The glaring inequities in the current tax system

It is clear that there are serious vertical inequities in the tax code, in the sense that some people who are in the highest income quintiles, and even some of those in the top 1%, pay federal taxes at a lower rate than those in lower quintiles. Bruce Bartlett shows a handy table prepared by the US Treasury Department. The table shows that 10% of those whose incomes fall within the top 1% pay taxes at a lower rate than 35% of those in the bottom 20%.

The table also shows that there is also a great deal of horizontal inequity, in that even within the same income slabs, some people pay on average a lot less than others. This is because how much you are taxed does not depend only on the amount of your income but also the form of income that you receive, with that earned by one’s labor being taxed much more heavily than that from capital. As Bartlett explains,

The wealthier one is, the less his or her income is derived from labor. According to the Tax Policy Center, households in the middle three quintiles get about 70 percent of their total income from wages and salaries. Those in the top quintile get 55 percent of their income from labor.

For those in the top 1 percent of the income distribution, only about 30 percent of their income comes from labor and for those in the top tenth of 1 percent, just 20 percent of their income comes from labor.

By contrast, those with low and middle incomes derive very little of it from capital. The bottom 80 percent of households get less than 4 percent of their income from capital. For those in the top quintile, however, 16 percent of their income comes from capital. And among the top 1 percent it is 35 percent.

But looking at the data this way understates how low taxes on capital benefit the wealthy, because if one looks only at capital income, virtually all of it goes to them. Those in the top quintile get 86 percent of all the capital income in the United States — $960 billion out of $1.1 trillion in total capital income. Most of that went to the top 1 percent, which received $633 billion — 57 percent of the total. And the top 0.1 percent got two-thirds of that.

Bartlett spoke on The Daily Show about his new book The Benefit and The Burden: Tax Reform-Why We Need It and What It Will Take that examines this issue.

(This clip appeared on February 22, 2012. To get suggestions on how to view clips of The Daily Show and The Colbert Report outside the US, please see this earlier post.)

Note how Bartlett calls the Republican party “insane”, a “plutocracy that worships the rich”. What is noteworthy about such comments is that Bartlett is, or used to be, a Republican in good standing, having served in both the Ronald Reagan and George H. W. Bush administrations. He joins David Stockman and even Arthur Laffer as former Republican economic advisors who are aghast at the things being proposed by the current Republican party.

I do not think the tax code will ever be simplified as long as so much money is legally allowed in the election process. Complicated tax laws are a huge cash cow for members of Congress. They are the prime mechanism by which they can get campaign contributions, gifts, and other favors. All you have to do is whisper that an existing tax law is being modified or that a new law is being contemplated for an army of lobbyists to descend on you to try and influence the outcome the way their clients want. Endless tinkering with the tax code provides money for politicians and employment to thousands of lobbyists.

Politicians love to talk about reforming the tax code and simplifying it because that serves two purposes. It pleases the general public who suspect, rightly, that the tax system is somehow broken, while it also alarms oligarchs and businesses who then open their wallets to make sure that they don’t lose by any changes and may even win.

This is why, as Lawrence Lessig pointed out very clearly in an extended interview on The Daily Show, the tax code will never be simplified until our campaign finance laws are changed.


  1. P Smith says

    The only thing that will ever change the US tax system is the collapse of the US economy because of debt. Why would those who benefit from a corrupt system ever accede to change, especially when they have the most power and influence with lawmakers?

    And given how the US tax system works -- poorly, and getting worse -- a collapse is inevitable.


Leave a Reply

Your email address will not be published. Required fields are marked *