Former Fair Oaks Assemblyman Roger Niello writes that California needs tax reform because the state taxes the “productive” class. Taxing those “productive” people kills jobs, while workers with the lowest 40% of incomes pay no (income) tax at all!
The parenthesis is worth noting. Tax expert David Cay Johnston says: “It’s true that the top 1 percent of wage earners paid 38 percent of the federal income taxes in 2008 … But people forget that the income tax is less than half of federal taxes and only one-fifth of taxes at all levels of government.”
Low-income wage earners often pay more. Billionaire Warren Buffett famously said his tax rate was lower than his secretary’s. The Tax Policy Center says 40% of taxpayers with incomes of $30-40,000 pay more than 12.9% as income and payroll taxes; meanwhile, 25% of those with incomes exceeding $1 million pay less than 12.6%, suggesting that many very-high-income taxpayers pay lower rates than their secretaries.
Niello remains unpersuaded, however, and wants even more favorable tax treatment for Wall Street’s Masters of the Universe and their unearned income (economists call this income “rent”), even if rent-seeking amounts to predatory lending, as it did in the recent banking scandal. Fifteen percent is the income tax rate Wall Street speculators pay on their rent incomes.
But lessening the tax burdens on rent-seekers has actually occurred in the last 40 years, so we have arrived, at least partly, at the destination for Niello’s train of thought. The Reagan administration halved the top marginal (progressive) income tax rates on the wealthiest taxpayers while (with Bush 41) quadrupling (regressive) payroll taxes on wage earners.
The immediate consequence, besides a then-largest-in-history Federal deficit, was an average business cycle recovery. Characteristically immodest, the pre-Murdoch Wall St. Journal called this outcome “Morning in America.” Reagan’s policies also included bank deregulation and led to bank scandals like the Reagan era S&L bailout, and arguably our current one.
In the wake of Reagan’s policies, although it was previously the world’s largest creditor, the U.S. became the world’s largest debtor. Now we have a middle class economically eviscerated by the lost equity in their homes, who tapped this equity during the housing bubble to sustain their consumption. Now that the bubble is over, the borrowing can’t be sustained and aggregate demand shortfalls have brought us the “Great Recession.”
Any rise in median real incomes in the U.S. when we had the Reagan/Niello tax policies was anemic. Real median incomes rose much faster during the pre-tax-cut years when 70 - 90+% was the rate paid by the rich. Despite neo-con prophesies of apocalyptic failure, real incomes rose faster after the Clinton administration raised income taxes 3% on the rich.
A look at income distribution, post-Reagan, also shows some troubling trends: The bottom 90% of real incomes stagnated, while incomes ballooned at the top -- a five-fold increase for the top 0.01%.
As for job creation: the Center for American Progress found, “in the past 60 years, job growth has actually been greater in years when the top income tax rate was much higher than it is now”
Britain, the U.S., Germany, and Japan got rich during periods when taxation was progressive, and encouraged real productivity, not rent-seeking, and infrastructure was well-funded (and provided at much lower cost than privatized infrastructure). So responding to the current crisis by taxing earned income more, and lowering taxes on rent-seeking is the opposite of what robust economies have done to prosper.