Mike Hihn, Editor Publisher

Tax Quacks

"Now comes the voodoo, recited by the supply-side cult. 'We can pay for it all with economic growth, just like the 1980s. Revenues skyrocketed after the Reagan tax cuts.'   No ... they did not.

"Total federal revenues skyrocketed because of six FICA tax increases between 1983 and 1990.  Income tax growth averaged less that $5 billion per year in constant dollars."

"There is a lesson from the 1980s. Tax cuts indeed stimulate economic growth, without triggering inflation.  Even steep cuts, like Reagan's, can keep tax revenues growing (if slowly).  But without a significant recession to recover from, tax cuts require spending cuts."

(Updates/revisions, June 2005:  Added links to all cited sources for original data.  Added new table at the end with current data for middle-class share of federal income tax revenues.)


Since the early 1980s, I've plugged hundreds of tax plans into computer spreadsheets. I oppose ''progressive'' tax rates, so it's not hard to set up. It's just impossible to do.

The spreadsheets have two components. One part totals the revenues. The other part shows the impact at all income levels.

I've probably fiddled with every combination of tax rate and exemptions. If I get the revenue right, taxes balloon on the poor and middle class. If I work toward the poor and middle class, the deficit skyrockets.

This leads to Hihn's Principle:

It's impossible to replace the current federal tax code, with a single flat tax, on income or consumption, without either:
a) exploding the deficit, or
b) increasing taxes on the middle-class.

That should be common sense. Steve Forbes spent over $30 million promoting the flat tax, and went nowhere.

Most voters knew, instinctively and correctly, that a flat tax would increase their own taxes. For years, supply siders (including Forbes) had kept insisting said most income taxes are paid by a small percentage of taxpayers at the very top.  Well, if all those "progressive" (higher) taxes are flattened, then who winds up paying them? The French?

Forbes and Dick Armey get around that tax shift by simply creating - out of thin air - large new exemptions for the middle class. Here again, common sense should suffice. If everyone gets a 50% tax cut, what does that do to the deficit? It explodes, as first reported by Liberty Issues two years ago.

If politics made sense, this column would not be needed. But the flat tax and the sales tax have assumed cult-like properties.

I assume our regular readers already know the flat tax and the sales tax are quackery. You may want either of the two. So do I, but it can't be done. 

The purpose of this column is to show why it can't be done. From that, we may rightly question the desperation of GOP tax policy.

Hihn's Principle has two causes. As documented below, The middle-class pays a a smaller share of income taxes, relative to its share of income.  The wealthy pay a larger share of income taxes, relative to its share of income.

In the Table below, shares of the tax burden are shown by income category. This is for 1992, the latest data you can easily confirm on your own.

Working down, the top 0.83% of taxpayers paid over a quarter of all personal income taxes, on less than 14% of all Adjusted Gross Income (AGI). That may not surprise you.

One subtotal lower, this one may surprise you ... the top 7% paid more than half of all individual income taxes, earning only 1/3 of AGI.

Skip now to the bottom subtotal, showing the core of the middle class ($25,000-99,999).  I doubt you've seen this, anywhere, ever. 

Income Taxes:  Who Paid What? (1992)
Compares share of Adjusted Gross Incomes, vs share of taxes paid, by income group.
(Dollars in billions)    (Data updated at bottom of this page)

AGI (Adjusted
Gross Income)

% of
returns

Total
AGI $

Total
taxes $

% of
AGI

% of
taxes

Avg
Rate/AGI

To Pay
Actual Share

TOTAL

100.0% $3,629 $476 100.0% 100.0% 13.1%  
$1 million + 0.05% $177 $48 4.9% 10.1% 27.1%
$200,000-999,999 0.78% $314 $77 8.7% 16.2% 24.5%
Top 1% 0.83% $491 $125 13.5% 26.3% 25.5%  
$100,000-199,999 2.5% $368 $67 10.1% 14.1% 18.2%
$75,000-99,999 3.5% $341 $52 9.4% 10.9% 15.2%
Top 6.8% 6.8% $1,200 $244 33.1% 51.3% 20.3%  
$50,000-74,999 10.4% $712 $89 19.6% 18.7% 12.5% +4.8%
$25,000-49,999 25.5% $1,040 $106 28.7% 22.3% 10.2% +28.9%
$25,000-99,999 39.3% $2.093 $246 57.7% 51.7% 11.8% +11.6%
(lower incomes) 57.4% 677 37 18.6 7.7% 5.5%
Source:  1995 Statistical Abstract of the United States, Table 534
Avg Rate/AGI: Total Taxes divided by Total AGI.
To Pay Actual Share is the tax increase required, to have each income group pay a share of total taxes, equal to its share of total income.

Let's put that into perspective. What if this middle-class core paid taxes equal to its share of income (57.7%)? The ''taxes'' column would show $275 billion instead of $246 - an across-the-board tax increase of 11.6% - for the middle class to merely pay its own share.  (see more recent data below for 2001.)

This is not an argument for a middle-class tax increase. But it begins to show why a flat tax is impossible, on income or on consumption. The deficit would skyrocket, or middle class taxes would increase.  Period.

