Wednesday, June 20, 2012

Mitch McConnell: Lying Accidentally On Purpose?

McConnell is the Senate Republican leader and he doesn't like the US tax system.  It's too progressive!

In an interview that aired on "CBS This Morning" Tuesday, the Kentucky Republican said he is ready to sit down with "this president or the next president" and have an animated discussion about the tax code to "reach a conclusion" that would bring down the ballooning U.S. deficit.
"Almost 70 percent of the federal revenue is provided by the top 10 percent of taxpayers now. Between 45 percent and 50 percent of Americans pay no income tax at all. We have an extraordinarily progressive tax code already. It is a mess and needs to be revisited again," McConnell said in the interview, taped Monday.

What McConnell wants is a less progressive system, one in which the tax burden of the poor will rise and the tax burden of the rich will drop.  This in a country where 400 people have more wealth  than 50% of all Americans.

Yes, I know wealth is not income.  I referred to the wealth comment because of the vast income and wealth inequalities in this country.  Given those inequalities, McConnell's comment is disgusting.

It's also false:

Claim: The top 10 percent wealthiest Americans pay 70 percent of federal income taxes.
Fact: This statistic presents a deeply misleading picture of the actual federal tax burden because (1) it fails to include payroll taxes, which every worker pays, and which fall disproportionately on the middle class, and (2) because it doesn’t reflect that high-income Americans earn a disproportionate share of income.    
    •    Payroll taxes account for 34 percent of federal revenues. They only apply to income earned on the job – not income from capital gains on investments, which make up a much greater share of the income of the top 10 percent. And payroll taxes for Social Security are capped at $106,800.
    •    For both of these reasons, wealthier Americans face a disproportionately lower burden from payroll taxes.   According to the independent, non-partisan Congressional Budget Office, the wealthiest 10 percent only pay 25 percent of all payroll taxes.
    •    Counting both payroll and income taxes, the top 10 percent only pay about 50 percent of that tax burden – not much larger than their share of our nation’s income (around 42 percent).
    •    The top 10 percent (households earning an average of nearly $400,000) has been earning a larger and larger share of our nation’s income. Twenty years ago, they accounted for 34 percent of our nation’s income. In the past twenty years – as tax rates have fallen for the highest earners – the income share of the top 10 percent has grown to 42 percent of our nation’s earnings.
    •    This aggregate figure also masks the fact that certain high-income Americans pay far less than others—and less than the middle class.  That’s what the Buffett Rule is meant to address.

Got it?  What the US has is a very mildly progressive tax system with respect to federal income taxes and payroll taxes combined.   It is NOT extraordinarily progressive, and if we add state taxes and sales taxes and all other taxes it comes out roughly proportional.

A small detour on the concepts of progressive, regressive and proportional taxes is in order.  A proportional tax means that the taxes you pay are the same percentage of each dollar you earn, whether you earn a lot or only a little.   The tax rate (e.g. 0.3 for a 30 cent tax on each dollar) remains constant.  This is the flat tax plan many conservatives support.  Sounds fair, right?  Everyone pays the same percentage!  But wait...

A regressive tax rate decreases as one's income rises.  The more you earn the less tax you pay on the last dollar you earned.  For instance, you might pay 30% on each dollar earned up to, say, 20,000 dollars a year, then 20% on each dollar earned for incomes between 20,000 and 50,000 and so on.  Regressive taxes are seldom sold that way because of their obvious unfairness.

A progressive tax rate increases as one's income rises.  The more you earn the more tax you pay on the last dollar you earned.  Thus, you might pay 20% on each dollar earned up to 20,000 dollars a year, then 30% on each dollar earned for incomes between 20,000 and 50,000 and so on.  Progressive tax systems are common in practice.

And there are good reasons for that.  The obvious one is that one cannot squeeze blood from a stone.  It is easier for the government to get money by going where the money is.  But there are deeper reasons for progressivity.

Consider someone very poor.  So poor that getting enough food and safe housing is extremely difficult.  If that person had to pay proportional income taxes those taxes could cause starvation.  To avoid that outcome, the government has two choices:  Either exempt the poor from paying income taxes (which turns the system into a  progressive one) or set the tax rate (percentage of taxes on each dollar) so low that even the poorest of the poor can afford to pay it.  The latter would mean a government which wouldn't be able to afford anything, not even the kinds of things drown-the-government-in-a-bathtub conservatives want it to be able to afford.

The deeper theoretical reason is this:  We want income taxes to be fair in terms of actual sacrifice.  But the sacrifice of, say,  an additional 100 dollars in taxes, is not the same for a person earning a million a year and a person earning 30,000 a year, because the value of money declines the more of it one has.  Just ask yourself under which income scenario you are more likely to take a cab when it rains.

What this means is that in order to have fair taxes (everybody contributes the same sacrifice) we need to have progressive taxes.  Probably even McConnell agrees on this.  But he regards the current, mildly progressive income tax system as extraordinarily progressive!

The real world tax system is messier than the simple case I've described, what with deductions and loopholes and so on.  Often (but not always)  those work to reduce progressivity.  For instance, to take advantage of the mortgage interest deduction you need to have enough money to get a loan from the bank for a house or an apartment, and only the wealthy can take advantage of intricate financial tax planning.

That's it from me, pretty much.  Except that I should note the reason why such a large percentage of taxpayers pay no federal income tax:  It's Republican tax cutting policies.  Those still cannot apply to only the rich so every such proposal has pushed more people into the group of non-payers.  Note, also that those Americans do pay other kinds of taxes, including payroll taxes.