More on Leonhardt

Beyond the two points in my last post, two of Leonhardt's tax facts deserve brief comment.

First, Leonhardt notes that despite the corporate income tax rate remaining unchanged at 35 percent since 1993, corporations have continually found ways to lower the portion of their profits going to federal income taxes (down to 22 cents of every dollar by 1998). Johnston (Perfectly Legal 14) notes that for almost three decades corporate profits have been growing faster than corporate income taxes.

A major cause of this tax avoidance is American-owned multinational corporations shifting profits to lower tax jurisdictions (e.g. Ireland or Bermuda). America's complicated approach to taxing income from multinationals enables such profit-shifting schemes. For a better approach to multinationals' profits, see discussion paper from my Reed Professor Kim Clausing (with Reuven Avi-Yonah). Clausing and Avi-Yonah contend that their reforms would increase corporate income tax revenue enough to make reductions in the corporate income tax rate revenue-neutral. Someone ought to mention these ideas to Charlie Rangel.

Second, consider this summary of Leonhardt's first two facts:

As a group, the rich pay a greater share of taxes than in the past.

The top 1 percent of taxpayers — those with adjustable gross income of at least $267,000 in 2004 — paid more than 25 percent of all federal taxes that year, according to the Congressional Budget Office. That was up from 15 percent in 1979.

The affluent are paying more of the taxes because they’re making so much more money.

A family in that top 1 percent of earners paid a total federal tax rate — including everything from payroll taxes to income taxes to capital gains taxes — of 30 percent in 2004. That was down from 41 percent a decade before. Since the 1950s, tax rates on high-income families have generally been falling.

The top earners pay a bigger share of the government tab than in the past because their incomes have risen so sharply — even more sharply than their tax bills.

The affluent, in short, are paying less in taxes on every dollar they earn but earning many more dollars.

While noting that the incomes of the richest 1 percent have grown more quickly than their tax bills, Leonhardt neglects to numerically compare the richest 1 percent's slice of the tax pie with its slice of the income pie. In 2004, when the richest 1 percent payed 25 percent of all federal taxes, they earned 19 percent of national income. In 2005 the richest 1 percent's take of national income rose to 21.2 percent, the highest share recorded since the IRS began tallying the figure in 1986. Thus, not only is a rising share of national income the cause of the richest 1 percent's rising share of the national tax bill, the two percentages are fairly close.