Obama Tax Plan Show Dramatic Redistribution
July 8, 2008 · Filed under: News
According to a new Tax Foundation analysis, Senator Obama’s tax plan is a dramatic redistribution of the nation’s tax burden.
In Tax Foundation Fiscal Fact, No. 132, Tax Foundation president Scott Hodge uses revenue estimates from the Tax Policy Center to show that Obama’s plan would greatly accelerate the decades-long trend toward a federal government that depends for tax revenue almost exclusively on a few high-income people. This contrasts starkly with the McCain plan, according to Hodge, which would give every taxpayer a cut and leave the current tax burden distribution approximately where it is. “Under the Obama plan for 2009,” explains Hodge, “more than $131 billion would be redistributed from the top 1 percent of taxpayers to all other taxpayers.”
I thought the closing comments were interesting.
While many Americans may cheer this outcome as just or equitable, this sort of direct redistribution raises some important questions that should be part of a larger national discussion:
- What is the long-term effect on the economy of so few households shouldering such a large share of the tax burden?
- What are the consequences for our democratic system when a majority of Americans are disconnected from the full cost of government? Will that majority demand more from the government because they bear little of the cost?
- Should the tax system be used as a means of redistributing income or simply as a neutral mechanism for raising money for government services? Can a tax system premised on redistribution also be compatible with economic growth?
- The Obama plan assumes little behavioral change from such a large tax hike on high-income workers. Is this realistic or will the higher rates encourage tax minimization strategies and reduced work effort, which will lead to lower tax revenues?
14 Responses to “Obama Tax Plan Show Dramatic Redistribution”
Maybe I’m missing something here, but the opening paragraph of this does not make sense to me. I assume this is a typo, but maybe I’m just dense of something...
The first part of the paragraph says “Obama’s plan would greatly accelerate the decades-long trend toward a federal government that depends for tax revenue almost exclusively on a few high-income people.” This sounds like what my understanding of Obama’s plan is, not that I know much about it. However the quote at the end reads, “more than $131 billion would be redistributed from the top 1 percent of taxpayers to all other taxpayers.” This part seems to indicate redistribution in the opposite direction?
Am I missing something here? Can someone explain what sound to me like polar opposites?
There’s a link to the full article in the post, which may help clarify it. $131 billion from the top 1 % would be used to offset all other taxpayers.
Tax Foundation: “...the decades-long trend toward a federal government that depends for tax revenue almost exclusively on a few high-income people...”
Undoubtedly, the “almost exclusively on a few” comment is overstated. In addition, the Tax Foundation’s statistics are unhelpful when they don’t provide a range of total income amounts from all sources of income represented by each quintile referenced, nor do they provide the mean effective tax rate from all sources of income paid by individuals in each quintile (advocates for lower taxes frequently speak in terms of marginal rates and absolute amounts and rarely, if ever, mention effective tax rates–far more useful statistics for apples-to-apples comparisons).
In fact, the primary reason that the top 1 percent have been paying higher amounts in absolute dollars (not to be confused with paying higher effective tax rates) over time is that the real income growth among those at the top has dwarfed the real income growth, if any, among those at the bottom and in the middle. Obama’s “redistribution” plan is a reflection of the redistribution of real income that has occurred over the last several years, and perhaps, decades. His plan, I suspect, would likely achieve greater parity among effective tax rates incurred among taxpayers at different income levels and among taxpayers receiving most of their incomes from various sources.
With regard to various sources of income, earned income (i.e. income from work) is, generally speaking, taxed at higher rates than income from other sources such as capital gains, inheritances and dividends (note that taxes on income from work is double-taxation in the same way that capital gains, estate and dividend taxes are double-taxation). Since most of those at the bottom and in the middle receive the larger proportion of their incomes from work while those at the top are more likely to receive larger portions of their income from other sources, leveling the playing field (my loaded phrase) could technically be labeled as redistribution–but depending on your point of view, that might be a good thing.
Finally, Obama’s plan recognizes that taxing households in financial risk is counter-productive for both our government and our economy. The question for me is not: what are the consequences for our democratic system when a majority of Americans are disconnected from the full cost of government? The question for me is: what are the consequences for our democratic system when a significant proportion of Americans have such low household incomes that they can barely afford to pay any taxes at all?
Even though I’m pretty much of a Democrat these days, I don’t like the idea that an ever-increasing percentage of folks don’t pay any income taxes. I think everyone who has an income — from welfare recipients to hedge fund managers — should pay some meaningful percentage of their incomes as taxes, mainly so that we will all have the same vested interest to control government spending. When a sizable percentage of people don’t pay any income tax, they don’t get as upset as the rest of us about government waste, and it’s easy to view the government just as a source of services rather than a cost.
Now, actually under our current system most people do pay some taxes. All workers pay social security and medicare taxes regardless of their incomes (though I don’t know if that gets fully offset by the “negative income tax”), so maybe they do get upset by government waste, but I don’t think most folks view SS and Medicare taxes quite the same way as they view regular income taxes.
