Taxes

Our reading in public policy includes chapter 2 of Hacker and Pierson, Partying with the People's Money, regarding the Bush Tax Cuts. Hacker and Pierson argue that the policy of tax cuts was chosen in part by ifnoring policy tradeoffs -- what else coould have been done with the large surpluses projected in the early 2000s -- and rosy scenarios of overestimating the size of those surpluses (as well as underestimating the size of the cuts -- including backloading th ecosts, and inserting "timebombs."

Several recent articles on taxes in the US:

First, an excellent article on politics of taxes, including historical perspectives:
Taxes Flatten but Deep Pockets Still Bulge
By Joel Havemann, Times Staff Writer
April 17, 2006

The idea that income tax rates should be graduated, with those who had more money paying a larger share of it in taxes, was a fundamental premise of the federal income tax system when it was created by constitutional amendment in 1913 on the eve of World War I.
...
Although the top tax rate is 35%, nobody pays that percentage in total because it applies only to income beyond the first $326,450. At the other end of the income scale, the lowest rate — 10% — applies only to the first $7,300 in income.

And then there is the regressive effect of the payroll tax, which finances Social Security and Medicare. Social Security's share of the tax — 6.2% — applied last year only to the first $90,000 in wages. People who earned more than that paid a smaller percentage of their income in payroll taxes than did those who earned less.

As a result, people with income between $500,000 and $1 million owed the same share of their income in combined federal income and payroll taxes — 22% — as did taxpayers reporting at least $1 million in income, according to the Tax Policy Center.

The New York Times' David Kay Johnston writes about taxes regulalry: he won the pulitzer prize for the articles that formed the basis of his book Perfectly Legal. Recently he wrote about the benefits to the investor class of the Bush tax cuts: as a student of politics might well expect:

Big Gain for Rich Seen in Tax Cuts for Investments

When Congress cut investment taxes three years ago, it was clear that the highest-income Americans would gain the most, because they had the most money in investments. But the size of the cuts and what share goes to each income group have not been known.

As Congress debates whether to make the Bush tax cuts permanent, The Times analyzed I.R.S. figures for 2003, the latest year available and the first that reflected the tax cuts for income from dividends and from the sale of stock and other assets, known as capital gains.

The analysis found the following:

¶Among taxpayers with incomes greater than $10 million, the amount by which their investment tax bill was reduced averaged about $500,000 in 2003, and total tax savings, which included the two Bush tax cuts on compensation, nearly doubled, to slightly more than $1 million.

¶These taxpayers, whose average income was $26 million, paid about the same share of their income in income taxes as those making $200,000 to $500,000 because of the lowered rates on investment income.

¶Americans with annual incomes of $1 million or more, about one-tenth of 1 percent all taxpayers, reaped 43 percent of all the savings on investment taxes in 2003. The savings for these taxpayers averaged about $41,400 each. By comparison, these same Americans received less than 10 percent of the savings from the other Bush tax cuts, which applied primarily to wages, though that share is expected to grow in coming years.

As we resurrect the notion of myths and symbols, of symbolic politics, we want to pay attention to the justifying nature of these myths. Is it true that tax cuts actually "grow the economy" and thus pay for themselves? Partisan defenders of the policy might not care too much about the answer to this -- a tax cut is good for the party?

A Conservative might care about the answer to this: if you define yourself in part by fiscal responsibility, being fiscally irresponsible is bad. Writing recently on the Heritage Foundation's webpage, conservative Bruce Bartlett concludes:

Revenues as a share of the gross domestic product fell every year from 2000 to 2004, from 20.9 percent to 16.3 percent. The 2005 increase only raised revenues to 17.5 percent -- still well below their historical average of 18.1 percent of GDP. It seems to me that the normal cyclical expansion after the end of the recession in 2001 has done far more to raise revenue than any Laffer curve effect. Revenues are simply returning to trend, nothing more.

In short, there is very little likelihood that revenues are rising because the 2003 tax cuts or would fall if they are not extended. The case for extending them must be made on other grounds.

As Hacker and Pierosn tell us, the sunset provision in these tax cuts was purposeful, both to limit their estimated size, as well as to have a permanent campaign issue.