The Myth of Progressive Taxes

Every few years, there's a little flurry of headlines about millionaires who don't pay any taxes. Last year's version included stories like that of Michael Dingman, chairman of the New Hampshire-based aerospace manufacturer Abex, who gave up his U.S. citizenship to become a Bahamian. Dingman told the New York Times that he was seeking "a gentle, thoughtful, pleasant place to raise our three children." Along the way he also eliminated his U.S. tax liability. His wife and children remained Americans; when Dingman dies, if it's at least 10 years from now, they will get their inheritance tax-free.

Dingman and people like him may have found the ultimate estate plan (as William Zabel, author of the cheerily titled The Rich Die Richer--And You Can, Too put it). But you don't really have to go to quite those lengths to avoid paying your share. J.P. Morgan had it figured out back in 1932, when his accountants figured out a way to cut his taxable income almost to zero. "Congress should know how to levy taxes," declared Morgan, "and if it doesn't know how to collect them, then a man is a fool to pay."

And that's assuming Congress, and the executive branch, want to collect more money from the rich. Every time the stories about tax-free millionaires surface, a lot of talk follows about closing "loopholes" (last year's remedy was an expatriation tax). But according to Philadelphia Inquirer reporters Donald Barlett and James Steele, authors of America: Who Really Pays the Taxes?, that very language is myth: It implies that unfairness in the tax code gets there by accident, only to be removed as soon as sharp-eyed politicians catch it. The record, they write, reads differently: "For over 30 years, members of Congress and Presidents--Democrats and Republicans alike--have enacted one law after another to create two separate and distinct tax systems: One for the rich and powerful--call it the Privileged Person's Tax Law--another for you and everyone else--call it the Common Person's Tax Law."

There are plenty of people who would quibble with Barlett and Steele's phrasing, but the raw numbers aren't in dispute. Liberal or conservative, academic or political, pretty much everyone who studies the tax code concludes that it offers plenty of good deals to those who can afford them. What follows are some examples; for reasons of space--and because "corporate welfare" has received a fair amount of attention lately anyway--we're only talking about taxes on individuals and families.

Start with the tax rates themselves, structured so that taxes go up dramatically as you move through the lower rungs of the middle class, but barely budge when you hit the six-figure set. For a single person getting a raise from $26,000 to $29,000, the rate nearly doubles on the additional money (going from 15 percent to 28 percent); by contrast, the rate stays exactly the same for someone whose income jumps from $300,000 to $3 million.

The differences are even more drastic with the portion of taxes devoted to Social Security. Everyone's been talking about how the retirement system is destined to implode as the boomers age; much less noted is the fact that, partly as a result of changes Congress made over the years, the burden has been shifted almost entirely onto the poor and the middle class. That's because the Social Security tax is only applied to the first $61,200 of a person's income; thus, a single person making $62,000 pays the tax on every paycheck while the person's boss, making $500,000, pays only on what he earns by mid-February.

(Incidentally, though Social Security has a reputation as a program for the poor, in 1989 some $5 billion in payments went to people with incomes over $100,000. Only 14 percent of retirees with that kind of money collect Social Security now, but that figure is rising.)

Much of the current rate system is a product of the Reagan years, and it's worth noting that the Gipper knew what he was talking about when he said "tax relief." When he first started out in Hollywood, the top tax rate was 71 percent; World War II brought it to 91 percent. The top rate was still at 50 percent in 1980; then, the tax reforms enacted by Reagan and the Democratic Congress's tax bills slashed it to 31 percent. By Barlett and Steele's calculation, the First Family alone thus saw their effective tax rate cut from 40 percent in 1981 to 25 percent in 1986. In 1992 Congress tweaked the rates, increasing them to 39.6 percent for income over $256,000--still one of the lowest rates in the industrialized world.

Now the hottest ticket in political circles is the flat tax, most versions of which would effectively slash the top rate in half again. According to the Treasury's analysis, the savings for people making more than $200,000 would come to at least $79 billion a year under a 17 percent flat tax.

Of course, almost no one who can afford an accountant pays the full rate. Ever since the U.S. first got an income tax about a century ago, lobbyists have swarmed to the tax-writing committees for the same reason Willie Sutton said he robbed banks--it's where the money is. Federal "tax expenditures," as they're called, are estimated by the Joint Committee on Taxation to amount to $483 billion in 1996; by 1999 they're expected to come to as much as all federal "discretionary spending"--the Pentagon, social programs, foreign aid, everything--put together. In Minnesota, the list of tax expenditures put out by the Department of Revenue runs 19 pages and totals more than $7 billion; that includes everything from a beverage-tax exemption for sacramental wine to a sales-tax break for "Petroleum Products used in Passenger Snowmobiles."

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