Clicking on banner ads enables JWR to constantly improve
Jewish World Review April 19, 2001 / 26 Nissan, 5761

Amity Shlaes

Amity Shlaes
JWR's Pundits
World Editorial
Cartoon Showcase

Mallard Fillmore

Michael Barone
Mona Charen
Linda Chavez
Ann Coulter
Greg Crosby
Larry Elder
Don Feder
Suzanne Fields
James Glassman
Paul Greenberg
Bob Greene
Betsy Hart
Nat Hentoff
David Horowitz
Marianne Jennings
Michael Kelly
Mort Kondracke
Ch. Krauthammer
Lawrence Kudlow
Dr. Laura
David Limbaugh
Michelle Malkin
Jackie Mason
Chris Matthews
Michael Medved
MUGGER
Kathleen Parker
Wes Pruden
Sam Schulman
Roger Simon
Tony Snow
Thomas Sowell
Cal Thomas
Jonathan S. Tobin
Ben Wattenberg
George Will
Bruce Williams
Walter Williams
Mort Zuckerman

Consumer Reports


High earners right to feel lonely at the top


http://www.jewishworldreview.com -- FEELING lonely, are we? Tax week can do that. And if you're paying high rates of income tax, that sense of tax isolation isn't mere paranoia. You are isolated.

Fewer than two in a hundred filing households have income sufficient to bring it anywhere near the top statutory rate of income tax rate of 39.6 per cent. Because of deductions, an even smaller number of people actually end up paying at this high level. You and every one else at the executive meeting may be forking over half your money to Washington and your state capital. But you are a tiny crowd.

That, however, doesn't mean you are shouldering a small tax burden. On the contrary. Today, Americans as a group pay more taxes than they ever have before, both nominally and as a share of the economy. And top earners are responsible for supplying a greater share of that overall obligation.

In 1998, the last year for which complete data are available, the top 1 per cent of earners paid 34.55 per cent of all individual income taxes. This is up from a 19.05 per cent share for the group in 1980. The top 5 per cent of earners paid more than half of all income taxes in 1998, up from about a third of the total obligation in 1980.

Meanwhile, at the bottom end of the income scale, things have changed as well. The bottom 50 per cent of earners now pay only 4.23 per cent of income tax. And several tens of millions of households, nearly all of them with incomes under $40,000, pay no income tax at all. He ain't heavy, indeed.

What happened? Well, the low end of the scale is relatively easy to explain. Under the Earned Income Credit, many workers have zero tax liability and get cash back. The idea of this negative income tax is to encourage work and discourage the dole. But the EIC sure skews the tax picture. And higher up? Here the answer is that Washington has taken a hammer to the old progressive rate structure, rebuilding it several times in recent decades.

Imagine a set of stairs. Increases in income drive taxpayers up the steps to new and higher brackets. In the late 1970s, the trip up was short and steep. It wasn't long before taxpayers got to the top step, or bracket, of 70 per cent (50 per cent on labour income). This tax experience was similar to the one that obtains in the UK today. Any number of modest earners reached the top bracket. In America, inflation made the trip particularly fast and brutal. Today, the American tax stair looks different. The summit isn't so high, the nominal top rate being 39.6 per cent. And it takes a longer time to get there - the steps themselves are big ones. Singles and married couples have to have $288,350 in adjusted income to reach the top bracket. Brackets are indexed, so those have to be real dollars.

These changes were engineered by two sets of carpenters. The first set, the supply siders in the administration of Ronald Reagan, figured that lower rates would inspire entrepreneurs to work harder on the Treasury's behalf. The supply siders were right, as it turned out. Productive workers did work more when rates came down, so they paid more tax. This is why you'll never hear President George Bush label supply-side ideas "voodoo", the way his Dad did.

The second set of carpenters came in the 1990s. These were the folks in the Bush and Clinton teams who knew that they could get away with raising the top rate from 28 per cent, to 31 per cent, to 39.6 per cent as long as the new punishment hit only the slimmest minority of taxpayers. They were also right.

