Giving Most-Productive Their Due In One-Sided Tax-Burden Debate

By J.T. YOUNG

Class warriors are mobilizing again. The high federal deficit, decreasing revenues, increasing spending and the expiring 2001 tax cuts all can serve them as reasons to raise taxes. With such ample ammunition for class warfare's resumption, the Left will have no problem singling out who should pay these higher taxes.

The rest of us, however, should use this opportunity to re-examine how the tax burden debate has been mischaracterized to the detriment of our most productive workers.

The common perception is that the federal income-tax burden focuses on the upper-income part of the scale, while social insurance taxes — Social Security and Medicare — focus on the lower-income range.

Social insurance, or payroll, taxes are flat-rate assessments on the first dollar earned. There are no deductions or credits to diminish their impact and, in the case of Social Security taxes, they are not assessed beyond a certain earnings threshold ($102,000 in 2008).

The Left argues that, for lower-income earners, payroll taxes neutralize the income tax's progressive nature.

The logical leap from the Left's argument is that lower-income groups shoulder the same disproportionate level of contributing to total payroll tax revenues as upper income groups do to total income-tax revenues — right? Wrong.

As the accompanying table shows, the U.S. is not much less dependent on top earners for funding its social insurance programs than it is for its general revenues.

The bottom 51% of earners have a negative income-tax burden — due to refundable credits such as the earned income credit — but they still only shoulder 13% of total payroll tax revenues. In contrast, the top 49% of earners pay 102.4% of income-tax revenues (making up for refundable credits' cost) but still pay 87% of payroll taxes too.

Judged as a ratio of their population percentage vs. their contribution percentage, the difference grows dramatically up the income scale.

The top 3% of earners pay almost 20 times their population rate in income-tax revenues and over five times their rate in payroll tax revenues. The bottom 51% of earners contribute just one-tenth their population level in combined federal tax revenues.

While social insurance programs are regressive in their taxation, they are progressive in their distribution — low-income contributors receiving a greater relative payout than higher-income contributors do. This is possible only because of the top earners' disproportionate contribution.

Illuminating in its own right, this distributional examination also underscores how one-sided the tax debate has become. Top earners are immediately transformed into "the wealthy" — despite the fact that there is substantial lifetime movement up and down the income scale.

In fact, earning status is an "effect," not a "cause." It results from the worker's contribution. Without output, there is no income — the more the output and the more it is valued, the more the remuneration. Top earners are not only top revenue contributors, they are because they are also our most productive workers.

These are workers who we want producing — and, yes, earning — at their full potential. Again, it is an illusion that paychecks follow positions rather than performance. They do not, simply because they can not. The private sector cannot overcompensate for long, whether willfully or mistakenly, because it cannot afford to. Only a redistributive system can do that.

By allowing the tax debate to be cast in terms of wealth, instead of value-produced, redistributional aims can seem plausible to the misguided but well-intentioned Left.

But if we speak in proper terms of productivity, an increased redistributional goal takes on an entirely different meaning. The effect of shifting resources away from more- to less-productive uses reduces the entire system's output.

No struggling private company shifts resources away from its most productive uses. Yet the public sector routinely and tacitly seeks to do just this.

The policies of class warfare result because we nonwarriors do not understand the extent or the effect of redistributional policies. We neither recognize how pervasive redistribution already is nor what in fact is being redistributed.

In hard times, the emotional reaction is to reallocate all the more. Yet what is truly necessary is to increase productivity as much as possible — and thereby the overall economy — and then allow the private sector to allocate resources according to their best uses. Our tax policy goal should be to minimize the reallocation, not further increase it.

• Young served in the Department of Treasury and the Office of Management and Budget from 2001 to 2004 and as a congressional staff member from 1987 to 2000.