Monday, July 21, 2008

The Weaselly Wall Street Journal

According to the Wall Street Journal, the bottom tax brackets in America should stop complaining: The top 5% are paying their fair share.

Aha, we are told: The rich paid more taxes because they made a greater share of the money. That is true. The top 1% earned 22% of all reported income. But they also paid a share of taxes not far from double their share of income. In other words, the tax code is already steeply progressive.
So what should America do to cut its deficits? Why, cut those taxes!
The idea that this has been a giveaway to the rich is a figment of the left's imagination. Taxes paid by millionaire households more than doubled to $274 billion in 2006 from $136 billion in 2003. No President has ever plied more money from the rich than George W. Bush did with his 2003 tax cuts.
Hmm . . . counterintuitive . . . I like it! The rest of you peons might think that cutting taxes to the rich makes the public poorer, but not so! When you lower their taxes, the rich pay more!

I wonder why that is. . . hmmm. Perhaps the WSJ will explain it somewhere in the article. . .
This is precisely what supply-siders predicted would happen with lower tax rates on capital gains, dividends and income. The economy and earnings would grow faster, which they did; investors would declare more capital gains and companies would pay out more dividends, which they did; the rich would invest less in tax shelters at lower tax rates, so their tax payments would rise, which did happen.

. . .
[In] the Carter Years . . . the rich paid only 19% of all income taxes, half of the 40% share they pay today. Why? Because they either worked less, earned less, or they found ways to shelter income from taxes so it was never reported to the IRS as income.
And herein lies the key to understanding the WSJ's claims about income distribution - to return to the original quote:
Aha, we are told: The rich paid more taxes because they made a greater share of the money. That is true. The top 1% earned 22% of all reported income. But they also paid a share of taxes not far from double their share of income. In other words, the tax code is already steeply progressive.
REPORTED income. In reality, the WSJ knows why this is important - indeed, they explained it themselves a few paragraphs later. The rich pay more taxes after a tax cut not because a tax cut on the rich somehow magically compels them to do so, but because it becomes less profitable to shift that income into places where the IRS doesn't see it.

"Aha!" you might say, "What about the fact that lower taxes provide an incentive to work harder?" The size of that effect is hard to quantify, but were the rich working so much harder that they were doubling their revenue? That is what you would have to contend, according to the same article, as:
Taxes paid by millionaire households more than doubled to $274 billion in 2006 from $136 billion in 2003.
Methinks not. "Stimulating the economy" doesn't explain the growth either - the economy did not double in size from 2003-2006, so if there was growth, it must have disproportionately favoured the rich.

This leaves us with 3 possibilities:

1) Millionaires are exploiting the complexities of the tax code to hide vast portions of their income, which is why the tax cut increased tax revenue . . . In which case they likely haven't been paying their fair share at all.
2) Millionaires are moving shifting their income into categories that are taxed at a lower rate, but they don't do this when the income tax rates are lowered to be comparable. . . in which case the tax cut didn't change government revenues at all, but just shifted them into income tax revenue.
3) The facts in the article are wrong.

Whichever is the case, there is something rotten at the Wall Street Journal.

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