The battle for the moral high ground in the tax cut debate has begun. At issue is a 10% across-the-board proposal to cut income taxes. Republican conservatives want to show that the tax burden on Americans is the heaviest since World War II--20% of GDP--and is unfair. Democrats and GOP moderates want to show that a uniform tax cut mostly benefits the rich--and is unfair. The truth is that both sides are being disingenuous. If "fairness" is to be the measure, it is just as easy to argue that the rich deserve a tax break as it is to say that the poor and middle class should get one.
America has "deserving rich." It's not fashionable to say it, but the rich in America pay their dues, and then some. Here are the numbers. The Congressional Joint Tax Committee estimates that in 1999, people making $200,000 or more will pay 40.1% of all income taxes. Folks making $100,000 to $200,000 will pay 21.9%. So people earning $100,000 or more will shoulder 62% of the income tax burden in 1999. Assuming the economy grows at about 3% this year (economists are scrambling to revise their estimates upward from an average of 2.2%), the total income-tax take will amount to $1 trillion. The top 5% in income will pay $620 billion in taxes.
That's some number. It appears that much of it comes from executives and participants in the option-rich high-tech sector of the economy. The booming stock market is generating big capital gains. And recent OMB studies show that executive compensation, including salary, bonuses, and nonqualified options, may be an even greater contributor to the surge in income taxes. Nonqualified options, which constitute the vast majority of all options given out by companies, are taxed as ordinary income--with a top rate of 39.6%. Combine the Clinton tax hike of 1993 with the surge in equities prices, and it becomes obvious that the rich, particularly those in large corporations and high tech businesses, are paying plenty.
But what does the average person pay in income taxes? Well, it turns out that most Americans don't pay much. Literally. The working poor, making $20,000 or less, will get about $10 billion back from the government by way of the Earned Income Tax Credit and other tax credits. People in the $20,000-to-$30,000 income bracket will pay 2.4% of all income taxes. Those making $30,000 to $40,000 will pay 4.3% and those in the $40,000 to $50,000 will pay 5.9%. Once the income bracket hits $50,000 to $75,000, people begin to really pay--14.9%. But remember, the average household income is about $38,000, and people in that household aren't paying a lot of income taxes. The rich are.
But what about the payroll tax? That's about as regressive and unfair as one can get. And it is onerous. Some three-quarters of all taxpayers pay more in Social Security taxes than they do in income taxes. Combine Social Security taxes with income taxes and the tax burden appears heavy not only on the rich but to the poor and the middle class as well. Both the rich and the not-so-rich are equally deserving of a tax break. To argue otherwise is to be less than truthful.
So what's really "fair?" If conservatives want a 10% across-the-board income tax cut, they should simply say the rich deserve one because they pay most of the income taxes. Be honest about it. Liberals and moderates are on firm ground when they say that a 10% cut will give the average household a paltry $99. But they, too, should be honest in acknowledging that these households don't pay a great deal of income taxes and that the real problem is a regressive payroll tax that needs fixing. That, at least, would put the debate on an honest footing.