The 47% and the Flat Tax That's Already Here

The conservative wet dream is a flat tax. Cain, Gingrich and Perry endorsed it in the primaries, as it tackles two problems at once: it lowers taxes on the rich, and it gets the 47% to pay up.

Sadly, it's already here. (Click to embiggen.)

As The Atlantic's Matthew O'Brien points out:

We barely have a progressive tax system. People basically pay what they earn -- even the top 1 percent.  (Emphasis added).

So how does this square with Romney's indictment of 47% of America?

Well, there are lots of other taxes, and they're mostly regressive. The payroll tax and state and local taxes all hit poorer households harder than they hit richer households.

In fact:

Once you add up the progressive federal income tax and the regressive federal payroll tax -- which raise roughly the same amount of revenue -- with regressive state and local taxes, you only just get a progressive system overall.

As this graph from the Tax Policy Center shows, payroll taxes made up 40% of federal tax revenue, as opposed to 42% for the individual income tax. Corporate income tax, meanwhile, made up only a meager 9%.

And, just for fun, the amount of taxes paid by corporations has been on the decline for decades.

Revenue from the corporate income tax fell from between 5 and 6 percent of GDP in the early 1950s to 1.3 percent of GDP in 2010.

That's a drop of between somewhere around 75 - 80%. If you're looking for a reason why the deficit's been growing, you might want to look here.

When Romney limited himself to a discussion of income taxes, he gave the game the away. The taxes he pays counts -- and should be reduced. The taxes the rest of pay? Not so much. The 47% include 26% who pay payroll taxes -- you know, the other big revenue stream for the government. And the remaining 21%. They're the poor, the disabled and the elderly, with some students thrown in the mix.

But they still pay taxes! The pay sales taxes, excise taxes, taxes on cell phones. Now, they may not pay much, but that's due in large part to the fact that they have don't have much money.

Undiscussed (with one notable exception) has been the role of tax expenditures. They are (more or less) the flip side of entitlements. The government can subsidize you by paying for something -- your rent, healthcare, etc. -- and that's an entitlement. But the government can also subsidize you in the form of tax breaks. Those are tax expenditures.

When Mitt Romney pays only 14% in federal income taxes because most of his income was from capital gains, he's a beneficiary -- just like someone on welfare. Except that his subsidy is a lot bigger than anything you'll ever see.

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One last point. Conservatives will argue that a lower rate for capital gains is necessary, or else people won't invest and the economy won't grow.

This is horseshit, as we showed here. The vast amount of capital gains are derived from assets purchased in the secondary market, where $0 -- not a typo -- has been invested. When you buy a stock on the open market, betting that it goes up -- that's what you're doing. You're gambling, not investing.

And we have no problem with gambling. We just want the proceeds to be taxed like everything else e.g., earned income. And fully half of these gambling proceeds go to top .1%. Again, not a typo. Not the top 1%, but the top 0.1%. 

But what about the economy? Don't lower tax rates result in more growth? Let's ask our friends at the Congressional Research Service, who just published a helpful little document called Taxes and the Economy: An Economic Analysis of the Top Tax Rates Since 1945.

Analysis of [the data] suggests the reduction in the top tax rates have had little association with saving, investment, or productivity growth. However, the top tax rate reductions appear to be associated with the increasing concentration of income at the top of the income distribution. The share of income accruing to the top 0.1% of U.S. families increased from 4.2% in 1945 to 12.3% by 2007 before falling to 9.2% due to the 2007-2009 recession. The evidence does not suggest necessarily a relationship between tax policy with regard to the top tax rates and the size of the economic pie, but there may be a relationship to how the economic pie is sliced. 

There you go. Conservatives just want a bigger slice.