Just my opninion, of course.
Scott,
Make no mistake about it, Obama plans to raise the taxes on the top 1% of earners by $131B and lower the taxes on the rest of us by the same amount-$131B. The net revenue would be the same, but the number of lower income families who would pay no income taxes at all would certainly increase.
This plan is an example of class warfare/wealth envy at it’s worst, and it ought to galvanize the wealthy to contribute the max to McCain’s campaign, imho!
And it also seems to me that it reduces the probability for any consideration of a consumption tax under the Democrats to near zero. If the vast majority of Americans will pay no income tax, where is the pressure to get rid of it going to come from? Politically, the Fairtaxers ought to get on McCain’s band wagon. At least he seems to get it?
Helena, I have an issue with the assertion that “a significant proportion of Americans have such low household incomes that they can barely afford to pay any taxes at all”. What is the percentage or income group of this “significant proportion” and what is their wealth level? Low income households already pay few if no taxes, yet often receive very progressive social program spending from the federal government. Those in “financial risk” at higher income groups are usually there by their own life choices and by living beyond their means. I wouldn’t even label this as some “robin hood” policy, it’s worse - it seems like robbery by the masses. Makes me want to go listen to The Law. I’m for a progressive tax system, but this seems extreme, unfair, and punishing. If the taxes are too high, than perhaps we should reduce the spending of government.
Morphh,
The Census Bureau indicates that approximately one out of every ten household are living below a ridiculously low poverty line (currently $21,200 for a family of four). The median household income is at or below about $48,000–meaning that four out of ten of all households make somewhere between the poverty line and $48,000. This indicates that at least half of all households are “at risk”. A layoff, a medical condition, an auto repair even…any number of things can throw a family in this range over the proverbial financial cliff (if not already there).
Also, it’s not true that low income workers pay little if no taxes. In fact, all low-income workers pay property taxes (whether they rent or own), sales taxes, payroll taxes, ad valorem taxes, gas taxes, fees imposed by states having little or no state income taxes, and yes, most do pay federal income taxes (including most illegal immigrants, by the way).
It’s also not true that families in financial risk are primarily there because of life choices. Most who file for bankruptcy, for example, do so because of a medical condition not covered by insurance (for serious medical conditions, many blow through their meager $1M limits relatively quickly), layoffs or divorce (my friend, for example, didn’t choose his divorce–his wife did). Also, as you know, many struggling these days are young and college-educated, but are having more and more difficulty climbing out of overwhelming debt arising out of steadily rising college tuitions, books and fees.
A progressive tax system isn’t robbery; it’s pragmatism (for the record, Adam Smith indicated support for progressive taxes in The Wealth of Nations decades before Karl Marx came along). It helps to grow and maintain a large middle-class which leads to a more stable economy and fewer social ills. Lately, we’ve been moving in the wrong direction in this regard (I assert, toward third-world status).
Do you know what you’re effective (not marginal) federal income tax rate was for 2007? Do you know what it would be under Obama’s plan? What about for those in various income groups? What if you include payroll taxes, both in their current structure and under Obama’s proposal? Until you know the answers to these questions, I don’t think you’re in a position to label Obama’s plan as “robbery”.
I think Helena raises a number of good points (that you don’t normally hear on talk radio).
In particular, what is the effecitve tax rate on the various income groups? I do not know, but my guess is that the highest quintile pay in the high 20s, the middle quintile pay in the low 20s, and the lowest quintile pay in the 10 percent range (assuming you count both sides of payroll taxes and deduct tax credits.) If anyone knows, please provide a link.
Here ya go.
Total (income, social insurance, corporate, excise) Effective Federal Tax Rate for 2005:
Lowest Quintile: 4.3%
Second Quintile: 9.9%
Middle Quintile: 14.2%
Fourth Quintile: 17.4%
Highest Quintile: 25.5%
All Quintiles: 20.5%
Top 10%: 27.4%
Top 5%: 28.9%
Top 1%: 31.2%
The CBO assume that corporate income taxes “are borne by owners of capital in proportion to their income from interest, dividends, capital gains, and rents.” If you believe the FairTaxer assumption that these taxes are paid by consumers through higher prices or the common economic theory that they are borne partially by labor through lower wages, these numbers would be less progressive.
Helena, I think you took several of my statements out of context. I was referring to the federal government in that sentence regarding paying taxes as indicated by the second part of the sentence. Payroll taxes can often be offset with tax credit programs and then is paid back with interest in benefits - often thought of as “retirement funding” for themselves not the funding of government. I also stated that I support a progressive tax and did not call such robbery - I agree with Adam Smith. However, at a certain level of progressivity, it starts to become wealth redistribution on a larger scale as spending is also often progressive (or based on use - like gas/roads and many local taxes). In any case, I wasn’t disputing your case regarding effective tax rates, only that “a significant proportion of Americans have such low household incomes that they can barely afford to pay any taxes at all”. We’re the richest country in the world. The standard of living in the United States is one of the top 20 in the world, with a smaller government than most (relative to GDP). It’s often our life choices that put us “at risk”.