For the other half of the story, we need to know how much of the personal income tax is now collected from ''progressive'' (higher) tax rates. Or - how much revenue would be lost by simply repealing the higher rates?

Roughly 70% of all taxpayers now pay the lowest marginal income tax rate, 15%.

For taxpayers with AGIs of $50,000 or more, the average effective tax rate was 22.8% on $1.454 trillion of taxable income (same source as previous table).

An average rate of 15% is a tax cut of (22.8-15.0=) 7.8% times $1.454 trillion. That's a revenue loss, and higher deficits, of $113.4 billion per year -- back in 1992, plus the entire 1993 Clinton income-tax hike!

Case closed. That's why a flat tax can't work. No Republican is proposing to cut spending by over $100 billion per year.

A sales national tax would be even worse. In addition to over $100 billion now collected from progressive tax rates, there's another $118 billion (also 1992) from repealing the corporate income tax.

Now comes the voodoo, recited by the supply-side cult. ''We can pay for it all with economic growth, just like the 1980s. Revenues skyrocketed after the Reagan tax cuts.''

No ... they did not.

Income tax growth in the 1980s averaged less than $5 billion per year in constant dollars, as shown by following Table. In 1980 dollars, annual receipts increased less than $45 billion, for the ten years shown -- and income taxes grew only half as fast as GDP growth.

Real Tax & Economic Growth:  1980s
$billions, nominal & constant dollars
  1990
(1990$)
1990
(1980$)
1980 %
change
Income Taxes $560.4 $353.3 $308.7 +14.5
Personal Income $4673.8 $2946.8 $2265.4 +30.1
GDP   $4897.3 $3776.3 +29.7

Source:  1995 Statistical Abstract of the United States
Income taxes:  Table 518
Personal income: Table 710
GDP, Table 700 (constant dollars)
CPI, Table 761 (constant dollars 82.4 / 130.7 = 63.0)

Further, revenue growth came almost entirely from capital gains taxes. Tax receipts on the basic wage base declined.   (It's important to adjust for inflation, because inflation was so high early in the decade. A dollar in 1980 was worth only 63 cents in 1990.)

There is a lesson from the 1980s. Tax cuts indeed stimulate economic growth, without triggering inflation.  Even steep tax cuts, like Reagan's, can keep tax revenues growing (if slowly). But without a significant recession to recover from, tax cuts require spending cuts.

By divorcing tax cuts from (sufficient) spending cuts, GOP tax policy throws away the best argument for spending cuts. Play it backwards:  Spending cuts can create economic growth - if matched with tax cuts.

One last point regarding 1980s tax revenues. In that column noted earlier (Truth in Budgeting) I showed how a GOP shell game inflates the effect of Reagan tax cuts - by including revenues from FICA taxes (Social Security and Medicare).

FICA taxes increased six times between 1983 and 1990. That's what caused most of the increase in total federal revenues. 

Conservatives have taken to chanting, ''Liberalism is morally and intellectually bankrupt.'' On tax policy, so is conservatism.




Update:  Middle-class share of income tax vs share of income (2001)
Dollars in billions.  See disclaimer

AGI (Adjusted
Gross Income)

% of
returns
Total
AGI $
Total
taxes $
Total
AGI  %
Total
taxes %
Avg.
Rate/AGI
To Pay Actual
Share

TOTAL

100.0% $6,170 $888 100.0% 100.0% 14.4%  
$1 million + 0.1% $579 $164 9.4% 18.5% 28.3%  
$200,000-999,999 1.8% $820 $203 13.3% 22.9% 24.8%  
Top 2% 1.9% $1,399 $367 22.7% 41.3% 26.2%  
$100,000-199,999 6.5% $1,114 $185 18.1% 20.8% 16.6%  
$75,000-99,999 6.8% $764 $100 12.4% 11.3% 13.1% +10.1%
Top 15.3% 15.3% $3,277 $652 53.1% 73.4% 19.9%  
$50,000-74,999 13.5% $1,074 $114 17.4% 12.8% 10.6% +35.5%
$30,000-49,999 18.8% $995 $82 16.1% 9.2% 8.2% +74.3%
$30,000-99,999 39.1% $2,833 $296 45.9% 33.3% 10.4% +37.7%
(lower incomes) 52.4% $824 $40 13.4% 4.5% 4.9%  
Disclaimer:  This table is not directly comparable to the 1992 data.  Reasonable people can disagree on how to define the middle class.  For me, it's more important that you can easily check my sources and my math.  So I stayed with income ranges used in government tables. Originally, $25,000-99,999 sounded good.  For the update, $30,000-99,999 sounded good, allowing for inflation -- from choices available in the government tables.
To Pay Actual Share is the tax increase needed for each group to pay a share of total taxes, equal to its share of total income.  Allowing for disclaimer, it now takes a 37.7% tax increase on the middle class, just to pay its own way -- versus 11.6% nine years earlier
(Source:  2004 Statistical Abstract of the United States, Table 476.)

Back to original data.


Last Revision:  4/Jun/2005