Sunday, April 15, 2007

Survival of the Fittest Tax Code

On April 15, Kevin Hassett opines:

Like a finch in the Galapagos Islands, the tax code has gradually evolved in a manner that maximizes its chances for survival. So a natural history of our tax system provides an interesting mirror on ourselves and reveals some surprising facts.

....The similarity between the tax proportion for the high-income family and that of the middle-income family will surprise many. That's because the federal income tax, which is steeply progressive -- the higher your income, the more you pay in taxes -- gets all the media attention. But other taxes that are less visible, such as sales taxes, hit lower-income families with a heavy thud and quickly fill in the gap between their lower federal income taxes and the higher rates paid by those with high incomes.

....The federal income tax in 2003 for the family earning $50,000 was about $3,800, whereas it was about $17,500 for the family bringing in $150,000. But everything else worked to more than offset this difference. Middle-class families spent a larger share of their income and thus paid more sales tax. Gasoline and property taxes also ate up a larger share of the middle-class family's budget. Finally, the payroll tax is limited to 15.3 percent of income, so the wealthy paid a smaller share.

Governments at all levels have voracious appetites for cash, but taking revenue from the middle class is a politically risky maneuver; after all, that's where the votes are. So lawmakers have crafted ingenious ways around the dilemma, imposing hefty levies on those with lower incomes but relying on stealth taxes to do it. If you're going to tax widows and orphans, you'd better be quiet about it; use a sales tax.

Government thus takes more from the wealthy through income taxes, but extracts more from the poor with all the other taxes. By doing this, politicians get to pretend that they are virtuously redistributing wealth from the richer to the poorer, and they can maintain that fiction without sacrificing the cash. Voters seem to like this approach.

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