The GOP Must Move The Tax Debate From Fairness to Facts

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The current battle in Washington over how to avert the fiscal cliff (or even if we should) has the two sides talking past each other more than talking to each other. Republicans keep repeating that raising tax rates on people, including higher earners, slows down economic growth and leads to lower employment and less government tax revenue. Democrats say tax rates need to rise on higher earners in the interest of fairness. Republicans appeal to facts and numbers; Democrats appeal to fairness.

When one side tries to employ facts while the other points to an ideal, the side relying on the ideal usually is doing so because the facts are not in their favor. That is certainly true in this case.

Democrats decry without end the failure of the "rich" to pay their fair share of taxes. Yet, they rarely add any numbers to support this notion. The occasional reference to a fact is generally a mention that the Bush tax cuts lowered tax rates for the rich, how those tax cuts went mostly to the rich, or that Warren Buffett pays a lower average tax rate than his secretary. Note that none of those supposed facts actually refers to the total share of income taxes paid by the rich.

The facts come courtesy of the IRS which compiles annual data on income tax shares released with about a two year lag. The Democrats are counting on the fact that most people don't know the facts revealed in that data.
Before we go through the numbers, note that the term fairness cannot be defined in an objective manner; it is a subjective concept. People differ in their ideas of what is fair and there is no single correct answer. At best, society reaches a consensus based on what a voting majority believes.

To begin discussing the facts, let's start with the share of taxes the higher earners pay. The IRS data for 2010 show that the top 1% of income earners paid 37% of all income taxes while earning 19% of the income. The top 5% paid 59% of the income taxes and the top 10% paid 70% of the income taxes. This certainly sounds to me like more than their fair share.

But income taxes are not all taxes. Democrats always remind us that payroll taxes are regressive, so what if we look at total taxes paid? The top 1% paid 22% of all taxes, the top 5% paid 40%, and the top 10% paid 52% of all the taxes. These numbers still look to me like the higher earners are paying at least what is fair.

Those are the facts on current taxes paid; now let's look at the Bush tax cuts. Luckily, the Congressional Research Service estimated the effect of extending the Bush tax cuts when analyzing two current proposed pieces of legislation: one to extend the tax cuts for one year for all Americans and another to extend the tax cuts only for 98% of income earners (letting the rates rise for those in the top 2%, meaning those earning over $250,000 per year). The Congressional Research Service found that extending the tax cuts for all would reduce tax revenue in 2013 by $177 billion compared to letting everyone's taxes go up. Extending the cuts only for those earning under $250,000 would reduce revenue by $130 billion. Simple subtraction suggests that the top 2% would be getting only $47 billion of the $177 billion total tax cut, or 26%. Those are the facts on the Bush tax cuts.

If you listen to the Democratic Party rhetoric, you would be forgiven for believing that the top 2% were receiving a much larger share of the tax cuts being debated than slightly more than one-quarter. Even after learning that the rich were getting a quarter of the tax cuts, you still might think that is an unfair share for just 2% of the people to get. However, once the number is put in context and compared to the income taxes paid by those high earning taxpayers, the picture suddenly changes. What seemed unfair now looks much fairer. Isn't it funny how adding a few facts changes the picture?

What about longer term trends? These numbers are rarely reported as usually only the latest numbers are reported and even those are ignored by most of the media. If we look at data on income tax shares by income bracket, the only people paying more now than thirty years ago (before the Reagan tax cuts) are the top 5% of income earners. In 1980, the top 1% paid 19% of all income taxes; in 2010 they paid 37%. The share for those between the top 1% and 5% has risen from 18% to 22%. Those between the fifth and tenth percentile of the income distribution have seen their share of income taxes paid reduced from 12% to 11%. More dramatically, the share of income taxes paid by people between the tenth and 25th percentile has plunged from 20% to only 11% between 1980 and 2010. And, finally, those in the bottom 50% of the income distribution have seen their share of income taxes paid decline from 7% to only 2%.

People can have any definition of fairness that they wish, but the indisputable fact is that the top 5% now pay much more of the income tax burden than before the Reagan and Bush tax cuts (and Clinton tax increase). Their collective share has soared from 37% to 59%. Meanwhile the remaining 95% of Americans have enjoyed having their share of income taxes fall from 63% to only 41%. It is hard to see how one can factually claim the rich are not paying their fair share unless the country's income tax system has not been fair in at least two generations.

If the Republicans expect to win the current debate over tax cuts, they need to learn how to answer the Democrats when they play the fairness card. First, the Republicans should demand numbers, not appeals to vague ideals. Then the Republicans should place those numbers in context so that people understand the share currently being paid by the rich and how that share has already risen significantly over time. Then all Americans can properly evaluate whose proposal is fairer.

If the Republicans move the debate from fairness to facts, they can win the day.

Jeffrey Dorfman is a professor of economics at the University of Georgia, and the author of the e-book, Ending the Era of the Free Lunch

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