Let’s examine the 1 in 10 figure. Today, the typical American defined by the government as poor has a car, air conditioning, a refrigerator, a stove, a VCR, a microwave, a stereo, and a color TV. He is able to obtain medical care. His home is in good repair and is not over-crowded. By his own report, his family is not hungry, and in the last year he had sufficient funds to meet all his essential needs. While his life is not opulent, it is far from what the popular consciousness understands by “poverty.” I’m fine with letting this group off the federal hook, but have issue when you start getting toward 50% of the population having little vested interest in controlling federal government spending.
I find all your examples that “are not life choices” are in my opinion life choices. They choose their job, where to work, what city to work in, choose their schooling / self-training for the level of job, choose not to look for a another job when things looked difficult, did not increase their skill level sufficiently to quickly get a new job, ad nauseam. They could have secured more health insurance to prepare for more serious illness, got a different job with better insurance, lived a different lifestyle to prevent the illness, etc. They could have avoided credit, lived within their means and create savings to make sure that an issue did not cause bankruptcy. They could have choose a different spouse, done more to prevent the breakup, etc. All their life choices. I’ve done several of the things above to prevent such an at risk situation for myself. I’ve taken the extra time, spent less, trained more (much of it not easy). My life choices. I tired of people acting like their a leaf in the wind, blaming everything else - take responsibility for yourself.
I did not call Obama’s plan robbery. I was using an analogy in regard to Robin Hood taking from the rich and giving to the poor but in this case it’s not just giving to the poor but pretty much everyone else. So it “seemed like robbery by the masses” in relation to the analogy, hence the reference to “The Law”. I do understand the philosophy (and lean towards it) that many taxes are legalized robbery (Obama, McCain, and even the FairTax), although this often has more to do with spending. However, I do agree to some degree, as expressed by Milton Friedman (or maybe it was Alan Greenspan), that the government has a role in economic equality.
To clarify, since I sounded a bit cold, I do think we should provide a help up to those that do fall into a bad situation. That’s what social programs like unemployment, welfare, charity, etc. do by addressing those that actually need it (preferably done at the state or private org level for more accountability). We should avoid using the federal tax code for this.
If one believes (as I do) that the government can’t control who pays the taxes (they can only control who is required to remit the taxes), the redistribution effect through the tax code isn’t as much of an issue as we think. So, it’s not that the bottom 50% are only paying approximately 3% of the taxes. They actually have a much higher burden. However, they (and other voters) believe they are only paying 3%. Which I assert is a much worse situation. Our income tax policy revolves around always the appearance of shifting the tax burden from poor to rich. Once this new level of distribution is established, any shift in the other direction is deemed as “stealing from the poor to give to the rich.” That means any time taxes are cut, or raised, the distribution from rich to poor has to be increased or, although not usually politically feasible, maintained. It’s called the “ratchet effect”.
Our current federal tax system is theft, but (as Morph stated) it has to do more with what our tax money is spent on (SS, Medicare, Department of Agriculture, The Drug War, etc) than how it is collected. The basis for federal laws is the US Constitution, which implicitly prohibits such things via the 10th amendment (in addition to its basic logical structure).
IMHO, the progressive tax structure is completely unfair and totally counter-productive. I guess I’m okay for now allowing some exempted amount of income, but why should your 164,551st dollar earned (after exemptions) be taxed more than your 164,449th? Why is the person in the 4th bracket charged more than the person in the 3rd, or 5th to 4th? Pick an exemption amount and then treat everyone the same.
Personally, I think it’s a farce that the middle class is the creation of a progressive tax scale. I believe that distinction belongs to economic freedom such that people have the ability to move between economic classes. This is as opposed to one class (say the ruling class) controlling the resources and dividing them as they see fit. There was no Soviet middle class.
OBAMA’S ECONOMICS ARE DANGEROUS !!!
Unemployment at 6.1% simply reinforces McCain’s argument that if you raise taxes on businesses, they will have to cut back their work force in order to keep their doors open. In the short run, Obama’s desire to raise taxes on businesses, and give the money to struggling Americans sounds good ... but, it panders to people’s desire for hand outs and immediate gratification ... for, in the long run, this kind of bad judgement is like eating the goose that lays the golden eggs ... or, like eating your seed crop, instead of using the seeds to grow more crops. Raising the taxes on businesses is the best way to dramatically increase unemployment in America.
“To take from one, because it is thought his own industry and that of his fathers has acquired too much, in order to spare to others, who, or whose fathers, have not exercised equal industry and skill, is to violate arbitrarily the first principle of association, the guarantee to everyone the free exercise of his industry and the fruits acquired by it.” —Thomas Jefferson