More and more, rich paying less and less

Income taxes: Lower- and middle-class workers, experts say, now pay most of the government's bills.

April 11, 2004|By Miles Benson | Miles Benson,NEWHOUSE NEWS SERVICE

WASHINGTON - When Democrats charge that President Bush's tax policies favor the wealthy, Republicans cry "class warfare."

But many experts say middle- and lower-income Americans are indeed getting nicked - by both parties. More of government's costs have been shifted down the income ladder, critics say, even as the 1 percent of families with the highest incomes reap government's biggest benefits.

"If class warfare is being waged in America, my class is clearly winning," Warren Buffett, the billionaire investment specialist and chairman of Berkshire Hathaway, told his shareholders recently.

It has happened through a series of changes. To be sure, at Bush's urging, income taxes were cut for everyone. But so were taxes primarily paid by the wealthy - on dividends, investment gains and inheritances. In the meantime, aspects of the tax system that favor the wealthy went without significant reform.

When the income tax was established in 1913, it was steeply progressive, affecting just the wealthiest 4 percent of families. A majority of Americans did not pay income tax until World War II. Today, the federal income tax falls on two-thirds of us, starting at an annual income of about $20,000 for a family of four.

But progressivity - the principle that the percentage of a citizen's income paid in taxes should increase as income does - is eroding. Factoring in state and local taxes, including sales taxes, exacerbates the trend.

When Bush took office, the very wealthiest taxpayers - the top 1 percent, earning more than $966,000 a year - paid 37 percent of their income in taxes to federal, state and local government. This year, that group will pay just 33 percent, said economist Robert S. McIntyre, who heads the labor-backed nonprofit research group Citizens for Tax Justice.

The complete picture has been well concealed, New York Times reporter David Cay Johnston writes in Perfectly Legal, a book examining what he calls a "covert campaign to rig our tax system to benefit the super rich and cheat everybody else."

In 2001, Johnston calculates, the top fifth of Americans, making an average $116,666 a year, paid 19 cents in federal, state and local taxes for every dollar of income. The lowest fifth paid 18 cents on the dollar of incomes averaging $7,946.

Meanwhile, Johnston argues, the wealthiest families benefit most from what government makes possible: the enforcement of property rights and peace. "Without political stability and honest government you won't have all these large fortunes we have in America," he said.

Americans for Tax Reform President Grover Norquist, an influential GOP activist with close White House ties, makes no secret of his low regard for progressive taxation: "It's an obscenity."

He would prefer to apply the same tax rate to everyone, regardless of wealth and income levels. "Flat taxes treat everybody the same," Norquist said. "If the government is going to want some of your dollars, it should take the same from everybody. It's a question of equity."

Eroding principle

But off-loading taxes paid by the wealthy transfers the burden to the working poor and middle classes, counters Bill Gates Sr., father of the nation's wealthiest taxpayer, Microsoft founder Bill Gates. He points to efforts to repeal the federal estate tax, calling them "a movement sponsored by very wealthy families to avoid paying the tax" and "a blow to progressivity."

Should the repeal become permanent, as Bush wants, the estimated $1 trillion in lost revenue over the next 20 years would be "taken off the hides of Social Security beneficiaries," the elder Gates warns, referring to Federal Reserve Board Chairman Alan Greenspan's recommendation that Congress offset the difference by cutting spending, including Social Security and Medicare.

Progressivity is eroding by other means.

One, continuing since 1984 and supported by Democrats and Republicans, is the diversion of $1.5 trillion in Social Security taxes to finance regular government operating costs. The Social Security tax, intended to support the popular retirement program, is regressive. It is levied only on the first $87,900 of income, and does not apply to income above that level. Had the $1.5 trillion "borrowed" from the Social Security Trust Fund been raised via federal income taxes, the wealthy would have paid a larger share.

Then there are the complex rules of the tax code, written over the years by members of both major political parties. Americans with substantial wealth may claim an array of deductions and take income in forms that legally goes unreported.

Dick Armey, the former House Republican leader, argues that a flat tax would restore fairness by eliminating the "maze of exemptions, loopholes, depreciation schedules, graduated rates and targeted tax breaks." His version would have exempted all households earning less than $30,000 a year.

Flat tax falters

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