US already moving toward a flat tax

Bigger tax breaks for wealth produces a system in which the middle class pays about the same as the rich.

Billionaires are paying not much more taxes, proportionately, than those Americans who are merely prosperous.

It's a sign that, even without the formal adoption of a so-called "flat tax," America's tax system is getting flatter.

Ever since the introduction of the modern income tax in 1913, US policy has been guided by the notion that the rich should pay a larger of their income in federal taxes, since they arguably owe something extra to a government that protects their greater wealth, and to a society that has helped them prosper.

But a debate has long waged over just where to draw the line, with populists pushing to "soak the rich" and conservatives arguing that a too-progressive tax structure creates a disincentive for the creation of jobs and wealth that benefit the whole nation.

Chalk up President Bush as not just a tax cutter but also a tax flattener. Under Mr. Bush and a Republican Congress, big tax cuts since 2001 have given major tax reductions to those wealthy individuals presumed, up to now, to be able to afford paying a bigger chunk of their income in taxes. By one measure of the federal, state, and local tax burden, just 3.4 percentage points separate the effective tax rate paid by the top 1 percent of earners from the other 99 percent of American households.

"That's the goal of the president and Congress - to shift the tax and debt burden to middle-income Americans," charges Bob McIntyre, director of Citizens for Tax Justice (CTJ), a liberal Washington think tank that crunched the numbers.

The comment may be unfair to a president who has cut taxes for all income groups, and has not publicly espoused such a goal. But his policies could have the effect of shifting greater tax burdens to the middle class.

If the Bush tax cuts are made permanent by Congress, by 2010 billionaires and millionaires will be paying a smaller percentage of their income in federal taxes than those in the upper middle class, according to a calculation by Brian Roach, an economist at Tufts University, in Medford, Mass.

In his second term, Bush has identified further tax reform as a top goal. This could include a push for a flat tax, one in which all income groups are asked to pay the same rate.

Two tax cuts currently before Congress would flatten taxes further - if their proponents overcome objections to measures that would add to the already large budget deficit.

Many conservatives see the shift to a flatter system as progress. It leaves more money of the well-to-do untaxed, and thus available for the investment that creates jobs and prosperity. Eventually, a truly flat tax system could be simpler than the current one, encrusted by years of detailed congressional changes in the law to please various constituents.

Simpler tax filing would be welcome to most Americans. A new AP-Ipsos poll finds that most Americans think federal income taxes are too complicated, but they're not eager to get rid of some deductions and tax credits. And when asked about instituting a flat tax, a majority doesn't like the idea. Some 57 percent of those surveyed say people with higher incomes should pay a higher tax rate, while 40 percent thought tax rates should be the same for everyone.

In 1913, only 0.5 percent of the population paid the tax, and rates rose from 1 percent to 7 percent as income increased. That income tax level has risen, of course, but progressivity remained an important element.

The system still has progressivity, but that element is shrinking.

When the top 1 percent of taxpayers, those making an average $978,000 last year, sent in their tax forms for 2004 to the Internal Revenue Service in recent weeks, on average they paid 24.6 percent of their income in federal taxes. That rate is down 4.3 percentage points from pre-Bush tax law.

All income brackets have got tax cuts under Bush. But the reductions for less affluent Americans are smaller, proportionally, than those for the millionaires and billionaires.

The "effective" tax rate is that which taxpayers actually pay. It isn't the higher marginal tax rate paid on their last dollar of income.

The poor, the near-poor, and the lower middle class do pay a lower effective federal tax rate. The bottom 20 percent, for instance, pay 7.9 percent - basically just payroll taxes for Social Security and Medicare.

When less progressive state and local taxes are added, the nation's tax system becomes even flatter. CTJ's analysis finds the top 1 percent were paying at a 32.8 percent rate, with the bottom 20 percent paying at a 19.7 percent rate.

A study last summer by the nonpartisan Congressional Budget Office (CBO) of effective tax rates basically confirms the flattening pattern shown in the CTJ analysis. Because the CBO uses modestly different assumptions - for instance, it ignores the estate tax - its numbers are slightly different.

Several factors explain the flattening in the federal tax code. Under Bush, the tax on dividends and capital gains has been cut - although not eliminated, as flat-tax proponent Steve Forbes proposed in his 1996 presidential bid. The wealthy own the bulk of stocks and other financial assets.

Under Bush tax-cut legislation, the estate tax shrinks and then expires in 2010. But it is slated to return to a 55 percent level on large estates in 2011. Permanent repeal, under consideration in the House this week, would flatten federal taxes further in the next decade.

The other tax legislation now under review is a budget resolution in the Senate that would eliminate income taxes on Social Security payments. This would primarily benefit affluent seniors. The rich would also gain, but it would be a drop in their bigger buckets.

The fate of both tax provisions is uncertain. The budget process will likely continue until the fall.