Republican Presidential candidates say–all the time–that they hate budget deficits. A linchpin of each of their campaigns is a promise to slash government and eliminate the deficit and the national debt. So which one of them would accomplish this ambitious goal?
According to a new analysis from the non-partisan Committee for a Responsible Federal Budget, none of them would. At least not through the next decade. In fact, compared to what the fiscal watchdog calls a realistic budget baseline (that is, if the government continues on the track it’s on today) all of the GOP candidates, save for Ron Paul, would make matters worse.
Rick Santorum and Newt Gingrich would make things far, far worse. Mitt Romney’s tax and spending plan wouldn’t bend the debt curve very much one way or the other. But, according to CRFB, if he doesn’t find a way to pay for his latest plan to cut tax rates by 20 percent Romney would significantly increase deficits and the debt as well.
Except for Paul, each of the candidates has the same problem. They have enthusiastically promised to cut taxes in very specific ways—sometimes by vast amounts. But when it comes to offsetting spending reductions or cuts in tax breaks, they mostly offer little more than platitudes.
A few numbers: The group figures that if government policy stays on track, the national debt would grow from 78 percent of Gross Domestic Product today to 85 percent in 2021. Paul would pare that to about 76 percent.
With Romney, the debt would change little from the CRFB baseline but only if he finds tax hikes to offset those 20 percent rate cuts. He has not said what those revenue increases would be, and without them, he’d add about $2.6 trillion to the debt and drive it to about 96 percent of GDP. Santorum would increase the debt by $4.5 trillion to 104 percent of GDP. Gingrich would add $7 trillion to the debt and drive it to 114 percent of GDP.
Some caveats: CRFB compares the campaign plans to a baseline that assumes 2001/2003/2010 tax cuts are permanently extended, the Alternative Minimum Tax “patch” continues to protect millions of middle-class families, the legislated cut in Medicare physician payments never happens, spending on the wars in Iraq and Afghanistan gradually comes to an end, and the automatic spending cuts that are due to kick in at the end of this year will be canceled.
In addition, the analysis does not assume any economic growth from the candidates’ proposed tax rate cuts though some is possible. It also looks only at the next nine years, and not over the long run. The group calculated a high- low- and intermediate- range of deficit effects for each candidate. I’m citing the middle-range.
The group acknowledges its effort is a work in progress and it will revise its estimates as campaign promises change over the next eight months. Finally, CRFB did not score President Obama’s agenda in today’s exercise, but will once the general election is underway.
Cutting the national debt should not be the only goal of any president. Stuff happens, as you may have noticed in recent years. We fight wars. The economy collapses. Priorities change.
But with these candidates making the deficit such a big part of their campaign rhetoric, the CRFB scorecard is a very useful reality check. Give it a read.
Here’s what I love about President Obama’s Framework for Business Tax Reform: His diagnosis of the problem is spot on. In just a few pages, the Treasury Department does a marvelous job describing what’s wrong with the way the U.S. taxes business. Anybody interested in understanding why the tax code is such a mess should read this.
Here’s what I don’t like: After doing a great job explaining the problem, Obama often flops when it comes to a cure. Sure, he proposes cutting the corporate rate. These days, who doesn’t? But when it comes to which tax preferences he’d dump, Obama often ducks the tough choices. More troubling, some of his proposed cures may make the disease worse.
Here are a couple of examples. The joint White House and Treasury Department paper explains what’s wrong with business subsidies and high tax rates. One big flaw: this toxic brew distorts business decisions. It encourages firms to finance with debt instead of equity, it drives firms to organize as pass-throughs such as partnerships to avoid paying taxes twice on corporate profits, and it drives investment to low-tax industries and away from high-tax industries.
So far so good. But now, Obama’s cure: He proposes to cut rates for all non-manufacturing corporations from today’s top rate of 35 percent to a flat 28 percent. Manufacturers would enjoy a more generous 25 percent rate, and “advanced manufacturing”, whatever that is, would receive an even lower rate. But wait a minute, didn’t the president just tell us that it is bad thing to use the tax code to distort investment decisions?
Similarly, he decries income shifting by U.S. based multinationals. But his solution, an alternative minimum tax on overseas profits, seems entirely wrongheaded. He says this would prevent companies from moving profits overseas. Maybe it would. But more likely it would encourage companies to move themselves overseas. Companies domiciled on sunny Caribbean islands would not be subject to this new AMT, only U.S. firms would.
On the other side of the ledger, Obama does what all of his GOP rivals have done. He parades his lower rate, but never quite says which tax breaks he’d eliminate.
