[Editor's note: The original version omitted the writer's byline.]
Without much public debate or even awareness, the United States is heading toward an almost flat tax.
That means the middle class will pour nearly as large a share of its income into tax coffers as millionaires and billionaires do. Throw in another tax cut along the lines of the two successfully supported by President Bush, and the middle class could actually pay a little more.
That change would reverse decades of US policy and constitute a major victory for some conservatives who have long advocated a flat tax.
"Another significant tax cut could be enough to eliminate progressivity from the US tax system," says Brian Roach, an economist at Tufts University in Medford, Mass., and author of a new analysis on what citizens really pay to all levels of government - federal, state, and local.
Ever since the inauguration of the modern income tax, in 1913, the US has relied on a simple rationale. The well-to-do pay a larger share of their income in federal taxes than the rest of Americans, because the rich can afford it. In return, the government protects their wealth and property. The gap in tax rates has varied over time. (In 1913, only 0.5 percent of the population paid the tax, and rates rose from 1 percent to 7 percent as income increased.) But it has always remained progressive.
Then in 1996, Republican presidential candidate Steve Forbes championed a 17 percent flat tax that would eliminate personal deductions and many other loopholes, and exempt interest, dividends, and capital gains. This flat system, he argued, would bring in about the same revenues and be far simpler. Though receiving much attention during the campaign, Mr. Forbes did not win the Republican nomination and his proposal soon faded into obscurity.
Today, with state taxes becoming more regressive - and the two Bush tax cuts providing large tax savings for the rich - the tax system is moving in the direction of a flat tax, but doing so out of the spotlight. For example, despite sharp debate about the administration's tax cuts on the campaign trail, talk about whether taxes are regressive or progressive is hardly material for the stump speeches of presidential candidates.
Perhaps that's partly because the system looks likely to remain progressive for the lowest-income Americans. The poorest 20 percent of households pay on average about 19 to 20 percent of their total income, and that's unlikely to change, according to Mr. Roach's analysis. Generally, the poor pay no federal income tax. But they do pay Social Security and Medicare taxes on earned income and various federal or state sales taxes on purchases.
But at the top, the tax system has already become regressive. The super-rich pay proportionately less in federal income tax than the merely rich. In 2000, the nation's 400 richest taxpayers, making an average $173 million, paid an effective tax rate more than 5 percentage points lower than those making $1.5 million to $5 million, notes economist Martin Sullivan in Tax Notes magazine.
That gap has probably shrunk a bit since then. In 2000, the peak year for stock market prices, the super-rich probably saved some taxes on their huge capital gains. (Capital gains are taxed at a lower rate than ordinary income.) Since then, stock-market capital gains have diminished. But Congress also cut the capital gains rate from 20 to 15 percent - a provision especially beneficial to the rich.
"At the rate we are going, in which more and more investment income is simply untaxed, we will end up with a federal income tax that is not only regressive at the top, but regressive overall," warns Richard Kogan, an economist at the Center on Budget and Policy Priorities in Washington. "The middle class will be the tax-bearing class."
Roach, a liberal, argues that the top 1 percent really don't need tax cuts because they have been doing extremely well in recent years. Between 1979 and 2000, the richest 1 percent enjoyed a 201 percent improvement in their average after-tax income. That compares with 15 percent for those in the middle 20 percent of the income spectrum and 9 percent for those in the bottom 20 percent.
But Roach's tax burden projections (see chart) include some "ifs." Some projections assume that all the tax cuts of 2001 and 2003 are made permanent. Several tax cuts are now scheduled to expire by 2010.
For example, the estate tax, which hits the heirs of only the wealthiest 2 percent of households, is now scheduled for elimination in 2010. But the law Congress passed in 2001 calls for a return to 2001 estate-tax levels in 2011. Observers suspect Congress will not allow that to happen. Rather, it may raise the amount of an estate exempt from what some call the "death tax" to several million dollars. But should Bush be reelected and Congress remain under Republican control next year, the odds for permanent elimination of the estate tax are raised. Either solution would disproportionately favor the rich, but by varying degrees.
Prior to the 2001 tax cut, the richest 1 percent of households, making an average annual income just above $1 million, paid 42 percent of their income, or $431,800, in taxes to all levels of government. Under current law, they would pay 36.1 percent, or $371,200, in 2010 (see chart). Under current law, the rate would jump back up to 42 percent the following year.
But if the tax cuts are made permanent, these wealthy individuals would pay 33.3 percent or $342,600 in taxes. That would not be much more than those who are somewhat less affluent but still rank in the top 40 percent of incomes.
Not everyone agrees with the analysis. Roach's model is "completely wrong on the way the world works," says Daniel Mitchell, an economist with the conservative Heritage Foundation. It fails to take into account of the positive impact tax cuts have on the economy, he argues. Generally, the rich have more money left over after living expenditures to invest in business - and thus create jobs - than do the middle class. So if the nation wants to encourage growth, flat-tax proponents argue, it shouldn't impose extra taxes on those funds.
On the other side, some Democratic presidential candidates are pushing to restore the progressivity of the system. They advocate eliminating the Bush tax cuts for the rich to free up federal revenues for additional public services, such as more comprehensive healthcare. Or the extra revenue could lower taxes for those with lower incomes.
The amounts involved are significant, according to Roach. Suppose the tax cuts for the top 1 percent were eliminated and the additional revenues rebated equally to the other 99 percent of taxpayers. Under current law, each household would get an extra $613.
"Note that these checks could be provided every year," varying slightly with the status of the economy, Roach says.
Roach has another calculation: If the tax cuts for the top 1 percent were eliminated and those additional revenues were distributed to the bottom 20 percent of households - those with an average income of $9,400, these low- income families would receive a check of $3,032 in 2010.
Of course, the American tax system changes over the years as Congress and state legislatures pass new laws. At the moment, though, the changes under consideration - a corporate tax cut and a new tax-advantaged savings plan - would provide more benefits to the well-to-do than those with lower incomes.