All of which goes a long way to explain why Dubya is finding his income tax cut a harder sell than Mr Reagan found his in his day. It is pretty ironic: supply-side tax cuts are more challenging because supply-side theory has worked too well.

Not to say that all is dark for high earners at the end of the tunnel (or top of the staircase). For while lawmakers in the 1980s and 1990s managed to disenfranchise those with high amounts of earned income, they didn't do the same for the crowd with unearned income, such as interests, dividends and capital gains. And rentiers, once relatively scarce, have become an electoral powerhouse. These days, about half of Americans own some form of stock. Which is why the Bush administration may end up playing midwife to a capital gains cut, even though that was not part of the plan as conceived back in Austin.


JWR contributor Amity Shlaes is a columnist for Financial Times . Her latest book is The Greedy Hand: How Taxes Drive Americans Crazy and What to Do About It. Send your comments by clicking here.

Up

04/11/01: The right must learn the comfort of strangers
04/04/01: When domestic law arrives by the back door
03/30/01: A Lexus tax cut suits the jalopy driver
03/27/01: The unchallenged dominance of King Dollar
03/20/01: Natural selection of an intellectual aristocracy
03/16/01: The hidden danger of a regulatory recession
03/14/01: Is the American condition that boring? Why so many Oscar nominated movies aren't set in America
03/07/01: Trampling on the theory of path dependence
03/05/01: Fighting the good fight
03/01/01: It is time for Fannie and Freddie to grow up
02/27/01: IT's important
02/22/01: The guilty conscience of America's millionaires
02/14/01: The benefits of helping the 'rich'
02/09/01: The Danger and Promise of the Bush Schools Plan
02/05/01: Crack and Compassion
01/31/01: Debt is good
01/29/01: Clueless
01/24/01: A gloomy end for a half-hearted undertaking
01/17/01: The challenge of an ally with its own mind
01/15/01: An unexpected American family portrait
01/10/01: A fitting legacy for America's beloved dictator
01/08/01: The trick of tax 'convenience'
01/03/01: Time to stop blaming Greenspan over taxes
12/11/00: So smart they're dumb
12/06/00: How economic bad news came good for Bush
12/04/00: The Boies factor
11/30/00: "The inevitable demands for recounts erupted like acne…"
11/28/00: Fair play and the rules of the electoral game
11/23/00: The shining prospect beyond a cloudy election
11/21/00: Try the Cleveland model
11/16/00: A surprising winner emerges in the US election
11/09/00: Those powerful expats
11/07/00: What's right for America versus what works
11/02/00: Time to turn off big government's autopilot
10/30/00: Canada beating America in financial sensibility
10/26/00: When progressiveness leads to backwardness
10/24/00: The most accurate poll
10/19/00: The Middle East tells us the hawks were right
10/17/00: The split personalities of America's super rich
10/10/00: 'Equity Rights' or Wake up and Smell the Starbucks
10/04/00: Trapped in the basement of global capitalism
09/21/00: The final act of a grand presidential tragedy
09/21/00: Europeans strike back at the fuel tax monster. Should Americans follow?
09/18/00: First steps to success
09/13/00: America rejects the human rights transplant
09/07/00: Minimum wage, maximum cost
09/05/00: Prudent Al Gore plans some serious spending
08/31/00: A revolution fails to bring power to the people
08/28/00: A reali$tic poll
08/21/00: "I Goofed"
08/16/00: Part of the union, but not part of the party
08/09/00: Silicon Alley Secrets
08/02/00: Radical Republicans warm up for Philadelphia
07/31/00: I'll Cry if I Want To
07/27/00: Cold warrior of the new world
07/25/00: The Estate Tax will drop dead
07/18/00: Shooting down the anti-missile defence myths
07/14/00: A convenient punchbag for America's leaders
07/07/00: How to destroy the pharmaceutical industry
07/05/00: Patriots and bleeding hearts
06/30/00: Candidates beware: New Washington consensus on robust growth stands the old wisdom on its head
06/28/00: White America's flight to educational quality
06/26/00: How Hillary inspired the feminist infobabes

© 2000, Financial Times