With the president's compromise extending the Bush tax cuts and further slashing payroll and estate taxes, will the next two years represent the most rich-friendly tax code in the last 50 years?
Let's investigate. In the last half century, there have been two unyielding trends for the country's richest tax payers. The rich are earning a higher percent of total US income (bottom right) and paying a smaller share of that income to the government (bottom left) than at any time since the 1960s. Here's that information in graph form, via research by Thomas Piketty and Emmanuel Saez.
"It's a great time to be rich," Ben Steverman observes in Bloomberg Businessweek. And he's right. Top marginal tax rates on earned income have fallen dramatically over the last few decades. Tax rates on investment income -- which is even more important for the richest who earn much of their money in capital gains and dividends -- cascaded just as precipitously. "The top capital-gains rate was 77 percent in 1918," Steverman writes, "and, since 1921, its highest point was 39.9 percent in 1976 and 1977." Throw in the watered-down estate tax in the president's compromise and the payroll tax cut, which will hand America's most wealthy a cool $2,000, and you're looking at 2011 and 2012 as one of the most rich-friendly periods in modern tax policy.
One is tempted to continue along this line for quite a while, but it's worth pointing out an obvious counterpoint to the claim that the tax code is coddling the rich: The tax code is coddling everybody. Half of Americans receive more in tax credits than they owe in income taxes. One in ten Americans receives more that she owes in income and payroll taxes. Effective federal tax rates have fallen for just about every group over the last 30 years:
Since the bottom 40 percent of tax payers are receiving more tax benefits from the government while paying lower tax rates, the richest contribute an higher portion of total government revenue. In 1979 the top quintile contributed 56% of all federal taxes. In 2006 they contributed nearly 70%. Another key stat: the share of federal taxes paid by the top 1% nearly doubled in that time from 15% to 29%.
So what's the deal here. Are the rich paying too little or do we rely on rich folks' taxes too much? Both, maybe! It's intellectually consistent to say (1) That taxes on the rich rise to pay for our social obligations and (2) That taxes on the middle class should go up too, because it's civically harmful to exempt more and more Americans from having to pay for the programs they vote on.
The next two years represent a tricky time for tax reformers. On the one hand, we will need to raise taxes above the historical average to avoid draconian cuts to the budget. On the other hand, the fact that taxes are historically low across the board (for income, payroll, estate, investment) suggests that it might be impossible to ask Americans to accept a tax increase that takes us back even to historically average level.