Friday, January 25, 2008

More Phony Baloney from Art Laffer

Although I had planned to pen an article today regarding the stimulus plan and some other pieces of information from the week, I was alerted to this OP-ED piece in Today’s Wall Street Journal Online Edition and felt a need to respond. This piece is, in my humble opinion, another example of professional obfuscation by the very experienced Art Laffer. It requires little to dispose of this three-plus page propaganda piece, which states:

Since 1980, statutory marginal tax rates have fallen dramatically. The highest marginal income tax rate in 1980 was 70%. Today it is 35%. In the year Ronald Reagan took office (1981) the top 1% of income earners paid 17.58% of all federal income taxes. Twenty-five years later, in 2005, the top 1% paid 39.38% of all income taxes.
There are other ways of looking at tax receipts by income bracket. From 1981 to 2005, the income taxes paid by the top 1% rose to 2.96% of GDP, from 1.59% of GDP. There was also a huge absolute increase in real tax dollars paid by this group. In 1981, the total taxes paid in 2005 dollars by the top 1% of income earners was $94.84 billion. In 2005 it was $368.13 billion.
He goes on to devote almost an entire page to listing statistics about shares of taxes paid by the top 1% vs. the bottom 75% illustrating the point that the poor unfortunate top 1% have been carrying a much larger share of the total income taxes. What he does not explicitly mention is what I have set forth in the first graph above. The top 1% paid a larger share of the income taxes because the top 1% continue to get more and more of the total income. In fact, in 1986 the top 1% of taxpayers earned 11.3% of the total adjusted gross income reported to the IRS. In 2005 the top 1% earned 21.2% of the total adjusted gross income, an increase of 87.6%. In 1986 the top 1% paid 25.75% of all personal income taxes paid to the IRS. In 2005 the top 1% paid 39.38% of all the taxes, an increase of 53%. How is this bad for the top 1%? (See how easy it is to manipulate numbers? Think for a minute why percentage increase in income share is so much higher than the percentage increase in tax share. I will point this out to you, unlike some.) In reality, that entire page of percentages is irrelevant to anything other than deflecting from the fact that the rich have achieved higher riches relative to everyone else and this has occurred during the period in time that tax rates on the top 1% have been dramatically lower (the post 1981 period).

Mr. Laffer goes on to claim that the effective tax rate on the top 1% really does not change from year to year (thus proving my point above), concluding that this is because the rich find ways to alter their income so as to avoid the higher marginal rates (not that the wealthy don’t do some of this but it does not result in flat effective tax rates for the wealthy). There are two problems here. First, he is wrong as evidenced by the second graph above titled "Average Effective Tax Rate Top 1%". The effective rate does vary and the effective rate is measured over ALL income, not just the marginal portion at the higher rate. As a result we would expect the effective rate to vary much less than the marginal, and it does. The other problem is that if he is correct then the rich are masters at tax avoidance and the easy way to fix that is enforcement. His argument finishes with the proposition that if we cut taxes on the middle-class we will lose that revenue and if we raise taxes on the upper income earners, since they never pay the higher amount, we will lose income there too. Of course we just learned that this is not true, at least in connection with the top income earners.

Mr. Laffer’s piece ends with this hopelessly biased and unsupported conclusion:
Mark my words: If the Democrats succeed in implementing their plan to tax the rich and cut taxes on the middle and lower income earners, this country will experience a fiscal crisis of serious proportions that will last for years and years until a new Harding, Kennedy or Reagan comes along.
Trained economists know all of this is true, but they try to rebut the facts nonetheless because they believe it will curry favor with their political benefactors.

I have one final point about Mr. Laffer’s “analysis”. I find it interesting that he begins at the point in history when the highest marginal rates were dramatically lowered but goes no further back in time. I wonder if this change in income tax philosophy so strenuously argued for by the likes of Art Laffer has enabled the vast accumulation of wealth that appears to be concentrating at the top? I suspect there is a reason the analysis begins when it does.

Note: This article was revised from the original to add the second graph.

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