On Deficits, Tax Cuts Are Part of the Addiction

Kudos to the Wall Street Journal’s Gerald Seib for noting in his Capital Journal column today that the country has a major fiscal problem that demands a serious, bipartisan, and balanced policy response.  I agree and commend him for the piece.

In this context, here are a few more things to keep in mind on the tax side:

• Tax cuts are part of the addiction:
  Yes, prescription drugs and unpaid-for war spending are elements of Bush-era fiscal “sins.”  But, what about the Bush tax cuts?   Their $2.8 trillion in added debt to date is much larger than these other “sins” combined.

• High income people don’t pay all of the taxes:
  Given that April 15^th just passed, it is understandable to focus on the income tax.  Still, I would add a statistic on payroll taxes for a more complete picture:  As a group, the bottom 95 percent of people pay 20 times more in payroll taxes than the top one percent of people, according to the Congressional Budget Office (CBO).  And, keep in mind, payroll taxes generate roughly three-quarters as much federal revenue as income taxes.

• High income people make lots of money:
  That’s the main reason high-income people pay lots of taxes.  Consider, again according to CBO, that the top one percent of people make 18.8 percent of overall income on a pretax basis and 16.3 percent after all federal taxes are subtracted.   This is hardly a “soak the rich” tax structure, particularly when one considers that state taxes are regressive (i.e., they tax low- and middle-income people disproportionately).

• Taxes have been cut for average Americans and for wealthy Americans:
  The typical American family of four faces the second lowest income tax rate in 55 years (second only to last year’s rate).  Future CBO data will likely show a similar pattern for total federal taxes.   And at the high end, the IRS reported that the effective tax 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.