But don’t America’s poor pay an unfairly high percentage of their income in taxes while America’s rich pay an unfairly low percentage? Such, after all, is what is claimed to be found by economists Emmanuel Saez and Gabriel Zucman, each of whom received the American Economic Association’s prestigious John Bates Clark Medal.
No. Saez’s and Zucman’s claims about the burden of taxation across income earners is wildly inaccurate. As GEE [Gramm, Ekelund, and Early] note about the research of Saez and Zucman,
[t]hey count only earned income. They completely ignore transfer payments that make up more than 90 percent of the income of the bottom quintile and 50 percent of the income of the second quintile. By not counting transfer payments as income to the recipient households, they grossly understate income in the bottom two-fifths of the population. So, when they then divide the actual taxes paid by an income amount that is between two and nine times smaller than the real amount, the result tax rates are unbelievably too high….
For the lower part of the income distribution, they choose not to count the largest part of the actual income individuals actually received – namely, transfer payments. At the higher end of the distribution, Saez and Zucman decide to count fictional amounts that the households never received as income. They estimate how much assets by individuals might have appreciated. These assets may include stock, mutual funds, retirement accounts, art collections, or homes. Then they count that amount as if it were income, although the asset owners cannot use it for consumption, savings, or paying taxes because they never received it.
After adjusting household-income figures to include government transfers, but not to include unrealized (and often only estimated) appreciations in capital values, GEE find that income-tax filers in the bottom half of income earners pay, as federal income and payroll levies, on average about nine percent of their incomes. In contrast, income-tax filers in the top ten percent of income earners pay in these taxes on average about 21 percent of their incomes. The average tax-payment figure for income-tax filers in the top one percent is about 28 percent of their incomes. (These figures are all pre-COVID.)
The data simply contradict the popular claim that high-income Americans, compared to lower-income Americans, do not pay substantially higher portions of their incomes as taxes to the federal government.
…..
The picture painted from rich sources of data by Gramm, Ekelund, and Early reveals an American economy that over the past several decades steadily and surely raised the real incomes of Americans across the income distribution. This picture is encouraging. But a word of caution is in order. Most of GEE’s data end in 2017. Although that’s only six years ago, those six years were unusually bad ones for economic prosperity. Starting in early 2018 Americans have been subjected to recurring waves of protectionism – waves started by Donald Trump and continued by Joe Biden. Because no small part of our growing prosperity up through 2017 was caused by our greater integration into the global economy, today’s fever for protectionism – a fever prevalent now across the political spectrum – will surely dim, and perhaps severely darken the economy’s prospects going forward. Also worrisome is the current craze of politicians of all stripes with active antitrust enforcement. By penalizing innovative experimentation with different business models, the recent rise of antitrust activity will join protectionism in stymying economic growth.
Far worse, however, is the terrible precedent set by America’s, and most other governments’, authoritarian posture during COVID. Although COVID restrictions are now largely things of the past, no one can know just how much entrepreneurial energy is still being sapped away by uncertainty about what will happen when another contagious pathogen emerges – as one will. Having learned how easy it is to frighten people into sheepish obedience to diktats that shut down large swathes of the economy indefinitely, governments are very likely to pull such a stunt again. Even just the prospect of enduring yet another fear-fueled authoritarian lockdown might very well be draining would-be entrepreneurs of much of the optimism they need to energize their productive endeavors.
The post Continuing to Get Straight the Facts About the American Economy appeared first on Cafe Hayek.