[StBernard] The Rich Pay Their Fair Share

[Westley Annis]

The Rich Pay Their Fair Share 
They would still shoulder the burden under the McCain plan.
By ANDREW G. BIGGS and KENT SMETTERS

Tax policy has two main goals: fairness and efficiency. Fairness encompasses
philosophical values regarding how the tax burden should be distributed
based upon the ability to pay. Efficiency incorporates economic
consideration of how incentives built into the tax code affect individuals'
willingness to work or save. Deciding whether a given tax plan maximizes
fairness and efficiency is a difficult task under the best of circumstances.
But given how most information pertaining to the two presidential
candidates' tax plans is presented in the press, it is all but impossible to
say much about either fairness or efficiency.

The media typically report how each candidate's plan would change the tax
code relative to current law: the size of the typical tax cut or increase
that accrues to low, middle or high earners. So it is widely reported that
John McCain would mostly cut taxes for the rich while Barack Obama would
mostly cut taxes for the middle class. But how much a given income group
gains or loses from a specific tax reform tells us nothing about either the
fairness or efficiency of the tax code after such changes have been
implemented.

According to the Tax Policy Center, a joint venture between the Urban
Institute and Brookings Institution, around 78% of the McCain tax cut would
accrue to the top fifth of income earners, with almost 30% going to the
highest 1%. This seems inequitable on its face, a point the Obama campaign
and the press focus on.

But can we conclude that the rich would pay too little taxes under the
McCain plan? Not really, because most media reports do not reveal the
resulting share of the tax burden borne by the highest earners.

As it happens, the top fifth of earners currently pay 67% of all federal
taxes -- including not just income taxes, but payroll taxes, corporate taxes
and death taxes. The top 1% of earners pay 26% of all federal taxes.

If the McCain proposal were passed, the top fifth would actually pay a
greater share of total federal taxes and the top 1%'s share would decline by
only 0.3%. In other words, high earners carry the vast majority of the
federal tax burden and, despite what the media portrays as a shift from
Scandinavian egalitarianism to Latin American inequity, would continue to do
so under Mr. McCain's plan.

The fact that high earners pay the vast majority of all federal taxes will
come as a surprise to most Americans, who believe the middle class bears the
tax burden while the rich get off scot free. A 2007 Gallup poll found that
66% of Americans believe upper-income people pay too little federal income
taxes. Media reports play into these beliefs by focusing on how the
candidates' plans would change the tax code, not on what the tax code would
look like after those changes took place.

Moreover, can we say anything about whether the candidates' plans improve
economic efficiency? Only if we look at whether the plans reduce marginal
tax rates -- the amount of additional taxes paid for each additional dollar
earned -- which determine incentives to work, save and create jobs. But
media reports commonly tell us nothing about these issues.

As it happens, the McCain proposal would maintain current income tax rates
and lower corporate taxes to help American businesses -- which ultimately
provide American jobs and pay American wages -- compete in a global economy.
By contrast, the Obama plan would increase marginal income tax rates on high
earners and raise taxes on capital gains and dividends, with the likely
effect of contracting labor supply, reducing rewards for saving, and
increasing incentives to avoid taxes. All but the very lowest income
Americans would face higher marginal tax rates under the Obama plan than the
McCain proposal.

The media focus on how the candidates' plans would change the tax code
implicitly assumes that the current distribution of tax burdens and marginal
tax rates is somehow optimal. But there is no reason to believe this. We can
argue whether the Obama plan is fairer or more economically efficient than
the McCain plan, but only if we focus on the end product. How the
presidential candidates' plans would change the tax code matters far less
than where the tax code would stand when those changes are accomplished.

Mr. Biggs is a resident scholar at the American Enterprise Institute in
Washington, D.C. Mr. Smetters is an associate professor at The Wharton
School and a visiting scholar at AEI.