The fairly flat tax burden in 2011

The Center for Tax Justice released a report yesterday detailing the 2011 tax burdens of different income groups in the United States. Contrary to common wisdom, the poor are not free-riding on taxes and the rich are not drowning in them. As the CTJ notes (and as I have noted before), certain taxes are progressive while others are regressive. Right wingers make a big deal out of the fact that wealthier individuals pay higher income tax rates than poorer individuals, but rarely does anyone bother to point out that poorer individuals pay higher tax rates on payroll taxes, excise taxes, and state and local taxes. The income tax has to be progressive to counteract the regressive nature of these other taxes.

When you put all taxes together and divide by income, you wind up with the following distribution of effective tax rates:

The rich aren’t exactly being soaked and the poor aren’t exactly paying nothing. Even this chart is somewhat misleading however. Certain cash transfer programs — like the Earned Income Tax Credit and Child Tax Credit — show up in this data as reductions in tax burdens. But that is a somewhat confused way to understanding those programs. Although those transfer programs are carried out through the tax code, they are actually government spending programs (sometimes called tax expenditures). Although CTJ does not include a statistical breakdown of tax burdens with cash transfers removed, I have provided such breakdowns in the past:

I do not know if that breakdown reflects the current tax distribution, but it probably closely tracks it. Cash transfers disproportionately flow to poorer people and make up much higher percentages of their incomes. So when we remove cash transfers from the tax breakdown, the effective tax rates of those with lower incomes necessarily rise. Whatever the specific breakdown winds up being, the takeaway is that the total U.S. tax system is not that progressive and the super-rich are not being taxed at oppressive rates. There is plenty of room to increase taxes on the wealthiest Americans, and poor people are not “lucky duckies” as they are sometimes grotesquely called.

Corporate taxes at record low, profit margins at record high

The right-wing canard that corporations are buckling under high corporate taxes has always been misleading. Although the U.S. has a 35% corporate tax rate, few if any corporations actually pay that statutory rate. In reality, the United States has the second lowest ratio of corporate tax revenues to GDP in the entire 34-country OECD. In the budget baseline the Congressional Budget Office released earlier this week, we learn just how low the effective corporate tax rate actually was last year: 12.1%.

This 12.1% rate is the lowest effective corporate tax rate in the 40-year history that the CBO has been calculating such things:

At the same time, corporate profit levels and corporate profit margins are at record highs:

So right now, corporations in the United States are making records profits at record margins while paying record low taxes. Meanwhile, those on the right continue to fuel the myth that corporate tax rates and economic policy are destroying the ability of the United States to attract business capital. For example, check out this report from the Heritage Foundation, a right-wing think tank in the United States. In the report, Heritage uses a misleading graph of statutory tax rates (instead of effective tax rates, the more meaningful metric) to claim that corporate taxes in the United States are sky-high, making the country uncompetitive:

As the CBO baseline report shows, the claim that this graph is supposed to support — that U.S. corporate taxes make the country uncompetitive — is obviously false. The actual tax rate corporations pay in the United States is extremely low when compared against other OECD countries, making the claims of uncompetitiveness absurd on their face.

Although these kinds of reports from right-wing think tanks are largely useless for their intended purpose of policy analysis, they are very enlightening in other ways. If you have ever wondered why right-wing politicians and commentators say such demonstrably false things, the reports published by their think tanks give a great deal of insight. Some right-wing politicians and pundits are consciously lying and pandering of course, but I suspect that many others are actually just mislead by the intellectuals and policy wonks on their own side. If the only reports one ever reads are those coming from the American Enterprise Institute, the Cato Institute, and the Heritage Foundation, profound confusion about the nature of reality is certain to result.

The complicated and confusing Buffett Rule

The New York Times ran a piece about some of the hurdles facing the adoption of President Obama’s new tax rule dubbed the Buffett Rule. The idea for the Buffett Rule comes from the fact that investors who make their money primarily through capital gains pay much lower tax rates than a great number of far poorer Americans. As Buffett famously remarked, despite being a multi-billionaire who makes extraordinary sums of money each year, he pays a lower tax rate than his secretary.

Although the Buffett Rule does a good job of bringing attention to the ways in which the super-rich avoid paying a fair share of taxes, it is ultimately a misguided and unnecessarily complicated solution to that problem. The reason why people like Warren Buffet and Mitt Romney pay such low tax rates — Romney paid a 13.9% effective tax rate in 2010 — is that capital gains and dividends are taxed at a much lower rate than normal income. The solution then seems quite obvious: subject capital gains to the same taxes that wages and salaries are subjected to.

Instead, Obama has forwarded this complicated Buffett Rule which effectively institutes an Alternative Minimum Tax only for millionaires that ensures they pay at least a 30% effective tax rate. Why millionaires and not those making $999,999? Well, no good reason except of course that millionaires make a more compelling rhetorical target. While I support the Buffett Rule in principle and welcome the discussion it generates around the unfairness of capital gains taxes, ultimately it would be far better to simply tax all earnings the same. That would still make sure millionaires paid higher taxes, but without also instituting a needlessly complicated and somewhat arbitrary tax rule.