Former George Bush Press Secretary Ari Fleischer thinks the tax code is too progressive and wants to start from scratch with a new code that has no deductions or credits. Maybe there is some merit to this, but I think his case against the current tax code is misleading. He writes in this morning's Wall Street Journal that the current system is out of control because:
A very small number of taxpayers -- the 10% of the country that makes more than $92,400 a year -- pay 72.4% of the nation's income taxes. They're the tip of the triangle that's supporting virtually everyone and everything. Their burden keeps getting heavier.
As a result of the 2001 tax cuts enacted by a bipartisan Congress and signed by President George W. Bush, the share of taxes paid by the top 10% increased to 72.8% in 2005 from 67.8% in 2001, according to the latest data from the Congressional Budget Office (CBO).
Sure, this story is largely accurate. (A few small quibbles: The latest CBO data is through 2006, not 2005. And Fleischer's 72.8% refers only to the income tax. As a share of all federal taxes, the top decile pays 55.4%.) But Flesicher's story also seems terribly incomplete.
When I look at the CBO's dataset on long-term tax trends, I see plenty of things that are important besides the share of federal tax liabilities. Most important is the top decile's share of the national income. In 2001 the top decile earned 37.5% of the national pretax income. In 2006 the same decile earned 41.6% of the income. In 2001, households in the top decile earned an average pretax income of $294,700. In 2006 it was $366,400.
Why should we be surprised that this group pays more in taxes? It earns more money.
Another trend is the effective tax rate. Between 2001 and 2006, the top effective income tax rate fell from 18.7% to 16%. The top rate for all federal taxes fell from 28.5% to 27.5%. So while the top decile is paying a larger share of federal taxes, it is being taxed at a lower rate.
You can take what you want from these trends. In general, I find Fleischer's case against the current tax code unpersuasive because a question like "how progressive should we make the tax code?" isn't one that you can answer with national trends or dull data sets. It's a question of fairness, not economics.
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