America’s Tax System: Spreading the Wealth Upward Since 1980

Tax day in America is upon us. The days leading up to April 15th are inevitably filled with conservative clap-trap about how terribly unfair our tax system is for rich Americans and this year was no different. And while Republicans embrace a populist message when they address their Tea-Bagging base their solutions are just the same old give-aways to the wealthy and corporations.

Here’s a reality based analysis of our tax-code,

- Capital gains are only taxed at 15%, meaning those who are wealthy enough to avoid actual work see their incomes taxed at a far lower rate than the people cleaning your office, teaching your children or you. Our tax code is so mangled that Hedge Fund managers get to claim that their income from managing other people’s investments is really just capital gains too. Neat trick, huh?

There are economic arguments on both sides of the capital gains issue but conservatives prefer to talk in stark moral terms about fairness in the tax code, so let’s do just that. Is it fair that working Americans see their blood and sweat taxed at a higher rate than millionaires fortunate enough to never break a sweat outside of the gym?

- The overall tax burden for the wealthiest Americans has been in a decades long decline while America’s middle class is continually squeezed. This all while the richest among us have seen their wealth balloon and the middle-class has stagnated. The Center on Budget Policy and Priorities reported in February that,

The effective federal income tax rate for the 400 taxpayers with the very highest incomes has declined by nearly half over the past two decades, even as their pre-tax incomes have grown five times larger, new IRS data show.

The top 400 households paid 16.6 percent of their income in federal individual income taxes in 2007, down from 30 percent in 1995. This decline works out to a tax cut of $46 million per filer in 2007, or a total of $18 billion in tax cuts for these households per year.

And just how rich are these top 400 households? Hold your breath…

To make it into the top 400, a household needed an adjusted gross income of at least $35 million in 1992 (in 2007 dollars) and $139 million in 2007.

Good God! How in the hell did this happen?

The decline in effective tax rates at the very top is due in large part to the capital gains tax cuts enacted in 1997 and 2003. The top marginal tax rate on capital gains is now 15 percent, less than half the top tax rate on wages and salaries. The top 400 taxpayers derived two-thirds of their income from capital gains and qualified dividends in 2007.

Over roughly the same period, the top 400 filers enjoyed huge gains in pre-tax incomes. The average pre-tax income of this group rose by over 400 percent between 1992 and 2007, equivalent to a $275 million increase per person, after adjusting for inflation. In 2007 alone, average pre-tax incomes rose by 31 percent among these individuals.

- What about our corporate tax rate? Conservatives love to flog the United States’ 35% corporate income tax rate as being far too high and a detriment to our economic growth. John McCain wanted to cut that rate from 35% to 25%. As you may have guessed the reality is quite different, the effective U.S. corporate tax rate is far lower and our corporations pay lower taxes than other developed nations. The Wall Street Journal’s “Smart Money” reported in 2008,

Between 2000 and 2005, U.S. corporate taxes amounted to 2.2% of the GDP. The average for the 30 mostly rich member countries of the Organization for Economic Cooperation and Development was 3.4%…

The income not squired away overseas or channeled to the personal returns still enjoys protection in the form of various tax breaks that depress the effective rate to 27%, according to the Treasury Department. Such breaks are expected to cost the Treasury $1.2 trillion over the next 10 years, reducing the corporate tax revenue by 25%.

If that doesn’t get your blood boiling consider this report from the summer of 2008,

The Government Accountability Office said 72 percent of all foreign corporations and about 57 percent of U.S. companies doing business in the United States paid no federal income taxes for at least one year between 1998 and 2005.

More than half of foreign companies and about 42 percent of U.S. companies paid no U.S. income taxes for two or more years in that period, the report said.

During that time corporate sales in the United States totaled $2.5 trillion, according to Democratic Sens. Carl Levin of Michigan and Byron Dorgan of North Dakota, who requested the GAO study.

On this tax day remember that the entrenched interests who have manipulated and distorted our tax code since the Reagan administration are just as capable of manipulating the public discussion on taxation. The reality is that in America we tax actual labor at a far higher rate than we do investments, we’ve lessened the burden on the rich while tightening the screws on the middle-class and in any given year half of our corporations pay no Federal income taxes at all. None of that happened by accident, the wealthy are reaping the benefits of decades of conservative economic theory.

And when your conservative uncle sends you the inevitable email forward claiming that 47% of Americans pay no taxes at all be sure to send him to Dave Leonhardt’s New York Times piece dismantling that fable as well.

Photo by Limbic

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