As a firm believer in progressive taxation, I find this article really disheartening. The heart of the matter:
A decade ago, when publishing magnate Steve Forbes ran for president, he vowed to deliver a new era of prosperity with just a simple change in the federal income tax: Instead of people with more money paying higher rates, all would pay the same “flat” tax rate — unleashing “the fantastic growth waiting to burst forth in our economy.”
Forbes’ “flat tax” plan was dismissed as simplistic by many mainstream economists and viewed with horror by the legions of special interests that benefit from all the deductions and loopholes that flat tax advocates would eliminate.
But this weekend, as millions of Americans faced the perennial deadline for filing their federal tax returns, most of them were operating in something very close to the world Forbes and other flat-tax visionaries proposed. Without any fanfare or philosophical debate, millionaires and middle-class Americans now pay taxes at almost the same rates.*
In addition to outlining briefly the history of U.S. federal taxation and explaining how we’ve gone from sharply progressive taxation to the current situation, the article asks the most important question: What have we gained from this change?
Advocates of the flat tax have long argued that it would stimulate economic activity and thus ultimately benefit everyone. Bush shares that view, though he has not officially advocated a flat tax.
And in recent years lower tax rates do seem to have contributed to healthy economic growth. The economy has been producing goods and services at a rising pace since the end of the 2001 recession. Unemployment is a low 4.7 percent.
But the health of the economy as a whole has not translated into gains for most workers. Because of global competition, the decline of manufacturing, weaker labor unions, immigration and other factors, most workers have not been able to obtain higher pay.
Instead, “flatter” income tax rates have contributed to an economic landscape that David Kelly, economic adviser to Putnam Investments, likens to an hourglass. Some from the traditional middle class are rising into the top, while others are being squeezed out into the bottom.
Average family net worth has continued to grow, in large part because of rising home prices, but at a rate that sagged from 29 percent between 1998 and 2001 down to 6 percent between 2001 and 2004. And for most Americans, whatever nominal pay increases they got in the last three years were more than offset by higher costs of things such as health care.
Meantime, the disparity between the wealthiest Americans and everyone else has grown.
Okay, so that bit is not a direct cause and effect analysis, but the general gist is that this flattening of effective taxation rates has been one contributing factor to the trend of the rich getting richer of the last few years.
* The article mentions income tax, dividend taxation, and social security and medicare taxes, but it’s a little too general on the details for me. I’d like to see a more detailed breakdown on the types of taxes paid by each income group.