Taxes And Income Distribution: The Way It Was And The Way It Is

Got invited on to the local TV station today to discuss income distribution thanks to the recent statements about the matter by President Obama and Pope Francis, only to upset the local anchorman by telling him things he had not known previously, such as the shocking fact that someone making $115,000 per year pays the same in fica/Social Security taxes as someone making $115 million per year, although, well, that must be just fine because "that is the way it has always been, right?"  As it was I advocated raising the income cap on fica and taxing capital gains as income, just as was put into place back in 1986 under Ronald Reagan.  In the very conservative Shenandoah Valley this is how one must pose such radical proposals.

But, it got me to thinking about what I should have said, particularly if I had more time, which one rarely has on TV, especially local TV.  So, when the anchorman, who really is reasonably smart and well-intentioned, asked me if it had always been this way, that people above a certain income level (really, wage and salary level) pay no more in fica taxes than those at that level, I should have reminded him of how things used to be.  Yes, that is the way it has always been, but in other areas of the tax code, things have changed so as to really help out those at the top end of the income hierarchy, even if they have not been made to pay their fair share for our rising Social Security expenditures (and I noted that if one raised the income cap and was revenue neutral, one could cut the overall rate, thus lowering taxes for the bottom 96% of the income distribution, sort of like how closing loopholes back in 1986, such as the special break for capital gains, allowed a general cut in income tax rates for Mr. Reagan).

In particular I should have mentioned that from 1940 to 1965 we had a top marginal federal income tax rate that exceeded 90% in the U.S., which has since been drastically lowered.  Since 1986 that rate has not exceeded 40%, but somehow the economy grew more rapidly and produced more jobs during that earlier period than it has since that top rate was so sharply reduced.  In discussing the reintroduction of the special treatment of capital gains income under Bush, Jr., I noted that it was supposedly justified by the top 1/10 of 1% of the income distribution, who have gotten something like a third of the income increases since 2009, being those who would provide jobs for the rest of our society.  I asked perhaps a bit too sarcastically, "Where are those jobs?  They sure are not doing a good job of providing them," which brought a vigorous nod and chuckle from the crusty weatherman who was standing nearby.  Uh oh, now I am in deep doo doo, with a storm brewing.

What really strikes me is how successfully this very upper sliver has been able so to cow the media that one never hears these sorts of facts discussed.  We hear repeatedly about how "47% do not pay federal income taxes," but nobody talks about how fica taxes simply do not increase at all above a certain cutoff.  Occasionally someone will mention the special treatment of capital gains, but this is quickly dismissed because of the need to keep those "job creators" happy.  It is a hard fact that the group that pays the highest percentage of their income in taxes overall is actually around the 96-98 percentile, with that percentage falling steadily and firmly as income rises above that, because of the limit on fica taxes and the higher percentage of income earned as capital gains and also the regressive nature of sales taxes, the largest source of revenue for state governments nationwide, another point almost never discussed, except for in GOP states where they want to shift more to those sales taxes and away from income taxes so that those job creators will get helped more.

My bottom line was to say that I did not support "confiscatory taxation of the rich," but that I simply wanted to see them pay some of the same rates that others pay.  That seems fair, doesn't it?  But this is shocking, shocking, in today's environment.

Barkley Rosser