Monday, July 31, 2006

Where the Money Is

by Tom Bozzo

In yesterday's NYT, Edmund Andrews wrote this (a significant excerpt with some commentary from Mark Thoma is at Economist's View):
The good news was that people here appeared less polarized and more open to sharing burdens than do their elected leaders in Washington. The bad news was that the ... group thought the best solutions were to tax other people (smokers, drinkers, S.U.V. buyers, the rich) or to somehow “spend smarter.” [emphasis added]
This is "bad news"? Granted, there is only so much revenue to extract from sinners, though with the total cost of smoking as high as $2 per cigarette, of which 35 cents are external costs, smokers arguably remain undertaxed.

Taxing "S.U.V. buyers" would best take the form of a much broader carbon tax, but to suggest it's "bad news" to target drivers of gas-guzzlers is to make the perfect the enemy of the good. A long-standing anomaly (*) is that "cars," but not "trucks" that often have much worse fuel economy, are subject to gas-guzzler taxes — those range from $1000-$7700 and are assessed on cars that make less than 22.5 combined MPG. So you might pay $1300 in gas guzzler tax on a BMW 5-series (manual transmission) but not on an equally inefficient X5 4.4i; an Escalade owner dodges $2600 in gas-guzzler tax on the 18 MPG roadhog.

But it's characterizing taxing "the rich" as "bad news" that takes the cake. As should be well-known, the Bush tax "cuts" (or shifts, if you will) have substantially benefited "the rich" and account for a subtantial chunk of the hole blown in the Federal budget. And, as the title of the post indicates, as a group "the rich" have the ability — if not necessarily the willingness — to pay. The most recent (2003) publicly available tax statistics (MS Excel spreadsheet) show some 54% of adjusted gross income — $3.3 trillion — reported on the top 16% of tax returns, those reporting adjusted gross income over $75,000. So if, as economists like, you want to raise taxes with as little "tax distortion" as possible (i.e., with relatively "small" rate increases), you not only have to tax the rich but also the rich must bear most of the "burden" of the increase.

Since paying a 10% higher federal income tax bill really doesn't bite the rich like it would elements of the income taxpaying non-rich, tears should not be shed.


(*) It's a deliberate effort to exempt work vehicles from the gas guzzler tax. Whatever the merits of that policy choice when the gas guzzler tax was enacted in the late seventies, though, much would be out the window in the present world where many (if not most) "light trucks" are used as ordinary passenger vehicles.
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