[Taxes]

Our Current Flat Tax.

Yesterday I mentioned Ron Wyden's flat tax--which isn't flat in the Forbes sense of everyone being taxed at the same rate. Wyden's tax is progressive, meaning the wealthy are taxed at a higher percent of their income, which is the system we've had since the Supremes wrangled with this questions in the early part of last century. It's a system Americans generally agree on--it's a matter of fairness, sort of like giving worse golfers few extra strokes to compete with better golfers. Level playing field and all that.

Except, of course, it's not.

Right now, the wealthy are taxed about the same amount as median-income earners. The reason is because how we earn our money is taxed differently. If your income arrives via paycheck, you are taxed in one way; if it arrives as profit from moving money or assets around, it's taxed in a different way. In the first case, it's known as "income"--and you get dinged for various payroll taxes. In the second case, it's known as a "capital gain," and you pay different kinds of taxes. And guess what? Over the past thirty years, rates on the first type have gone up, while rates on the latter type have gone down.

The midcentury tax policies produced what was was known as the "great compression," when the distance between the rich and poor shrunk the most in history. That trend has been reversed since Jimmy Carter raised payroll taxes, and the result has been a New Gilded Age.

Kevin Phillips charted the course of this change in his book Wealth and Democracy. In 1948, the median taxpayer (half earned more, half earned less) in America paid 5.3% of their income in federal taxes. This includes all taxes, not just income taxes. The top 1% of taxpayers paid 77%. That held course until Reagan (in the early 70s, the median was still just paying 16%, the top one percent 69%). Carter started the shift by boosting payroll taxes, and Reagan piled on, by slashing taxes on capital gains. By 1985, the median income-earner paid 24.4% in all taxes, and the top 1% paid just 24.9%. I couldn't find a median figure for current rates, but in 2000--before the Bush tax cuts, the middle quintile now has a tax rate of 17%, while the top 1% was at 29%.

Meanwhile, the corporate income tax has also continued to drop. Between 1940 and 1970, it bounced around from highs of 39% to lows of 17% (most years it was in the low to mid-twenties). In 2001, Bush slashed them to 7.6%. The payroll rate, by contrast, was 31% that year.

Finally, two more stats are relevant. During the period of the New Gilded Age (consider this an effort to re-frame the Norquista agenda), while taxes on the middle class have risen, wages have stagnated. While the richest 1% saw their incomes more than double between 1979 and 2002, the bottom 60% of wage earners saw their after-tax incomes grow anemically. In order, the bottom, second, and middle quintiles saw their income increase just 4.5%, 12%, and 15%. During the Bush years, median incomes have actually fallen, after adjustments for inflation.

Last, all of these financial woes have led Americans to fall further into debt. In 1950, the household debt Americans carried as a percentage of their annual income was 38% (so, for example, if you earned $1000 a year, your entire personal debt was $380). In 2000, it was 94%. And, for the first time in decades, in 2005, Americans spent more of their disposable income on consumer items than they earned, going further into hock.

This post is running long, but I'll just conclude it by saying that American tax policy since the late 70s has been designed to shift the burden away from middle- and low-wage workers. At the same time incomes for those workers stagnated, they took on greater debt, and government had to slash off-setting social services. Meanwhile, the rich have done very well. These are not unrelated phenomema.