Illusions and Realities: The “Rich” and Tax Reform

The tax reform of 1981 was far less sweeping than tax reform in 1986 promises to be. Nonetheless, a top advisor to the U.S. Catholic bishops has said the 1981 tax law can “in no way” be characterized as fair.

Monsignor George G. Higgins so advised the bishops in his regular column last spring in the Catholic press. Higgins asserted that the tax law caused an “income transfer” from the poorest three quintiles (three-fifths) to the top quintile of income earners.

Higgins admitted that the “rich” did pay more taxes in 1983 than in 1981. That was the promise of “supply-side” reformers; and it was roundly ridiculed by the left, until it happened. Facts oblige Monsignor Higgins to concede the main point, but he raises quibbles about another. He wants to attack the rich. He defines the “rich” by the top quintile — which, for after-tax income, begins at $29,700.

Are people who earn $29,700 and above “rich”? Such “rich” people don’t deserve credit for paying more in taxes than ever before, the Monsignor writes, since they also gained a larger share of pre-tax and after-tax income. The error Monsignor Higgins makes is to attribute this gain in the income of the highest quintile to the tax law of 1981. How could he prove that?

There are, in fact, several other factors that deeply affect income distributions. Three are especially important: changes in family composition; changes in age distribution; and changes in income patterns caused, for example, by inflation. Let us take these in reverse order.

(1) Changed income patterns. “Inflation is the cruelest tax.” If salaries and wages increase, whether by inflation or by real growth, those parts of the population on fixed incomes may suffer by comparison with others. Independently of changes in tax law, such changes will alter income distributions.

(2) Changes in age distribution. Nearly all workers earn less in their youth than in their maturity. As an unusually large “baby-boom” cohort moves through its life cycle, its advances in income (relative to its own earlier stages) alter income distributions.  When “baby boom” workers are earning low incomes, their disproportionate numbers inflate lower quintiles of population. As the same “baby boom” earners move into higher brackets, their swollen effect upon other quintiles moves with them.

(3) Changes in family composition. The break-up of families or the non-formation of families (an increase in unmarried women with children) normally increases the number of families in lower income quintiles. This tends to lower the average earnings of lower quintiles.

All three of these factors were in evidence in recent years. All three have had discernible effects upon income distribution in the U.S. between 1980 and 1983. All three are independent of tax laws.

Higgins also describes the shift in income proportions between 1981 and 1984 as “massive.” Given the power of the several causes that affect them, they are in fact surprisingly small. In scope, they are well within patterns of historical fluctuations. For the record, here are the Census Bureau figures (which do not count non-cash benefits, given predominantly to the poor):

Percent of Income Received by:

  Highest Fifth   Lowest Fifth  
  Before After Before After
Year Taxes Taxes Taxes Taxes
1980 44.2 40.6 4.1 4.9
1981 44.4 40.9 4.0 4.9
1982 45.0 41.8 4.0 4.7
1983 45.1 42.0 3.9 4.7
1984 45.3 42.3 4.0 4.7

 

Higgins tries to make a moral issue out of the fact that in 1983 the top twenty percent of Americans (annual earnings above $29,700) received 42 percent of all after-tax income, up slightly since 1981. This proves, he asserts, that the “rich” aren’t paying their share of income taxes. Actually, their share of after-tax income increased about two and a half percent, while their share of income taxes increased almost eight percent.

In 1983, then, Higgins’s “rich” paid a larger share of taxes than in 1981. In 1981, that quintile paid 64 percent of all income taxes; in 1983, 69 percent. In 1983, it is true; they earned $195.5 billion more than in 1981. But they also paid $93 billion more in taxes than in 1981. Their income went up; so did their tax payments. On average 48 percent of their added earnings went into added taxes.

It is not easy to understand why Monsignor Higgins begrudges the success of those earning more than $29,700. They alone pay nearly 70 percent of all income taxes. They provide considerable support for churches, hospitals, clinics, and universities. Their success helps all the rest of us.

The Monsignor’s problem cannot be the green eye of envy. The standard of living of many clerics is at least as high as lay persons can afford on $29,700 per year: top quintile, or close to it. Most top-quintile people are far from being “rich.” Such persons deserve (and welcome) criticism for many things. Paying too few taxes is not one of them.

A good society promotes the creativity of its citizens. It protects their incentives to succeed. The more they succeed, the more taxes it draws from them. By this practical method, the common good of all is served.

The 1986 tax law, let us hope, will produce even better results. It should bring in more gross revenue from the “rich” than ever before, even while it lowers tax rates. If so, the whole country will benefit.

Michael Novak

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Michael Novak held for many years the George Frederick Jewett Chair in Religion and Public Policy at the American Enterprise Institute and is now a trustee and visiting professor at Ave Maria University. He is a philosopher, theologian, and author, as well as the 1994 recipient of the Templeton Prize for Progress in Religion. He has been an emissary to the United Nations Human Rights Commission and to the Conference on Security and Cooperation in Europe. He has written over twenty-seven books on the philosophy and theology of culture, especially the essential elements of a free society. He also founded Crisis Magazine with Ralph McInerny in 1982.

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