It seems that most everyone wants to make judgmental statements about the recently passed tax bill (the Tax Cut and Jobs Act, hereafter, the Act). Most complain about its lack of “fairness,” but very few refer to anything that might be considered part of a legitimate evaluation of the fairness of the situation prior to the Act, or baseline condition. Certainly the estimated impacts of any changes depend, at least partly, upon the situation that exists prior to the change.
The changes are expected, by all, to have multiple effects. The current judgment as to the value on the one hand, or the cost on the other, of those effects appear to depend more upon the political leanings of the evaluator than any carefully reasoned analysis. Allowing me a gross simplification, Democrats predict impending doom while Republicans predict economic salvation. Opinions expressed in The Montana Standard seem to have weighed in heavily on the side of impending doom; the attacks have ranged from a newfound national debt religion to essentially unsupported assertions of the unfairness of the changes, often implying that the rich are not now paying their fair share of income taxes, and will pay an even smaller share under the new tax laws. Of course “fair” and what a “fair share” look like are never defined. Some even seem to harbor the incomprehensible belief that those with larger incomes currently pay a personal income tax that is a smaller percentage of their income, and maybe even a smaller absolute dollar amount, than those with smaller incomes. Can either possibly be true, on average? Most certainly not! These beliefs are held in spite of readily available tax data to the contrary.
START AT THE BEGINNING
In any analysis, it is just basic common sense to start at the beginning. In this case the appropriate beginning is the current (pre-Act) status. Using an environmental impact analysis approach as a model, we would begin with an accurate statement of the baseline status as the first step in evaluating change. In this case, the relevant status quo is the existing relationship between income cohorts and the percent of total personal income tax payments made by each cohort: how much of the total personal income tax burden are the various income cohorts bearing under present tax law? Very few pundits have bothered to look at this baseline, and essentially none of the proponents of a tax doomsday has done so.
The single reference to beginning conditions I have found in The Montana Standard is in a recent political cartoon on the Opinion Page. That two-part cartoon shows Jon Tester: in the first panel saying: “This tax plan is just tax cuts for the rich,” while a Republican elephant queries: “How much more do you want the rich to pay?” (The elephant is holding up a brief table of adjusted gross income as related to the share of income taxes paid by each of several income groups.) In the second part of the cartoon, Sen. Tester replies “How about all of it.” The data shown in the table held by the elephant cartoon character, while certainly sketchy, show at least some semblance of the baseline status. But a more comprehensive baseline can be found in existing federal publications. These publications show the percent of total personal income taxes paid by income category, and are readily available to anyone with access to the internet who cares to check.
WHAT'S IN PLACE NOW
So … what do these tax percentages by income class show? Probably to the surprise of many, the current tax structure in place prior to recent passage of the Act, is strongly progressive, i.e., the higher the income, the higher the average tax rate paid. The following three income/tax cohorts clearly demonstrate this conclusion. These are taken from a summary published by the Tax Foundation, titled Individual Income Tax Rates and Tax Shares, based on Internal Revenue Service Statistics of Income, 2014. To save space, I show only three income/tax cohorts (many more are shown there), but these three clearly demonstrate the strong progressive nature of the tax code prior to the Act
The top 1% of the total Adjusted Gross Income earners show total earnings of just over 20% of total US Adjusted Gross Income (AGI) and pay just over 39% of the total personal income taxes paid; those earning the top 10% of AGI earn roughly 47% of total AGI and pay roughly 70% of total personal income taxes. In contrast to these top income groups, those earning the bottom 50% of AGI earn about 11% of the total AGI and pay about 2.75% of all personal income taxes.
Is the income tax status quo “fair”? I will leave that up to the reader, but many believe that a “fair” allocation of the tax burden would have the wealthy paying a smaller share (although, still a higher percentage than that of the poor) of the total tax burden. To those individuals, any system that marginally reduces the share paid by the wealthy is an increase in fairness. On the other side are many who want the wealthy to pay more.
ECONOMICS OF ENVY
In spite of the currently skewed tax burden noted above, many complain that the rich do not now pay enough. Many resent wealth. Much of that resentment seems to come from what might be called “the economics of envy.” This comes from a belief that when one group earns more, the rest must be earning less: that the wealthy add to their income only by taking from the rest of us. This is a zero sum view of economic activity, a view that all economic activity is similar to the splitting up of a fixed-size piece of pie: if you get more I must (necessarily) get less. However, I know of no serious economist today who views the workings of the economy as simple zero sum activities. Looking at income distribution without avarice, if your income doubles, I am no worse off! My welfare is probably completely unaffected.
Finally, it should be noted that all the predictions of the effects of the Act are, at this time, premature; it is not yet known which income tax shares will increase or decrease as a percent of income, once the new tax law, with its many changes, is in place. Full data will not be available until sometime after April 15, 2018.
My advice to the prognosticators on both sides is this: Take a deep breath, calm down, and wait to see how the story plays out. Life itself does not hang in the balance!
-- Jim Falvey, a 38-year resident of Butte, is an economist and sometimes college economics teacher at Hamilton College, SUNY Plattsburgh, Montana Tech and Montana Western.