively offsets much of what they pay in payroll taxes.

By contrast, Americans with an income in the top 1% paid 36.9% of all federal income taxes in 2004, down slightly from 37.4% at what was the height of the dot-com boom in 2000. But the top 5% and 10% of earners saw an increase in their tax share over that same period, with the top 5%'s share rising to 57.1% in 2004 from 56.5% in 2000. If this isn't the definition of a highly "progressive," a k a redistributionist, tax code, we don't know what is.

Emphasis added.

Apparently, the WSJ doesn't know what a progressive tax code is. Let me explain: It's a tax code that, when all taxes are factored in, is progressive. That is, the more one makes in income, the larger percentage of that income is paid in taxes. The key phrase is "when all taxes are factored in." Look carefully at the WSJ quote above. It focuses solely on income taxes.

Back in April, I had a post, Fools and Knaves, Wall Street Journal Edition. Since the WJS is pushing the same baloney now that it was peddling then, let me offer the quote contained in my previous posting from a study, authored by Michael Strudler and Tom Petska of the IRS and Ryan Petska of Ernst and Young:

[S]ince 1997, with continuation of the 39.6-percent rate but with a lowering of the maximum tax rate on capital gains, the redistributive effect again declined. It appears that the new tax laws will continue this trend. Analysis of panel data shows that these trends are not quite as great as seen by looking at annual cross-section data, but the trends cited above are still apparent.

The WSJ editorial is based upon an IRS report that has not yet been released, but which the WSJ has had an "early look at." I will update and offer additional comments when the report becomes publicly available.

Hat Tip: TaxProf.

An Additional Comment:

The WSJ editorial has the following chart, which TaxProf reproduces:


Note the title of the table on the bottom: "Percentage share of federal taxes and total income, 2004." (Emphasis added.)

Wrong, wrong, wrong.

To the extent that I understand the editorial, based upon a report that's not yet publicly available, the chart shows the distributional burden only of income taxes, not all federal taxes. In other words, the knaves have now even fooled themselves into believing their baloney.