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January 9, 2012
40 Years: Notes on the Mythology of Tax Reform

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by Gerard M. Brannon

In 2012 Tax Notes will celebrate the 40th anniversary of its inaugural issue, published on September 18, 1972. In recognition of that milestone and to show its appreciation for your continued readership, Tax Notes will be republishing select archived articles from each of the past 40 years. Tax Notes hopes that readers will enjoy these valuable contributions from prominent members of the tax community on issues that were and are of central importance to the field. Readers are invited to submit their own recommendations for our retrospective to, along with a short explanation for why the article has been recommended.

This article was originally published on November 20, 1972. At the time of its publication, Gerard Brannon was the director of tax research for Tax Analysts and Advocates. During his career, he served as Treasury's director of tax analysis, as a staff member for the Joint Committee on Taxation and the House Ways and Means Committee, and as chair of the economics department at Georgetown University.

Brannon responded to Jerry Jasinowski, then-staff economist for the Joint Economic Committee, who argued that figures published by Treasury were deliberately misleading regarding the tax burden of high-income earners.

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A principal purpose of these Notes is to discover and decry tax injustices. It is expectable that these pages will contain criticisms of the tax legislative and administrative process, and those involved in it, from time to time. In addition, however, Tax Notes plans to take it upon itself occasionally to debunk the rhetoric and mythology of tax reform. We are not even above saying something good about the Treasury once in a while.

These thoughts are occasioned by an October 30 article in The Nation carrying the byline of Jerry Jasinowski of the Joint Economic Committee. The article is on its face a populist partisan attack which deserves no more special consideration than any similarly partisan piece from big business. The Jasinowski piece, however, attacks Treasury's numbers; and for this reason the article is of some importance to media people, who often have no alternative but to use numbers provided by the Treasury.

Jasinowski attacks Treasury for propagating what he calls the "myth" that the rich pay high taxes. Treasury has stated that the rich pay an effective rate of 44 percent on adjusted gross income and that they pay high tax bills ($88,000 and up for incomes of $200,000 and up). Jasinowski counter-asserts that adjusted gross income excludes billions in real income, and that on a broader tax base constructed by Brookings economists Joe Pechman and Ben Okner, the effective tax rate on the rich is 32 percent. Neither of these statistics prove the point at issue, the relative tax burden on the rich.

Is it misleading to use only AGI? In high incomes AGI excludes major items, for example, half of capital gains. For low incomes, it excludes other important things, such as Social Security. Recent work by Pechman and Okner (for the Joint Economic Committee) indicates that rates on AGI are not misleadingly more progressive than rates on a broader definition of income. Treasury's use of AGI it turns out, decently describes the relative income tax burdens by income class.

Do the rich pay high taxes? Their effective rates are higher than on the non-rich, but the rates are not what one might call "confiscatory." Maybe rates are not "high" unless they are above 50 percent. Maybe anyone earning above $20,000 should be classed as "rich." But that is not what Jasinowski says. Broadly speaking we do have a progressive tax system.

If one includes the effect of the corporate tax on stockholders the effective rates on adjusted gross income probably average 50 percent in the top bracket. They don't come to this for everybody in the bracket and they are higher for some. We can conduct a serious debate about whether these tax burdens should be increased. It is not necessary to start that debate by spouting hyperbole to the effect that we don't have a progressive tax system now.

Jasinowski also attacks Treasury figures for misleading the public as to how tax loopholes relate to rich taxpayers. Treasury offered an analysis of the tax benefits bestowed by 43 different tax preferences. The analysis was set out in a table showing the effect of each preference on nine different income classes. For example, capital gains result in total tax avoidance of $5.6 billion, $3 billion going to the $100,000-and-up class. Jasinowski doesn't like Treasury's figures because they often show small amounts of tax benefits going to upper income groups.

For example, $470 million worth of medical deductions goes to $10,000-$15,000 households, but only a paltry $35 million worth goes to over-$100,000 households. One might conclude that the middle class was getting a more-than-fair deal out of this particular deduction.

Jasinowski makes the fair observation that the Treasury data is too crude, that it should include more calculations to put the numbers in perspective. Then he goes on to offer his own perspective: the dollar amounts these deductions are worth to typical poor, middle-class, and wealthy taxpayers. He prefers to point out that there are 14 million taxpayers in the $10,000-$15,000 group, getting $33 each in medical tax benefits; but that the 78,000 taxpayers in the wealthy group got $499 each. Jasinowski concludes that Treasury was "deliberately misleading" in simply reporting the tax savings by income class.

Treasury's figures don't purport to be anything more than they are, so the "deliberately misleading" tag may fall flat. A second problem is that the worth-per-taxpayer approach is misleading also. To a student of public finance, the customary way to evaluate a loophole is to look at the percentage tax saving in each bracket. On this basis, the medical deduction reduces tax by 2.4 percent in the $10,000-$15,000 bracket, but 0.5 percent in the high bracket.

It is useful to know the dollar amount saved for each individual, as long as the relative rate reduction is kept in mind. But as long as we have progressive rates, all deductions will be worth more to the rich. This phenomenon can be limited -- but not avoided -- by restricting the availability of deductions to the poor and middle class. Nowhere, however, does Jasinowski mention this possibility.

A third Jasinowski attack cites the liberal argument that corporations are getting more tax reductions than individuals. Treasury states that the total corporate tax bill is going up, and the total individual income tax bill is shrinking. Jasinowski says the corporate rate is going down, but the individual rate, counting Social Security increases, is about the same as before 1969. Both are correct.

Jasinowski misses another way to rebut the implication of the Treasury line. This requires pointing out a complicated problem stemming from the difference between the flat corporate rate versus the progressive individual rates. As the economy grows, both companies and individuals earn more income and pay more taxes. As average corporate and individual income rises, corporations still pay the same 48 percent rate, but individuals pay higher rates. Unless individual income tax rates are cut from time to time, the effective tax rate on all individual income will rise. Looked at this way, the generous tax relief for individuals in 1969 and 1971 is not really all that generous. It is, so to speak, just cancelling an increase. But the corporate cut is a true rate decrease. This "proves" the thesis liberals have believed all along: when corporations pay lower rates, individuals get the short end of the stick. Ironically, Jasinowski could find this point explained in Secy. Hickan's much-maligned slide show on taxes.

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The rest of Jasinowski's article attacks two other Treasury myths where he is on safer ground. One is the myth that tax subsidies achieve important social goals. Certainly Treasury makes this claim almost daily, but there is no serious effort to present the public with any kind of hard evidence as to whether this is true or not. Until Treasury makes more effort to show that things like DISC, the investment credit, and percentage depletion really do some good, the social arguments deserve to be treated as myths. The other "myth" is that the President won't increase taxes. So much has been said on this that there is no need for us to comment.

What conclusion can one draw from all this? Only that both sides are scoring points; neither, however, with much consistency or style. What economic conclusions can one draw? What conclusions about tax reform? Very few -- and that's precisely the problem.

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