Mitt Romney in a recent Fortune magazine interview: “I indicated as I announced my tax plan that the key principles included the following. First, that high-income people would continue to pay the same share of the tax burden that they do today.”
That’s odd. Sensible debates about tax fairness and tax policy focus on what rate each group should pay, not on what each group’s share of total tax payments (the “tax burden”) should be.
High-income people’s share of tax payments is determined by their average tax rate, their share of total pretax income, and the average tax rate among all taxpayers.
Policy makers have a lot of control over tax rates. They have some, but far less, influence on the share of pretax income that goes to each group. Hence they have limited ability to control the share of total tax payments paid by a particular group.
In the past several decades federal tax rates on the top 1% of Americans have been lowered (Reagan), raised (Bush I and Clinton), then lowered again (Bush II). If all else stayed the same, that would have reduced the top 1%’s share of total tax payments. But this effect has been dwarfed by the large rise in the top 1%’s share of pretax income, which causes their share of total tax payments to increase. Here’s what the numbers looked like in 1979 and 2007, two years at comparable points in the business cycle (data are from the CBO).
The top 1%’s share of pretax income doubled, from 8.9% to 18.7%. Although the average tax rate they paid fell, their share of total tax payments increased, from 14.2% to 26.2%, because their income share jumped so much.
Consider what the Romney approach would have implied for tax rates paid by the top 1% during the 1979-2007 period. In 1979 their average federal tax rate was 35%; in 2007 it was 28%. Suppose policy makers had promised to keep the top 1%’s share of total tax payments at its 1979 level of 14%. Given the sharp rise in the top 1%’s income share, the average federal tax rate paid by the top 1% would have needed to fall to just 15%.
What does this mean going forward? In pledging to maintain the tax share of the richest Americans at its current level, Mitt Romney is in effect promising that if that group’s pretax income share continues to rise as it has in the past three decades, he will slash their tax rates.
Mark Thoma adds: “He is also promising that if the income share falls, he’ll raise tax rates for upper income households. Anyone think he’d really do that?”
Interesting point! My only critique is my usual lament that we crry out these discussions in terms of Federal taxes rather than total taxes.
But Romney’s plan does not seem to follow the principle he announced; it reduces taxes on high income earners whether or not it reduces their share of total tax payments.
The calculation seams wrong. “Average tax paid by top1%” should be calculated as “total tax paid” divided by “pretax income”. Any other calculation for average would distort results. So, “Average tax paid by top1%” multiplied with “1% pretax income” gives a result of “total tax paid by top 1%”, which should be divided by “Total Federal Tax collected” and not by average rate.
Though the conclusion of the article is correct. It is obvious that if a group of people earn a higher percentage of the total income (as it more than doubled for example shown), their share of taxes will go up, even the rates stay the same (or are the same for every one).
Policies can affect pre-tax income distributions. Couldn’t the Dems make the same promise, intending to implement policies to lower the percent of pre-tax income going to the top 1 percent?
Radu Seserman average rate * share of income is the same as total income. But when you break it down the way the author did you can look at the moving pieces a bit better.
Do the top 1% really pay 28% tax rate on average? A quick Google search finds that Mitt Romney claims to have paid around 13% in past years, Paul Ryan paid about 20% in 2011, and the Obamas paid 27% in 2010. These three individuals’ average would be considerably less than 28%. What am I missing here?
We are becoming Greece. The problem there is working people pay for everything and the people who own for a living pay nothing. There is a Rule of Accumulated Advantage, every advantage you get leverages all your other advantages, and every disadvantage compounds your difficulties. Ability to evade and confound the IRS is one of the great advantages of wealth and influence. The complexity and opacity of this issue makes it easier to baffle the public about it. Romney is a beneficiary of this.