In recent years, claims that “the rich” don’t pay their “fair share” of taxes have been repeated countless times. But that excuse to tax them more to line others’ pockets is blown away whenever the highly disproportionate income tax burdens borne by higher earners are reported. As The Wall Street Journal titled a recent article,“Top 20% of Earners Pay 84% of Income Tax.” In fact, the top 1 percent of American earners earn about one-sixth of total income, but pay nearly as much in income taxes as everyone else combined.
Rather than abandon the electorally valuable false premise that such disproportionate burdens are justified, however, the political left rallies to its cause. They try to rescue it by asserting that other taxes are regressive, so that taxes aren’t really so clearly unjustifiable as income tax burdens reveal. The featured players in that drama are state and local sales and excise taxes and Social Security taxes. Unfortunately, those taxes are also misrepresented to defend “fair share” misrepresentations.
Columnist Michael Hiltzik illustrated the state and local gambit in a tax-day column echoing charges that their sales and excise taxes “disproportionately hammer lower-income taxpayers,” with that alleged regressivity offsetting income tax unfairness.
That claim arises because those with lower current measured incomes spend a larger proportion of them on those taxes. However, as Edgar Browning has noted, “relative to lifetime income, there is very little difference in the percentage of income consumed among income classes.” As a result, apparent regressivity using current incomes is shown instead as “roughly proportional” to income in the more-appropriate lifetime context. Low current-income families also often consume a multiple of their income, largely financed with government transfer payments excluded from income measures. That further exaggerates the share of their incomes going to such taxes.
The Social Security angle was illustrated in a Washington Post story a few days earlier. It argued that since Social Security taxes only apply to earned incomes up to $118,500, “the more money you make, the less your effective Social Security tax rate is, making this tax about as regressive as they come.” However, Social Security treats lower income workers far better than higher income workers.
Rather than being regressive, Social Security taxes are proportional to earned income up to the tax cap. So, for the vast majority of Americans who fall in that range, taxes rise apace with income. Beyond the cap, earnings are not subject to the tax. So for those earners, their average tax rates fall with further income. Only for them can one claim that despite paying more in total Social Security taxes, they pay a smaller percentage.
When one incorporates the fact that a great deal of income for low income households is government transfers that are not counted as official income nor subject to Social Security taxes, the picture changes. Years ago, the Congressional Budget Office (CBO) found that incorporating such unmeasured income actually made Social Security taxes progressive for all but the top 20 percent of earners.
Even more important, Social Security’s supposed regressivity reflects only its taxes. But they generate retirement benefits, and evaluation must incorporate both. Doing so reveals Social Security as progressive.
For example, for a single earner retiring at sixty-five in 1993, Social Security replaced 59 percent of taxed income for low earners, 44 percent for average wage earners, but only 25 percent for an earner at the Social Security tax cutoff. Higher income earners received far smaller return on their contributions than average earners, and less than half that of lower earners. Taxation of benefits for higher income retirees now increases this difference. In terms of lifetime net benefits, in 1992 dollars, a single low earner retiring in 2000 would net $27,983 from the system, an average earner, $14,833, but a high income earner would lose $23,129.
Both approaches show Social Security does not benefit higher earners at the expense of lower earners. It actually redistributes income the other way.
Allegations that higher income earners don’t pay their “fair share” of taxes are a mainstay misrepresentation of the political left. And when facts such as income tax burdens get in the way, they double down with a defense that misrepresents state and local taxes and Social Security, as well. Unfortunately, that illustrates how important taking other peoples’ money is to their agenda and how unimportant the truth is in advancing it.
