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Wednesday, October 12, 2005

Net GDP or Tax Inefficiency

Bruce Bartlett:
" What really qualifies Ms. Tritch to lecture the rest of us about tax policy is an absolute conviction our tax system is tilted too much toward the rich. To read her diatribe, one would think the wealthy pay no taxes at all and that the tax burden falls almost entirely on the poor and middle class. One would also come away thinking taxes do not affect economic growth at all.

According to Ms. Tritch, our tax system should serve one purpose and one purpose only -- to soak the rich. Any reduction in tax rates, especially on saving and investment, has nothing to do with raising growth, but is nothing but a giveaway to the ultrawealthy. One can see now why she was hired by the Times despite a paucity of knowledge or experience in the field of economics.

The reality is the wealthy pay almost all the federal income tax and there is clear and compelling evidence our tax system -- especially its misguided redistributive elements -- impose a heavy cost in growth terms ultimately paid by the nonwealthy via lower productivity and, hence, lower wages and incomes.

Interestingly, the latest Internal Revenue Service data on distribution of the tax burden were released the same day Ms. Tritch's tirade appeared. They show the top 1 percent of taxpayers paid 34.3 percent of all federal income taxes in 2003, although they earned just 16.8 percent of the adjusted gross income. The top 5 percent of taxpayers paid more than half of all federal income taxes, the top 10 percent paid two-thirds, and the top half of taxpayers paid 96.5 percent, meaning the bottom half paid just 31/2 percent.

Another IRS report decomposed the top 1 percent and found the top 10 percent of the top 1 percent (the top 0.1 percent) increased their share of all federal income taxes from 7 percent in 1980 to 15.3 percent in 2003. These 129,000 tax filers earned 7.6 percent of the income and paid an average tax rate of 23.6 percent. This came to $114.6 billion -- 4 times more than all the taxes paid by the 64 million taxpayers in the bottom 50 percent, who paid an average 2.9 percent rate.

I would be curious to know just how much more Ms. Tritch thinks the wealthy should pay? . . . .

[ . . . . ]

According to a new report from the U.S. Government Accountability Office, we pay a very heavy price for the heavy taxation of saving, investment, corporations and estates that Ms. Tritch strongly favors. It found the tax system's efficiency cost -- output lost over and above the tax itself -- is between 2 percent and 5 percent of the gross domestic product. In short, we lose between $240 billion and $600 billion every year just because of how we levy taxes. "
Is there a better way for the national government to raise revenue? Do we really want to loose 2% to 5% of the economy's output every year merely because of the way government chooses to raise revenue? The President has created a Commission to make proposals to reform the tax system, and I wonder, what are the odds the Commission's proposals will find a way to reduce this large tax burden of lost output?

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