PROTECTING SMALL BUSINESS, PROMOTING ENTREPRENEURSHIP

Taxing High-Income Earners: “Feelings,” Economics and the Facts

By at 9 June, 2021, 3:53 pm

by RAYMOND J. KEATING-

Some groups and people seem to have a difficult time with keeping matters straight when the public policy focus turns to raising taxes on high-income earners and business.

That becomes evident in a recent analysis of polling on taxing the wealthy from Gallup. For example, the author, Frank Newport, wrote, “The majority of Americans, public opinion data show, favor the concept of higher taxes on the wealthy… Pew Research recently summarized its data: ‘Far more Americans continue to say they are bothered “a lot” by the feeling that some corporations and wealthy people do not pay their fair share of taxes than by the complexity of the tax system or even the amount they pay in taxes.’”

Hmmm. “Bothered ‘a lot’ by the feeling…”? One might hope for something more concrete than being bothered by a feeling.

At the same time, Newport points out, “Concern about income inequality (or, for that matter, worry that taxes on the wealthy are not high enough) rarely shows up in Gallup’s monthly updates on the most important problem facing the nation. In Gallup’s May update, to cite the most recent example, only 2% of Americans mentioned the gap between the rich and the poor as the biggest problem facing the nation.”

For good measure, Newport put forth that Americans generally don’t see the “rich” as evil. Instead, he noted, “Gallup, over the years, has done interesting research on the ‘rich,’ and the conclusion I keep coming back to is that Americans, in some ways, like having a rich class. The majority of Americans themselves would like to be rich someday. Further, Americans believe that having rich people in society is good for that society.”

And then, of course, there is the ongoing and shifting (according to immediate circumstances, e.g., taking a jump up during the pandemic) debate over how active government should or should not be. The Gallup trend on this question is illustrated in the following chart.

Source: Gallup

Perhaps before we go down the path with President Biden in raising taxes on high-income earners, something more than feelings and even polling should be considered.

As the Tax Foundation recently spelled out, nearly all income taxes are paid by higher income earners. Consider the following chart and data from the Tax Foundation:

Source: The Tax Foundation

● “The share of reported income earned by the top 1 percent of taxpayers fell slightly, to 20.9 percent in 2018 from 21 percent in 2017. Their share of federal individual income taxes rose by 1.6 percentage points to 40.1 percent.”

● “In 2018, the top 50 percent of all taxpayers paid 97.1 percent of all individual income taxes, while the bottom 50 percent paid the remaining 2.9 percent.”

● “The top 1 percent paid a greater share of individual income taxes (40.1 percent) than the bottom 90 percent combined (28.6 percent).”

● “The top 1 percent of taxpayers paid a 25.4 percent average individual income tax rate, which is more than seven times higher than taxpayers in the bottom 50 percent (3.4 percent).”

Well, so much for “feeling” that the wealthy do not pay their fair share.

And then there are the economic effects of taxing upper income earners and businesses. For example, recent SBE Council briefs – here, here, here and here – explained how Biden’s proposed increases in corporate, capital gains and personal income taxes would hit small businesses hardest, and inflict harm by restraining economic, income and employment growth.

No matter how anyone might “feel” about increasing taxes on high-income earners and businesses, economic realities cannot be ignored.

The fact is that high-income earners not paying their “fair share” is a political invention that has nothing to do with the actual numbers. Also, raising taxes based on this fiction does not cancel out the real-world consequences of such tax increases, with small businesses, workers, and the overall economy suffering.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

 

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