Thursday, July 29, 2010

E.J Dionne on tax policy - Reckless disregard for consequences

E.J. Dionne argues in a Washington Post column today that high income taxpayers are "undertaxed."  According to the 2007 IRS data those "undertaxed" individuals paid 40.4% of the total income taxes paid in the US.

Mr. Dionne’s view of “undertaxed” is odd. The IRS reports that in 2007 (the latest year for which data are available) the top 1 percent of taxpayers in the U.S. paid 40.4 percent of the total income taxes collected by Uncle Sam. In 1987 that number was about 12% lower.  The Tax Foundation did a recent study which found that the top 1% of taxpayers now pay more taxes than the bottom 95%.  You have seen this chart before - but I thought it was so good it should be repeated.

Dionne writes "If taxes are the price we pay for government services – rather than booty to be extracted simply because someone is unusually wealthy – then Mr. Dionne’s conclusion that rich Americans are undertaxed overtaxes credulity." He goes on to say "The simple truth is that the wealthy in the United States -- the people who have made almost all the income gains in recent years -- are undertaxed compared with everyone else."

Dionne quotes a study that says the top 400 households "paid 16.6 percent of their income in federal individual income taxes in 2007, down from 30 percent in 1995."  Those top 400 have an annual incomes in the range of $35 million in 1992 and about $139 million in 2007.  That means all those rich folks paid $10.5 million in 1992 and something in the range of $22 million in 2007.   From my perspective, regardless of rate, the very richest of Americans are paying twice as many dollars as they did in 1992.  But from Dionne's perspective, these people and everyone making over $250K should have a more substantial part of their incomes confiscated by the feds.  Dionne and his like thinkers seem to believe that resources at the top are either unlimited or not subject to incentives.

Ultimately there is a tradeoff in tax policy.   If you push too much on rates, as Dionne would do, or on the amount of income taken from the most productive people, economic activity is diminished.   Clearly, if you buy the idea of progressive taxation, the rich should pay more than the poor.  But the question is not if, but how much.

Dionne seems to have no idea about the levers of tax policy he just wants to punish the rich. Like many of his counterparts he salutes the "brave" leaders like David Cameron who would raise rates on taxes.    The real question is do we want to look even more like Europe.  Wouldn't it be easier if Dionne simply decided to move to the UK or Europe so he could get the "benefits" of their policies?

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