Tuesday, September 4, 2012

Is the Tax Debate just Political Hype?

 (An internet search of “income tax breakdown of who pays” brings back 240,000,000 WebPages.)

I would say it is. The old adage the figures lie and liars figure holds true here. The entire debate is around collecting votes not improving America. First let’s look at the figure and then look at the strategy. The top 1% of the wage earners in America pays 40.4% of the total tax revenue bill. The bottom 50% pays in only 2.9%.  Forty-five percent of the income earners pay no taxes at all. This rate has been relatively constant since the late 90’s. The variance is about 1% - 3%, give or take. Changes in tax policy don’t seem to affect the actual outcome by much, if at all. This makes it look like the top 1% is being screwed. However, the top 1% only pays at an average rate of 17.6% of their income. This is partly due to the maximum capital gains tax rate of 15%, which brings down the average. The Bottom 50% pays at 17.1% of their income.  75% - 80% of the taxpayers pay more in payroll tax then income tax.

Most studies don’t take into consideration total government tax burden of local, state, and federal taxes, including payroll tax, which constitutes another 10% of the income of the bottom 50%. The real burden on the poor is not the Federal Income Tax system. It’s all of the taxes paid to all government organizations. This 10% does not include sales tax, advalorem tax or property tax (that is included in their rent if applicable). Their 3% federal tax contribution can quickly balloon to over  20% when all taxes are included.
Total share of actual income for the top 1% is only 22.2%. The total share of the bottom 50% is around 12%. Therefore, the rich are paying twice their share in taxes while the poor are paying a third of their share. This seems like a just system, if not totally fair. We have accepted this as the American way for several decades, nothing new for several election cycles.

Here’s the real issue… The group that contributes only 3% of the total tax revenue represents potentially 50% of the voters. This group by the way is growing, up from 40% in 2007. A candidate is not elected through tax revenue; they are elected via the ballot box. If a politician can run on a platform of reducing low income taxes by 33% (real impact is a reduction in tax revenues of 1%) they can garner the allegiance of 50% of the voters. Similarly, that same politician can berate the wealthy as living off of the backs of the poor and only lose 1% of the voters. 

Here’s the rub… the 1% can donate a lot of money to the election coffers of the politicians. The reality is that politicians don’t need the voters. If only three votes are cast and they get two of them, they win. In most cases, there are only two candidates for the voters from which to choose, one from the Republican Party and one from the Democratic Party. These parties provide the majority of the funding to run the election campaign. The politician’s allegiance is to their party, not the voter. The can get by without winning over the majority of the voting age population, but they can’t get on the ballot without the support of their party. Rich people know that changes in the tax code doesn’t bother them. They have a staff of smart people that will help them deal with it. The not so rich (PC statement) don’t have the staff. 

The top 1% understands political rhetoric, the bottom 50% may or may not. Either way the bottom 50% gets more money in their pockets even if nothing in government changes.