Kudlow’s Two Americas

Kudlow, criticizing John Edwards, wrote this:

“Yes, there are two Americas, but not the two that these tax-happy liberals keep talking about. The real two Americas are a taxpaying America and a non-tax paying America, according to Tax Foundation president Scott Hodge.”

Now, I don’t want to get into whether John Edwards is a good candidate. Perhaps that is a topic for another post. Right now, my opinion of Edwards is simple – he’s one of a bunch of candidates on all ends of the political spectrum that all look pretty lousy to me, but I don’t find him to be any more offensive than any of the others either. Perhaps if I had the time to pay a bit more attention right now, I’d find him either more or less offensive.

But I would like to look at those two Americas, the ones that Kudlow mentioned. So I went found this CBO report.

I’ve included some summary tables from the CBO report at the bottom of this post. Summary Table 1 showing Effective Federal Tax Rates for 2003 and 2004, and Summary Table 2 showing the Shares of Federal Tax Liabilities for 2003 and 2004 are reproduced below. Income is comprehensive household income: “pretax cash income plus income from other sources.” All data from here on comes from those two tables.

Now, presumably, the top 10% of income earners and the bottom 20% of income earners are as good a representation of taxpaying and non-taxpaying America as we can find.

In 2004, the bottom 20%:
– paid 0.9% of all federal taxes
– had an effective rate of 4.5%
– had a pre-tax income $15,400 and after tax income of $14,700

In 2004, the top 10%
– paid 52.3% of all federal taxes
– had an effective tax rate of 26.9%
– had a pre-tax income of $297,800 and an after tax income of $217,500.

So yeah, some people pay a lot of taxes and some people pay very little. Why the difference? Well, some might attribute it to differences in income. They might say – well, some poor person, whether single or trying to head up a family, making $15,400 can’t afford to pay much in taxes. Knock the cost of rent, utilities, food, transportation, and the cost of some clothing (notwithstanding how there’s always someone at the Corner who can point out you can get a very nice coat at the Salvation Army for $2) and what’s left? Is there enough for health insurance?

But people who think like that are fools. Take a good look at the tables and you’ll spot the real difference. See, the big difference boils down to the fact that the top 10% of income earners are paying a whopping 81.3% of corporate income taxes, while the lowest quintile is only paying 0.5%. Clearly, those at the so-called bottom have better accountants and know how to defer their income to minimize the tax bite while those at the so-called top are just fools being taken for a ride by everyone else.

Now, the solution is obvious. Every so Kudlow ends up endorsing a national sales tax which he thinks “would enhance productivity and grow the economy more rapidly, doubling national output over the next fifteen years.”

Now, I’m sure this particular Kudlow analysis is worth as much as any other Kudlow analysis. But I would prefer to note another reason why Kudlow would find a national sales tax to be desirable. The effective tax rate on excise taxes for the top 10% of income earners is 0.4 percent, which is less than a fifth of the effective tax rate (2.1 percent) on excise taxes for the bottom 20% of income earners. The top 1% do twice as well as that. Clearly, the fact that the top income earners seem able to bypass these taxes more easily than the slovenly, not to say reprehensible poor makes them very attractive. But I don’t understand – why stop with a national sales tax? Why beat around the bush, so to speak? Why not just tax poverty directly? Imagine how fast the economy would run then!