By Christopher Cocozza, assistant professor in Business Department
Recently President Bush has been defending his proposed $670 billion tax cut plan by describing opponents as engaging in class warfare: if you don't support the tax cuts, you implicitly support bilking the "wealthy class" and, therefore, class warfare. His strategy suggests the current tax system is unfair as it soaks upper income earners (the top 20%, who earned on average $116,666 during 2001) in favor of the lower income earners (the bottom 20%, who earned on average $7,946). The evidence offered to support this proposition is the disparity in marginal income tax rates (highest bracket 38.6% and lowest bracket 10%) and the disproportionate income tax burden placed upon upper income earners, who pay a majority of federal income taxes.
His solution to make the current income tax structure more equitable is to lower the top marginal tax rate to 35% and to eliminate the tax on dividends received by corporate shareholders. In fact, $364 billion, or more than half of the tax cut, will go to corporate dividend recipients. This tax cut primarily benefits upper income earners since they own the majority of stock that is held in taxable accounts. Lower and middle wage earners who hold stock do so in nontaxable (401(k)/IRA) accounts that do not benefit from this tax cut.
Whenever this class warfare argument is offered, I am instantly reminded of a scene in the Spike Lee film "Malcolm X" where Denzel Washington (playing Malcolm) passionately states to his followers that they have been "hoodwinked" and "bamboozled." Good citizens, it is you that have been hoodwinked into believing this tax cut is about fairness.
First let's take a look at the tax structure in this country. The personal income tax is a major source of revenue for both the federal and state governments. The federal system is progressive in that the more income you earn the higher percentage of tax you pay, consequently placing a greater burden on upper income wage earners (I use upper income wage earners instead of rich because it has become vogue, particularly in the Wall Street Journal, to deny being rich if you earn a high income. That's fine with me, upper income earner it is.). Pennsylvania's income tax system is more like a flat tax system in that it taxes income at a flat 2.8%. Upon first glance, the high marginal federal income tax rate (38.6%) creates a disproportionate tax burden on upper income earners.
However, to view the income tax as the only source of governmental revenue is misleading. Your day-to-day living is filled with a myriad of taxes including sales taxes, excise taxes on gas, alcohol and cigarettes, property taxes, telecommunication taxes on your phone bill... need I go on? Lower income earners consume most of their income and, therefore, a high percentage of their income is exposed to these taxes. As a result, these taxes are regressive in that lower income earners pay a higher portion of their gross income to these taxes than upper income earners.
Social Security payroll taxes, which are only paid on the first $84,900 of wages, are also regressive in application. For example, an individual who earns $284,900 would only pay Social Security tax on his first $84,900 of income; the remaining $200,000 would not be subject to Social Security tax. Some would argue that Social Security shouldn't be included in a tax burden discussion since those funds are set aside for a particular purpose - your retirement. But remember that social security has always run at a surplus, which is not and has never been put in a "lock box". The surplus has always been used to finance the day-to-day activities of the government. Sure the general fund owes the Social Security trust fund a few trillion dollars but that is like my left pocket owing my right pocket $10. The government will ultimately pay itself back by collecting more taxes. Herein lies that gist of the hoodwink. Since a tax is a tax whether it is placed on income, sales or property, we should examine total tax burden, not just income tax burden when looking at the fairness of our tax system. When we analyze total tax burden a far different result is reached.
The Bureau of Labor Statistics recently released a survey that examines the tax burden created by all forms of taxation - income, sales, property, etc. - and the results place a different picture of the fairness of our tax burden. According to the survey, during 2001, the lowest income earners paid 18% of their income in taxes. The upper income earners paid 19% of their income in taxes. Aren't you glad that President Bush is eliminating this bilking of the rich? I certainly am.
(Christopher Cocozza, CPA, JD and LLM, is an assistant professor in the Business Department at DeSales University. Email him at Christopher.Cocozza@desales.edu)
Press Release: Opinion Piece by Christopher Cocozza, Assistant Professor, Department of Business | Posted on: 1/29/2003
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