The New Class Envy (Part Deux)
By Pejman Yousefzadeh Posted in Economy | Featured Stories — Comments (59) / Email this page » / Leave a comment »
Of course, part and parcel of the new class envy evinced by Kevin Drum in the post below is the belief that since there are so many supposedly undeserving beneficiaries of a so-called new "Gilded Age," something must be done to bring about some semblance of financial equality and economic justice. And that something, naturellement, involves raising taxes on the rich.
To make them pay their "fair share," you understand.
Thank Heavens for Greg Mankiw, who tears this meme apart:
The best source for objective data on the distribution of the tax burden is the Congressional Budget Office. The C.B.O. goes beyond anecdotes and bald assertions to provide hard data on who pays taxes. One can argue about the details of its methods, but there is no doubt that it is nonpartisan and that its tax analysts are some of the best in the business.
The C.B.O.'s most recent calculations of federal tax rates show a highly progressive system. (The numbers are based on 2004 data, but the tax code has not changed much since then.) The poorest fifth of the population, with average annual income of $15,400, pays only 4.5 percent of its income in federal taxes. The middle fifth, with income of $56,200, pays 13.9 percent. And the top fifth, with income of $207,200, pays 25.1 percent.
At the very top of the income distribution, the C.B.O. reports even higher tax rates. The richest 1 percent has average income of $1,259,700 and forks over 31.1 percent of its income to the federal government.
So the top fifth and the top 1% are responsible for over 56% of the nation's tax revenue. Never mind this sentence. I misread. My bad.
"But Warren Buffett complains that his taxes are too low," you exclaim as an argument in favor of higher taxes on the rich. Well, there is a reason for his taxes being low. Here it is.
Read on . . .
One might wonder how Mr. Buffett gets away with a tax rate of only 17.7 percent, while a typical millionaire is paying so much more. Most likely, part of the answer is that Mr. Buffett's income is made up largely of dividends and capital gains, which are taxed at only 15 percent. By contrast, many other top earners pay the maximum ordinary income tax rate of 35 percent on their salaries, bonuses and business income.
The distinction is crucial for understanding how much the rich pay. Indeed, the share of top incomes coming from capital is much lower now than it has been historically. According to Emmanuel Saez, an economist at the University of California, Berkeley, for the richest Americans -- those in the top 0.01 percent of the distribution -- the percentage of income derived from capital fell to 25 percent in 2004 from 70 percent in 1929.
[. . .]
Another piece of the puzzle is that Mr. Buffett's tax burden is larger than it first appears, because he is a major shareholder in Berkshire Hathaway.
When the C.B.O. studies the tax burden, it includes all federal taxes, including individual income taxes, payroll taxes and corporate income taxes. In its analysis, payroll taxes are borne by workers, and corporate taxes by the owners of capital. For the richest 1 percent of the population, 9.3 percentage points of their 31.1 percent tax rate comes from the taxes that corporations have paid on their behalf. The corporate tax would undoubtedly loom large if the C.B.O. were to calculate Mr. Buffett's effective tax rate.
And finally, a passage that if read by fair-minded people, should go a long way towards demolishing the idea of the "undeserving rich" that makes up so much of the new class envy:
. . . the share of top incomes coming from capital is much lower now than it has been historically. According to Emmanuel Saez, an economist at the University of California, Berkeley, for the richest Americans -- those in the top 0.01 percent of the distribution -- the percentage of income derived from capital fell to 25 percent in 2004 from 70 percent in 1929.
If your image of the typical rich person is someone who collects interest and dividend checks and spends long afternoons relaxing on his yacht, you are decades out of date. The leisure class has been replaced by the working rich.
"A--holes," huh? Whatever.