Tax Incidence

Greg Mankiw writes:

Greg Mankiw's Blog: Reich on Taxes: I often enjoy reading Robert Reich, former Clinton Labor Secretary and now Berkeley professor.... [O]ver at his new blog, Reich reports some "facts" about the current tax law that I found so surprising that I decided to check them out. Here is what Reich says:

...the rich are now paying a smaller percentage of their income in taxes than at any time in the last seventy-five years. That they pay a lot of taxes nonetheless is a by-product of the mind-boggling increase in their income and wealth relative to most other Americans.... [I]f you consider not just income and capital-gains taxes but all the taxes people pay -- including payroll taxes and sales taxes -- you find that middle-income workers are now paying a larger share of their incomes than people at or near the top....

The best place to look to check these alleged facts is the Congressional Budget Office website.... Here is the Total Effective Federal Tax Rate for 2005, according to a CBO report (Table 2):

Lowest quintile 5.5 percent
Second quintile 12.0
Middle quintile 15.6
Fourth quintile 19.6
Highest quintile 26.3...
Top 1 percent 31.1

These data (which include all federal taxes, not just income taxes) seem hard to square with Reich's second claim....

Reich's first alleged fact is that "the rich are now paying a smaller percentage of their income in taxes than at any time in the last seventy-five years."... I compared that 31.1 percent number for the richest 1 percent with historical tax rates.... What I found is that the average tax rate for the top 1 percent was below the current 31.1 percent rate for 10 of the 11 years from 1982 to 1992. It reached a low of 25.5 percent in 1986. For better or worse, President Bush has not come close to reducing tax rates for the rich to the levels they achieved after President Reagan cut taxes....

I don't know what data Reich was using when he made his claims. He does not post a link to a data source at his blog. If there are data backing up Reich's claims, it would be interesting to figure out why they are inconsistent with CBO data. Comments and explanations from readers are welcome.

I'll ask Bob for his sources on Monday. Meanwhile...

On the "smaller percentage of income" point, I think Greg is wrong and Bob is right. Greg's source for the current (2005) tax rate, http://www.cbo.gov/showdoc.cfm?index=5746&sequence=1#pt4, is an August 2004 CBO report. It shows a jump in the federal effective tax rate from 26.7% in 2004 to 31.1% in 2005. Why? Because as of August 2004 Congress had not yet extended relief from the Alternative Minimum Tax into 2005. It did so shortly afterwards (and passed a number of other tax law changes for 2005 as well). Greg should be using something like the 2004 tax rate of 26.7%--not 31.1%--for the current tax rate.

President Bush has reduced tax rates for the rich to roughly the levels they achieved in the Reagan years.

On the "middle class pays as high a share of income as rich" point, I think Greg is right and Bob is wrong... but I don't have my numbers handy.

I should caution that this is really hard to do, especially on the fly without a crack staff of trained professionals backing you up. The distribution tables don't include the effects of the estate tax--repealing the estate tax would make the tax rate on income earned now and passed on lower relative to the tax rate on income earned in the 1980s and passed on. The distribution tables assume that *all* of the corporate income tax is paid by shareholders--an assumption that has to be wrong, although how wrong is a matter of fierce debate.

And in email, the wise Jason Furman--who is close to being a crack staff of trained professionals all by himself--cautions: "top 1% isn't the right concept to compare the 'rich' over time. Since the top 1% have been getting richer relative to everyone else, even in a world of unchanging taxes their tax rates would go up. If we looked at data over time for tax rates for people with incomes 20 times the median income or $1 million or what have you, they tell a slightly different story..."