Obama does pluck a few low hanging fruit, at least for his base. As he’s promised in the past, he’d tax carried interest at ordinary income rates, eliminate oil and gas preferences, raise taxes on buyers of corporate jets, and boost taxes on insurance companies. But this is the equivalent of promising to balance the budget by eliminating waste, fraud, and abuse and foreign aid. It won’t come close to paying for a 7 percentage point and more cut in rates.
When it comes to the really tough stuff such as broad changes in depreciation rules or interest deductions, Obama is silent. In fairness, given the challenges of making these reforms, his 28 percent rate is probably more realistic than the GOP alternatives.
Newt Gingrich, for instance, says he’d cut the corporate rate to an impossibly low 12.5 percent without ever saying how he’d pay for it. Rick Santorum says he’d cut the rate on manufacturing to zero with saying how he’d pay for that.
In all, Obama’s plan is a modest but useful step in the direction of reform. We now have all the major presidential candidates on record supporting lower rates and a broader base. House Ways & Means Committee Dave Camp (R-MI) will have his own proposal very soon. By recent Washington standards, that is progress.
Of course, there are big disagreements on how low to take rates and mostly black boxes when it comes to which tax preferences to eliminate. And there is a yawning chasm between Obama, who would collect at least as much in business taxes after reform as government does today, and most Republicans, who would deeply cut business taxes. But at least they all are, in their way, talking.
The other day, I criticized the unwillingness of Congress to finance the latest extension of the payroll tax cut. Since that blog, the Congressional Budget Office released its estimates of the cost of the entire mini-stimulus, including the so-called “doc fix” and changes in unemployment compensation. And the games were even worse than I feared.
Congress made no pretense of paying for the payroll tax cut itself. But it did claim it would pay for the rest of the package. Hint: It didn’t.
There are two bits of legerdemain happening here. Both are functions of the 10-year budget window the Congressional Budget Office and the Joint Committee on Taxation use to score legislation.
The first gimmick allows Congress to pretend tax cuts or new spending are temporary, when it is obvious to all they are not. The second is a sort of congressional lay-away plan. Lawmakers get to buy politically popular policies today but avoid paying for them until years from now.
There is nothing new in all this. Congress has been playing games with the 10-year budget window (or its cousin the 5-year window) for decades. But the mini-stimulus showed business as usual is alive and well on Capitol Hill, despite the best efforts of the tea party caucus.
The doc fix is a perfect example of Gimmick #1. Even though Congress has been temporarily protecting physicians from scheduled Medicare cuts for a decade, CBO must score only what Congress proposes.
So when lawmakers protect docs for only a year (or in this case 10 months) at a time, CBO has no choice but to score only the one-year cost. Thus, the limited fix appears to add only about $18 billion to the deficit over the 10-year budget window when the true 10-year expense of keeping the doc fix going would far exceed $200 billion.
Perhaps the payroll tax cut, which is supposed to be a stimulus measure, really will be allowed to expire at year’s end (though I doubt it). But the doc fix is not countercyclical economic policy. Like old man river, it just keeps rolling along. A year at a time. Since 2002, if you can believe it.
Here’s Gimmick #2. Most of the cost of the doc fix comes in fiscal years 2012 and 2013, as you’d expect with a “temporary” extension. But the measures to pay for them—a reduction in Medicare payments for hospitals’ bad debts and a cut in a preventive care program, don’t kick in until 2014 and beyond. One provision–a hike in federal employee retirement contributions for new workers–won’t start raising real money until 2016.
Will any of these pay-fors actually happen? Don’t bet on it. Already, Senate Democratic Leader Harry Reid (D-NV) has promised to restore the preventive care money. That took, what, four days?
In theory, this kind of budgeting makes sense. After all, while the economy seems to be recovering, it remains sluggish. Why not inject additional fiscal stimulus now and arrange to pay for those initiatives in a couple of years when the economy presumably is stronger?
The problem: Many of these pay-fors never quite seem to happen. Instead, Congress just creates more “doc fixes.” Remember, the first fix was aimed at blocking cuts in Medicare physician payments that were included in the Balanced Budget Act of 1997.
Yes, Virginia, Congress promised that cutting reimbursements to docs would help eliminate the deficit. And, as Sarah Palin, might ask, “How’s that workin’ out for ya?”
