Do the rich pay very little tax? Wouldn’t a flat tax be fairer?

Dear Cecil:

We ran across the enclosed item in Marilyn Vos Savant's column in Parade magazine and were astounded by her reply. Our first thought was, we should ask Cecil the same question. However, we're equally interested in your response to her answer.

Cecil replies:

Here’s the question from Marilyn’s column:

Q: Is it true that the rich pay very little tax?
A: No, and this is the myth, more than any other, that has created the unwarranted and destructive dissension among the so-called economic classes in this country. The wealthy pay a truly stunning amount of tax, and there are virtually no exceptions. Anyone who thinks otherwise has been misguided.

Regarding Marilyn’s answer, I’ll just say that when you make sweeping claims like this you might want to back them up with a little detail. She’s not wrong, though. As a general proposition, the wealthiest Americans do pay the bulk of the individual income taxes collected in the U.S. That’s a point worth making, since the belief that the rich pay zip while the little guy gets slugged is the impetus behind the “flat tax” proposal, the stupidest idea to come down the pike since pet rocks.

Here are the numbers for 1992 from the Statistical Abstract of the United States: The top 7 percent of those filing returns, those reporting adjusted gross income of $75,000 or more, paid 51 percent of total U.S. income taxes. People making $75,001, a group that includes many households in which both spouses work, may object that they don’t feel particularly rich. They should talk to a single mom who’s mopping floors. But let’s work our way up the income scale: The top 3 percent of filers, those making $100,000-plus, paid 40 percent of the taxes. The top four-fifths of 1 percent of filers, who make $200,000 or more, paid 26 percent of the taxes. The top one-twentieth of 1 percent of filers, those making $1 million or more — and Tom Wolfe’s little demonstration in Bonfire of the Vanities notwithstanding, nobody’s going to tell me those guys aren’t rich — paid 10 percent of the taxes. That’s a mere 67,000 households, who on average paid income tax of $707,000 apiece.

OK, but what about Marilyn’s second point, namely that the rich pay big with “virtually no exceptions”? In their entertaining 1994 book, America: Who Really Pays the Taxes?, investigative reporters Donald Barlett and James Steele note that the number of filers reporting incomes of $200,000-plus who paid no tax, presumably through outrageous but legal tax dodges, has risen steadily, from 155 in 1966 to 1,081 in 1989, despite numerous attempts to plug the loopholes. That sounds pretty bad, but let’s put it in perspective: the number of people making $200,000-plus shot up dramatically during the same time, from 13,000 in 1966 to 787,000 in 1989. The proportion of rich tax dodgers has dwindled from 1 percent of the $200,000-plus class to one-tenth of 1 percent in recent years.

The purpose of this exercise is not to make you feel sorry for the poor rich people. Quite the contrary. Barlett and Steele make the point that most efforts at tax “reform” are really attempts to reduce the tax burden on the wealthy. The most blatant recent example of this was the tax act of 1986. Between 1986 and 1987 the effective tax rate on millionaires fell from 40 percent to 29 percent, and as a result they paid $3.6 billion less in tax. Meanwhile people making from $50,000 to $75,000, a reasonably prosperous but hardly rich crowd, paid $7.6 billion more. Some reform.

The flat-tax scam is more of the same. Nobody’s sure what the actual flat-tax rate would be, but let’s suppose it was 20 percent. Based on the 1992 returns, if this inane proposal were implemented, taxes on everybody making $200,000-plus will go down and those on everybody else will go up. Malcolm Forbes Jr., one of the richest men in America, was the leading backer of the flat tax during the 1996 presidential campaign. Now do you see why?

Flat liners for the flat tax

Dear Cecil:

Re your column on taxes, I was curious about some of your conclusions. You say “people making $50,000 to $75,000 … paid $7.6 billion more” [after the 1986 tax reform]. What was the average increase per person? Or was there an increase in the number of people in this bracket, which would have increased the total collected? How much was the tax increase on these people as a percentage of income? You don’t say.

In your conclusion you start with a supposition of a flat 20 percent rate (higher than any I’ve heard proposed) without any mention of the automatic exemption of the first $20,000 to $30,000, which would result in the poor paying no tax at all. I assume this was a lapse and not an act of deliberate mendacity.

Yes, Forbes wants his taxes to go down. I want mine to go down too. Under every flat tax proposal I’ve heard (except yours), mine would go down dramatically. Doesn’t mean I’m going to vote for Forbes, but right now I find him more honest than you.

Can you explain why we should have a graduated tax system in the first place? Is it to make sure that everybody ends up with the same amount, regardless of effort? Isn’t that called socialism?

Following this logic, shouldn’t rich people also pay more for everything else? Why not a sliding scale for bus fare, Big Macs, movie tickets, etc.? After all, the rich can afford more.

Why do we need an income tax in the first place? Why don’t you consider the merits of the “Liberty Amendment,” which would abolish the IRS?

Way to go, Jim, defend the rights of the rich! Shows you what a great country we’ve got here. Also shows you that whereas left-wingers are jerks, right-wingers are nuts. To be fair, though, the flat tax is like a date with Julio Iglesias. It takes you a while to realize you’ve been screwed.

Let me explain. Following the 1986 tax reform, the average income tax paid by somebody in the $50,000-$75,000 bracket indeed went down, and I mean way down — $1,100. The total tax take for that bracket went up $7.6 billion because there were many more taxpayers in that range in 1987.

Ha, you say, Cecil was using statistics to lie! Uh-uh. Fact is, taxes for virtually all tax brackets went down. Yet the total tax collected went up. How was this miracle accomplished? By eliminating many popular tax deductions. This forced millions of Americans into higher brackets, so they paid more tax. Example: elimination of the IRA deduction. If you and your spouse (a) both worked, (b) made a total of more than $50,000, and (c) had previously both taken the maximum IRA deduction, in 1987 your taxable income increased $4,000 even if your real income stayed the same. Assuming two kids, $53,000 in joint income, and $9,000 in deductions in both ’86 and ’87, your taxes went up $862.

Taxes went up for most affluent Americans. In 1987 they reported an additional $300 billion in income, of which maybe two-thirds stemmed from closed loopholes. As a result, people making from $50,000 to $1 million paid an extra $24 billion in tax. OK, nobody’s bleeding for a $500,000-a-year lawyer. But look who paid less tax: those making under $50K (average tax cut: $5 to $867) and those making $1 million and up (average cut: $214,000). Like I say, some reform. Other points:

(1) Forbes claims his flat tax rate will be 17 percent. Most knowledgeable observers say if that happens the government will go broke. The real flat tax rate will have to be at least 20 percent. The working poor will get screwed because they will lose the earned-income credit, which lets them collect a tax “refund” greater than the amount of taxes withheld. You don’t have to be a genius to figure out that if taxes for the Forbes crowd go down, they have to go up for somebody else.

(2) The income tax is progressive for several reasons, the cynical one being that there are a lot more poor voters than rich ones. The practical reason is that a progressive income tax overcomes the regressivity of the sales tax, which falls most heavily on the poor, and the property tax, which falls most heavily on the middle class. Some analysts say total taxes as a percentage of income are about the same for all income levels.

(3) No income tax at all? Fine. When the guys in the military come looking for their pay, we’ll tell them to see you.

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