April 08, 2004

Kerry Is Backwards on Taxes

Bruce Bartlett on the distribution of the tax burden:

All of those in the middle 3 quintiles paid less in 2001 than they paid in 1984. In other words, between 1984 and 2001, average tax rates for the wealthy substantially increased while at least 80 percent of households paid considerably less. Progressivity rose as the wealthy now pay about 6 times more than the poor.

Looking at the share of taxes paid shows a similar pattern. From 1984 to 2001, those in the bottom quintile reduced their share of the total tax burden from 2.4 percent to 1.1 percent. Those in the top quintile saw their share rise from 55.6 percent to 65.3 percent. Among the ultra wealthy, the top 10 percent increased their share from 39.3 percent to 50 percent, the top 5 percent raised their share from 28.2 percent to 38.5 percent, and those in the top 1 percent raised their share from 14.7 percent to 22.7 percent.

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Unfortunately, all taxpayers pay a price for the steeply graduated tax system that has evolved. A new study by economists Steven Cassou and Kevin Lansing shows that a flat-rate tax would add significantly to economic growth. Published in the April issue of Economic Inquiry, the study concludes that real per capita gross domestic product might rise by 0.143 percentage points per year if a flat-rate tax were in place. This may not sound like much, but it's the difference between GDP doubling in 33 years instead of 36 years.

The Cassou-Lansing study found that flattening the marginal-tax-rate schedule causes most of the economic gains, which explains why tax burdens on the rich rose as their statutory rates fell. Raising statutory rates on the rich, as John Kerry proposes, likely would reverse this trend, causing taxes on the poor and middle class to rise.