The 2-percentage-point payroll tax cut extended by Congress in December and again last week will save workers a total of $114 billion this year, according to the Joint Committee on Taxation. Spread over nearly 160 million workers, that’s an average tax cut of $714. Yet the typical news report says “the average worker earning $50,000 [will] take home an extra $1,000.”
That’s a big difference. What’s going on?
The calculation implicit in the news report is simple arithmetic—2 percent of $50,000 is $1,000. But the average worker earns much less—just under $40,000 in 2010, according to the Social Security Administration. That suggests that the average tax saving would be about $800, still more than $714.
The remaining difference results from the Social Security tax cap–$110,100 this year. Since incomes over the cap go into the overall wage average, the average wage subject to the Social Security tax is less than the average for all pay, roughly 10 percent less.
But TPC estimates that the average tax reduction will total $921, well above the average worker’s savings. That’s because TPC looks at tax units—individuals or couples who file tax returns (or would if their incomes were high enough). And TPC leaves out dependents and hence misses the tax savings for many younger workers. Tax units are similar to both families and households but not the same as either.
So here’s the bottom line (or lines):
- Nearly 160 million workers will take home an average of $714 more during 2012.
- About 122 million tax units will save an average of $924 in payroll taxes.
Only above-average workers will get the $1,000 repeatedly promised in the media.
The new 2013 budget unveiled by President Obama on Monday again contains the Automatic IRA, which was developed by Brookings’ Retirement Security Project in conjunction with The Heritage Foundation. This year’s version includes an important change that will also encourage more employers to offer a 401(k) account to their workers. However, important changes to the Saver’s Credit that had been in previous budgets failed to make it this year.
Nearly half of American workers – an estimated 78 million- currently have no employer-sponsored retirement savings plan. The Automatic IRA is a simple, easy to administer and understand system that is designed to meet the needs of small businesses and their employees.
Employers facilitate employee savings without having to sponsor a 401(k)-type plan, make matching contributions or meet complex eligibility rules. Employees are enrolled automatically into an IRA with a simplified system of investment choices and a set automatic savings level. However, they retain complete control over all aspects of the account including how much to save, which investment choice to use, or even whether to opt out completely.
Automatic IRAs also offer savings options for the self-employed and independent contractors, and provide those who are changing jobs the ability to continue their retirement savings.
The new 2013 budget would also double the size of the tax credit that employers receive in return for starting a new 401(k) plan from $500 annually for three years to $1,000 annually for the same period. This increase will ensure that the credit covers more of an employer’s costs, and should encourage more employers to offer such a plan.
This is a very good move, but the annual credit could be still further expanded to $1,500 for three years as will be proposed by a new House bill coming from Rep. Richard Neal (D-MA). As Congress examines the proposal, it will have the opportunity to also expand the smaller credit that would be offered to employers that start an Automatic IRA to ensure that they are fully reimbursed for all expenses connected with starting and operating such an account for their workers.
A disappointing development is the failure to again include proposals to expand and improve the Saver’s Credit by making it fully refundable. The Saver’s Credit is an incentive for middle-and lower-income taxpayers to save in 401(k)-type accounts or IRAs.
Retirement Security Project research found that more than 69 million taxpayers had income that was low enough for them to be eligible for the Saver’s Credit in 2007. However, nearly 45 million of these filers actually failed to qualify for the credit because they had no federal tax liability. If the Saver’s Credit was made refundable as RSP has proposed and deposited directly into the account as a match for savings, those 45 million taxpayers could have taken advantage of the program and had significantly higher retirement savings.
It looks like Congress is about to assume its default position: In the face of an intractable partisan dispute over how to pay for a government initiative, don’t. If Democrats won’t cut spending, and Republicans refuse to raise anybody’s taxes, there is always the solution they both can agree upon—just borrow the money and increase the deficit.
The matter at hand is the payroll tax, of course. And after months of squabbling, it looks as if Congress is about to extend a “temporary” tax cut for another 10 months. And it will borrow $100 billion to do it. That would be OK if this was a short-term stimulus. But I don’t think it is.
How did we get here? To briefly review the bidding, in late 2010 Congress backed a plan by President Obama cut the employee share of the Social Security payroll tax from 6.2 percent to 4.2 percent for 2011 only.
Just as the tax cut was about to expire, Republicans and Democrats locked themselves in their usual fiscal death grip. But in a nice bit of political jujitsu, Democrats stole the GOP’s best anti-tax rhetoric. Letting the temporary tax cut expire as planned, they thundered, would raise taxes on 160 million working people.
