Friday, April 10, 2009
THE CONGRESSIONAL Budget Office recently released some details of U.S. tax liabilities that should dispel myths on both sides of the budget debate. The numbers will be particularly useful in informing the discussion when tax increases for households other than the super-rich are finally on the table -- and like it or not, once the economy has recovered, they will be.
In 2006, the top 20 percent of earners paid 70 percent of all federal taxes. On average, they paid 26 percent of their income to the government. The very richest -- the top 1 percent of taxpayers, with household incomes of over $332,000 -- paid 28 percent of all taxes, with an effective tax rate of 31 percent. The middle three quintiles paid rates of 10, 14 and 18 percent. The lowest 20 percent of households paid only 0.8 percent of all federal taxes -- and the bottom 90 percent of households paid only 45 percent.
Based on these numbers, it would be hard to argue that the country doesn't already have a significantly progressive tax system. Taxes aren't just for suckers, with cashiers paying more of their income than corporate chief executives. Nor is the system egregiously stacked against the wealthy -- who, after all, receive the bulk of the income. The top quintile earned over 55 percent of the income, and the top 1 percent earned a full 19 percent of all income.
This matters because the simple truth is that in the coming years, taxes will have to go up to help close the government's gaping fiscal hole. Much of the budget gap should be covered by spending cuts, but judging from recent budget proposals by both parties, neither has an appetite for reductions anywhere near what will be needed.
When taxes go up, they should be increased in a way that makes the tax code more progressive. Income inequality has widened for the past three decades, and it only makes sense for those who have benefited to pay more. But there is a limit to how much the tippy top should bear. President Obama has promised that taxes will not be increased for families making under $250,000. That is a promise that will probably have to be dropped down the road. There just isn't enough revenue to be found above that figure unless we create a system so lopsided that voters would always want more government spending because it would come at such a low price.
The commonly used political definition of "rich" has crept up in recent years from $100,000 to $250,000. Either that definition is going to have to change again, or we will have to come to terms with the fact that the middle class will have to face higher tax burdens, too.