The rich are taxed too much? It depends on whom you ask

Economist Bob McIntyre has a sarcastic streak. The director of Citizens for Tax Justice headlines a new study: "White House Reveals Nation's Biggest Problems: The Very Rich Don't Have Enough Money & Workers Don't Pay Enough in Taxes."

Of course, the Bush administration would deny that characterization of its policy. But the arguments put forward by R. Glenn Hubbard, chairman of the president's Council of Economic Advisers, and Larry Lindsey, the sacked head of the National Economic Council, suggest that at least some White House officials believe the really affluent are taxed too much and that more of the tax burden must be shifted to the middle class and the poor.

"The increasing reliance on taxing higher-income households and targeted social preferences at lower incomes stands in the way of moving to a simpler, flatter tax system," Mr. Hubbard told an American Enterprise Institute conference in Washington.

A "flatter tax system" is economist's lingo for reducing the present progressivity of taxes where the well-to-do pay a higher percentage of their income in taxes than do the poor on the grounds that the rich can afford it.

In a recent Washington Times opinion article, Treasury official, J. T. Young, argued that higher earners cannot produce enough tax revenues to pay for "increasingly costly" spending programs sought by liberals. So if this spending is not controlled, "the tax burden will have to begin extending backward down the income ladder."

There is probably no more explosive an issue in tax politics than the impact of tax changes on different income levels. "Class warfare," Republicans charged when liberal analysts like Mr. McIntyre noted the 2001 Bush cuts gave most of the benefits to those with higher incomes.

"Someone has to fight back," says McIntyre.

Mr. Hubbard's case rests on looking at the personal income tax alone. In 1970, he noted, the top 1 percent of taxpayers accounted for roughly 17 percent of all individual income-tax receipts. The top 50 percent were the source of 83 percent.

By 2000, the top 1 percent were the source of 37 percent of all these receipts, and the top one-half of taxpayers 96 percent.

Rebuttals came fast.

One reason well-to-do taxpayers are paying a bigger share of individual income taxes is that they are getting a bigger and historically high share of total income, notes Joel Friedman, an economist at the Center on Budget and Policy Priorities.

Internal Revenue Service data show that 21 percent of the nation's before-tax income flowed to the top 1 percent of the income spectrum in 2000. That's up from 14 percent a decade ago. The average income of that richest 1 out of 100 households exceeds $1 million.

If the top 1 percent took in, say, 90 percent of all income, they would pay almost all of the individual income tax - and complain louder.

McIntyre makes another point. "The overall federal tax system is only modestly progressive," he notes.

If payroll taxes, excise taxes, estate taxes and other federal taxes are included as well as the income tax, the burden shifts down dramatically.

McIntyre's numbers show that in 2001, the richest 1 percent earned 18 percent of total pretax income and paid 25.1 percent of all federal taxes - a proportion he doesn't consider excessive. "Poor guys," he jokes. "They are practically poor paying so much more taxes."

By McIntyre's calculation, the lowest 20 percent of households (average $9,400 annual pretax income) paid, on average, 7 percent of their pretax income in total federal taxes in 2001. The next 20 percent ($20,700) paid 13 percent, and the middle 20 percent ($34,300) paid 17 percent. The fourth 20 percent ($56,100) paid 21 percent. The next 15 percent ($796,200) paid 21 percent, and the top 1 percent ($1,028,000) paid 26 percent - maybe less, suspects McIntyre.

If Social Security taxes aren't included, the tax burden of the wealthy looks more severe, making tax cuts for them seem more justifiable. So Mr. Lindsey held that these payroll taxes could just as well be "deposits" held by the government on behalf of workers to cover pensions and other benefits paid back in later life.

But even conservative economists have trouble with that view. A tax is a tax, most economists figure.

"It sounds like a transparent cover for giving rich people all the money they can get," says Jeffrey Frankel, a Harvard University economist who served President Clinton.

If an individual paid taxes according to the benefits received, then the rich should pay more for US defense and other security measures since they have more property to protect.

If personal income tax rates were flattened for all to about 13 percent to replace only income tax revenues, then in 2010, the top 1 percent would get a tax reduction of $159,501 and those making less than $100,000 would pay an extra $3,089 each, McIntyre says.