The Accountant is in the Details

Thanks to WMK for pointing me at this.

The latest attempt to convince us that the rich are being unfairly burdoned by taxes comes from Mark J. Perry at the American Enterprise Institute. Did you know that the top 5% of the country now pay more taxes than the bottom 95%? You didn't? They got graphs!


This is not as big a deal as Perry is making out, but he's not lying either. Read the whole thing of course, but I'll quote a few salient paragraphs.

Tax Foundation economist Scott Hodge reports that “the percentage of tax returns with no liability was fairly low in the 1960s (only 16 percent in 1969) and again in the early 1980s (17.9 percent in 1984). A record had been set every year since 2002, as tax cuts throughout the Bush years, especially the refundable child tax credit, pushed low-to-middle income people off the tax rolls.”

What are the implications of a rising number and percentage of “non-payers”?

1. American Enterprise Institute economist Alan Viard commented on Fox News that “there’s concern that when you have so many people not paying the most visible tax—the individual income tax—you might lose a certain check that otherwise would be in place on government spending.”

2. It also means that the burden of income taxes is falling on a shrinking percentage of income tax filers who actually pay taxes, especially higher income groups. As the chart below shows (data here), the top 1 percent of taxpayers paid 40.42 percent of all income taxes collected in 2007 ($451 billion), the highest share in modern history for that group, and more for the first time ever than the entire bottom 95 percent of taxpayers, who paid $439 billion, or 39.4 percent of the total.

The truth that is hiding in plain sight here is that the graph doesn't document people who aren't paying taxes; it documents people who don't have taxes due when they file returns. In other words, people who have sufficient deductions during the year to cover their tax bill. If the rich are paying more when they file, it's simply because they're choosing to pay it then instead of deducting it in advance. Which is a pretty good strategy if you can swing it because you can keep your money longer and earn interest on it.

Anyway, that's why you keep seeing "non-payers" in quotes, because they are actually paying. The blog post I'm quoting doesn't have anything to say about who among these groups pays the most taxes; just what they haven't witheld. I'm willing to stick with conventional wisdom until someone shows me otherwise.