Tax Reform Debate Should Focus on Growing the Economy

This post will not be popular. Let’s get that out of the way at the beginning. The United States, like much of the developed world, is enjoying a populist moment, when the economic frustrations of those who feel left behind are bubbling up into our political system.

And yet this is a post that isn’t focused on blue collar workers, or the Rust Belt, or the rural areas that have felt the negative impacts of globalism, mechanization or technology. Instead, it’s a post about misperceptions about the progressivity of the tax code. In some ways it is a defense of the 1%.

But as we enter a season of tax reform, in which Democrats will repeatedly beat the drum of how it benefits the rich at the expense of the 99%, it’s worth pointing out some of deeply engrained myths about our current tax code.

We’ve already seen Democrats ramp up their rhetoric in defense of the status quo.

Rep. Ted Lieu called the plan “Voodoo economics on steroids.” House Minority Leader Nancy Pelosi called it a “wish list for billionaires.” Senate Minority Leader Chuck Schumer said the plan would make “life easier for the wealthy and special interests” and “harder for middle class and lower income Americans.” Bernie Sanders tweeted that we have an economy “designed to benefit the wealthiest Americans” and argued that “Trump’s tax plan would make that system worse.” And Sen. Casey called it “a massive tax giveaway to millionaires, billionaires and big corporations at the expense of middle-class families.”

That’s a strong populist message, designed to pit the relatively few wealthy Americans against the large number of middle- and working-class folks. Unsurprisingly, it lacks a lot of important context. Consider:

  • The percentage growth of America’s income tax bill has surpassed growth in incomes in recent years. Much of that growth has been borne by taxpayers earning over $250,000
  • High income tax payers earned 28 percent of total adjusted gross income, but paid 55 percent of the entire income tax burden
  • The average “effective tax rate,” which measures taxes as a percent of income minus credits and deductions, was 13 percent. The effective rate for those earning more than $250,000 is 26 percent.
  • In 2013—the year for which we have the most recent data—the top 1 percent of households paid an average of 34 percent of their federal income in federal taxes, higher than when President Reagan assumed office.
  • The lowest three income quintiles, representing 60 percent of U.S. households, are net recipients of government transfer payments. That means they receive more in government assistance and benefits than they pay in federal taxes. Meanwhile, the top 20 percent subsidize all of those transfer payments and the vast majority of the revenue needed to fund the government (see chart)

Although you’re unlikely to hear it discussed during the coming tax reform debate the progressivity of the tax system has grown steadily since the 1980s and is now more progressive that it has been in decades. And yet, over that same time span the Gini Index, which measures how evenly income is distributed across all groups, shows that inequality has been growing. In other words, despite massive income redistribution, the gap between rich and poor is growing.

Obviously, as we stated at the beginning, nobody is shedding a tear for the top 20 percent, much less the top 5 or 1 percent. After all, there are real problems facing the middle- and working-classes in America, problems that will continue to multiply unless the economy and wages begin growing again. So we understand why Democrats would use the issue of inequality as a wedge against tax reform. Moreover, we understand that we as Republicans have to tread lightly when talking about reducing marginal tax rates.

But at the very least we can demand a debate based on facts. And the facts are simple: The wealthy pay a lot of taxes. The progressivity of the tax code has grown remarkably in recent decades. And yet it’s done nothing (except perhaps accelerate) income inequality. Given those facts, doesn’t it make sense to focus the tax reform debate on how best to grow the pie for everyone rather than who is currently getting the biggest slice?