Community Columnist presents misleading tax picture

Al Smith , a Milwaukee Journal Sentinel community columnist, selectively uses tax data to plead the case that rich folks are overtaxed.

Mr. Smith distorts the real picture of who is shouldering the tax burden in this country by focusing exclusively on the mildly progressive federal income tax and ignoring the impact of social insurance taxes.

Yet the vast majority for Americans (80%) pay more in social insurance taxes, F.I.C.A. Social Security and Medicare, than they do in federal income taxes and a much higher percentage of their income on these taxes than the wealthy. As a result, social insurance taxes have become the nation's fastest growing source of revenue.

Now the facts that Mr. Smith ignores!

In 2005, the poorest 24 million households (the poorest 20%) averaged only $15,900 a year but paid 8.3% of their income in social insurance taxes.

The second poorest (average income $37,400) third (average income $54,500) and fourth (average income $82,200) paid 9.2%, 9.5% and 9.7% of their income in social insurance taxes- a significantly higher rate than the 6% contributed by the richest 20% who average $231,000 annually.

And it gets even more regressive. Those averaging $339,100 , the richest 10%, paid a social insurance tax rate of only 4.8%, while the wealthiest 1 %, averaging $1,558,500 a year, paid only 1.7% of their income in these taxes.

To be blunt, New York Yankee Alex Rodriguez paid a significantly lower social insurance tax rate than a welder at Bucyrus Erie or an MPS teacher!

Mr. Smith apparently thinks this is fair.

Other taxes Mr. Smith mentions, sales, property and excise, are all regressive taxes which means moderate and low income folks pay a higher percentage of their income in these taxes than do the wealthy. For example, the poorest 20% paid 2.4% of their income in federal excise taxes while the richest 10% paid only 0.5% and the richest one percent 0.2%.

The decision by the National Taxpayer Union and Al Smith to focus only on the income tax is a conscious effort to distort the facts to make their case that the wealthy are overtaxed. The reality is entirely different.

Federal income tax rates for the wealthiest American have been reduced by almost 50% since 1978 and by almost 66% since the 1950’s. Capital gains, dividend and estate tax rates have also been slashed so that billionaire hedge fund managers pay a lower tax rate than hourly employees.

Warren Buffett, the third-richest man in the world, recognized this inequity when he criticised the US tax system for allowing him to pay a lower rate than his secretary and his cleaner.

The Bush era tax cuts provide extremely wealthy families with vast benefits. The richest one percent of families will get an average tax cut of $92,000 in 2010, including cuts in income and estate taxes. The average income for families in the top one percent will be $1.6 million in 2010, and yet, the President and his allies in Congress have showered the most generous tax cuts on these fortunate families. Meanwhile, the poorest 60 percent will get only 12-15 percent of the total tax cuts in 2010.

The argument for these reductions is that lower tax rates encourage people to work harder, increasing incomes and savings, leading to reduced interests rates, increased investment and economic growth. Yet the rates of economic growth in the 1990’s and 2000s, the heyday of high income tax cuts, were significantly lower than in the Post World War II era when marginal income tax rates were higher and social insurance rates lower.

During the Post World War II era, which economists call the Great Compression, the United States invested more as a percentage of the GDP into research and development, education, health, and the nation’s infrastructure than it has since the nation began its experimentation with supply side ideology. The middle class grew and economic insecurity and inequality declined.

If the U.S. is to compete in an increasingly globalized world, strategic investments are required. How we pay for these is a contentious question that can only be answered through honest debate. A prerequisite is that the facts be presented honestly.

Mr. Smith's column may serve his ideological and political objectives, but it does not move us toward the real discussion we need to have.