D. Dowd Muska


The Facts on Taxes (Assuming Facts Still Matter)

October 24, 2013

The Tax Foundation has a difficult mission.

The D.C.-based research organization attempts to educate Americans about the tribute they must send to politicians and bureaucrats. It’s a vexing and thankless task, because government prefers that citizens be confused about the taxes they pay. Arcane terminology, dodgy numbers, and relentless blather about “fair share” and “working families” discourage Joe Sixpack and Jane Diet Coke from expending mental candlepower on a topic meant for “experts.” It’s best, many conclude, to obey and pay.

The foundation’s newest publication slices through the jabberwocky, and presents the essential facts on federal taxation in a few dozen graphs. If there is to be a “grand bargain” on fiscal policy sometime in the near future, it’s important that as many citizens as possible read Putting a Face on America’s Tax Returns: A Chart Book. Herewith, several of the document’s key takeaways:

• If you earn more money, you pay more taxes.

In 2011, filers who reported incomes above $200,000 supplied 55 percent of all income-tax revenue. At the extreme apex, the “top 1 percent” bore an average burden of 23 percent, almost twice the average rate for everybody. The super-earning cohort’s portion of income tax paid has climbed in recent decades, rising from 25.8 percent in 1985 to 37.4 percent in 2010. While the top 1 percent claim 18 percent of all pre-tax income, once the IRS is finished, the share tumbles to 11 percent.

“Tax the rich?” We already do.

• Washington is an income-redistribution machine.

Sorry, civics educrats, but the national government is not a constitutionally constrained enactor of the public’s collective wisdom; it is a mechanism for grabbing from one group to reassign to another. The foundation’s money stat: “Families earning under roughly $17,000 pay less than $3,000 in total federal taxes, but receive more than $24,000 in federal spending benefits of all kinds.” At the other end, the top quintile of tax filers (those making $120,000 and over) gets a terrible thumping -- paying nearly $87,000 in income taxes, while reaping barely $21,000 in goodies. The full bill for Washington’s spread-the-wealth-around scheme is $1.5 trillion.

America, the land of heartless capitalism.

• Corporate loopholes? They’re overrated.

It’s true that Big Business hires phalanxes of government-relations professionals to etch giveaways into the tax code. The process is sleazy, and wasteful -- pursuing customers, not politicians, should be the goal. But compared to the deductions, exceptions, and credits granted to individual citizens, the corporate community is an also-ran. The perk for pensions and 401(k) plans alone is greater than all business-targeted preferences. Charitable giving, mortgage interest for owner-occupied homes, Social Security income, employer-provided health coverage -- 91 percent of the value of “tax expenditures” accrues to individuals.

Looking for the loophole lobby? Look in the mirror.

• Rich and poor move up and down the income scale -- frequently.

The notion that the rich perpetually grow richer and the poor ceaselessly become poorer is useful for securing votes. But it’s nonsense. An IRS analysis of taxpayers between 1999 and 2007 revealed remarkable fluidity between quintiles. Furthermore, millionaires are not “some monolithic group that can be taxed at will.” The number of seven-figure tax returns “fluctuates wildly each year, largely due to changes in the business cycle. Indeed, between 2002 and 2007, the number of millionaire tax returns more than doubled to a record 392,220. However, thanks to the recession, the number of millionaire tax returns fell by 40 percent between 2007 and 2009, or more than 155,000.” A foundation study of high earners between 1999 and 2007 found that “just 6 percent …  remained millionaires in all nine years.”

The war between Paris Hilton and Tom Joad exists only in the minds of dopey entertainers and bubble-headed media figures.

• “Business” isn’t what it used to be.

The words “corporation” and “company” evoke images of sprawling factories, looming skyscrapers, and mammoth office parks. However, “since 2005, the total amount of net business income claimed on individual returns has exceeded the net income claimed by the traditional C corporations that issue publicly-traded stock.” Apple, Wal-Mart, Citigroup, and General Electric are giving way to sole proprietorships, LLCs, partnerships, and S Corporations. These smaller entities pay income, rather than corporate, taxes.

Tax individuals, and increasingly, you’re taxing businesses.

The foundation’s book of charts may not explore every cranny of the tax debate, but it hits the highlights. Putting a Face on America’s Tax Returns is required reading for anyone interested in, and/or working for, a simpler, sounder, lighter federal tax burden.

D. Dowd Muska (www.dowdmuska.com) writes about government, economics, and technology. Follow him on Twitter @dowdmuska.

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