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No Laffing Matter

Bruce Bartlett offers a very useful analysis is this op-ed appearing in today’s Washington Times.  Here are two highlights:

[I]n 1980, when the top statutory income tax rate [in the United States] went up to 70 percent, the share of income taxes paid by the top 1 percent of taxpayers was just 19.3 percent. After Ronald Reagan’s tax cut of 1981, which reduced the top rate to 50 percent — a massive giveaway to the wealthy, according to the political left — the percentage of income taxes paid by the top 1 percent rose steadily.

By 1986, the top 1 percent’s share of all federal income taxes rose to 25.7 percent. That year, the top statutory tax rate was further cut to 28 percent — another huge giveaway, we were told. Yet the share of income taxes paid by the top 1 percent continued rising. By 1992, it was up to 27 percent.

Today, the share of income taxes paid by the top one percent of income earners is 34.3 percent.

A common liberal retort to these data is that they exclude payroll taxes, which are assumed to be largely paid by the poor. However, it turns out that when one includes payroll taxes in the calculations, it has far less effect on the distribution of the tax burden than most people would assume, because the wealthy pay many of those taxes, too.

In a 2004 paper to the American Statistical Association, IRS economists Michael Strudler and Tom Petska calculated percentiles data that included both income taxes and Social Security taxes. In 1999, the top 1 percent paid 23.3 percent of combined payroll and income taxes, the top 10 percent paid 52.2 percent and the top 20 percent paid 68.2 percent.

Bartlett goes on to relate international data showing that as income-tax rates fall, the share of income-tax revenues paid by top income earners rises.