The talking point was wildly successful. Just before they headed home for the winter holidays, Republicans went into duck and cover mode and Congress voted to extend the payroll tax break for two months—without paying for the extension, of course. The theoretically temporary tax cut is due to expire again in a couple of weeks. And until this week, Ds and Rs were rehashing the same old argument. Except for some tea party conservatives, most lawmakers insisted they wanted to extend the payroll tax break, but nobody would budge when it came to paying for it.
On Monday, the House Republican leadership announced it would support a 10-month extension without offsetting spending cuts. Problem solved. Just put another $100 billion on the tab.
This wouldn’t bother me if I thought the payroll tax cut was really going to expire in 10 months. But I don’t. Given the Democrats’ politically successful claim that allowing the tax break to expire was akin to a tax increase, it is hard to imagine them abandoning the provision–or the issue– anytime soon.
And if Congress can’t agree on how to pay for it now, how will it do so at the end of the year? That’s exactly when lawmakers will be locked in an epic fiscal policy battle over what to do about trillions of dollars of other expiring tax cuts, how to dodge $1.2 trillion in automatic spending reductions that were mandated by Congress’ failed deficit reduction efforts last year, and how to increase the debt limit.
I can imagine the payroll tax extension becoming another version of the Alternative Minimum Tax patch–extended year after year with borrowed money. To make matters worse, a permanently temporary tax cut further damages the credibility of the Social Security system which the payroll levy is supposed to fund. The government can fill the hole by shifting general fund dollars into the system, but this bit of legerdemain is not going to boost confidence in the retirement program.
Perhaps Congress will find a way to sort out this mess without adding trillions more to the budget deficit. Perhaps it will somehow let the temporary payroll tax cut quietly fade away at year’s end. But, somehow, I doubt it.
When it comes to taxes, President Obama has proposed what might best be called a conceptual budget—a powerful call for tax reform that is long on principles but, at least when it comes to individual levies, woefully short on specifics.
This is understandable with what is effectively a reelection manifesto. In high campaign season, specifics get a candidate in nothing but trouble. Still, this framework is at once disappointing and illuminating.
It sets up a powerful contrast with whomever the GOP nominates to replace Obama: Should tax reform be used to raise revenues, an explicit goal of this budget, or should it be a vehicle to cut taxes and increase the deficit—the specific aim of every remaining GOP presidential contender?
Yet, Obama’s fiscal plan is disappointing because it is so vague. There is simply no chance Congress will make the tough votes necessary to enact any serious tax reform without a president who is prepared to take the heat for specific, deeply controversial cuts in popular middle-class tax preferences.
But Obama’s budget contains little more than gauzy promises for a “simpler, fairer and more progressive” tax system or, elsewhere, a “simpler, fairer and more efficient’ system. Know anybody against those principles?
There are plenty of proposals to end corporate tax breaks, but when it comes to individual taxes, the Obama budget is the Oakland of tax policy. To borrow from Gertrude Stein, there is no there there.
Yes, he’s proposed taxing dividends at ordinary income rates and found a new way to tax investment firm partners so they could no longer treat their compensation as capital gains. Talking to you, Mitt Romney. But otherwise, the White House has done little more than rehash some Golden Goodies—allowing the 2001/2003/2010 tax cuts to expire for those making more than $200,000, and capping the economic value of itemized deductions at 28 percent.
This adds up to little more than raising taxes on “the fella behind the tree” and ignores those deductions, exclusions, and credits that benefit middle-income households, pervert the tax code, and keep tax rates high.
Even the much-ballyhooed “Buffett tax” is an empty vessel. After making a major fuss in his State of the Union address about requiring those making a million dollars a year to pay their “fair share” in income taxes, President Obama has proposed…nothing.
Obama’s unwillingness to get down and dirty with legislative specifics seems ingrained in his DNA. He did the same thing with the health reform law, which Congress turned into a mess. And he did it with financial reregulation which, despite whining from Wall Street and the banks, has done little to prevent a rerun of the financial abuses of the past decade.
Still, pay attention to Obama’s principles for tax reform. They set the stage for what could become an epic battle, if Obama gets reelected and is serious about pursuing tax reform (I wouldn’t bet on either at the moment).
Obama laid out five principles. Three–lowering rates, increasing job creation and growth, and cutting “inefficient and unfair tax breaks” –are the mom and apple pie of tax reform. It’s just that nobody can agree on what inefficient and unfair means.
But numbers 3 and 5 will generate a political donnybrook. Number 5 is the Buffett rule. Number 3 is to use tax reform to cut the deficit by $1.5 trillion over the next 10 years.
The last one will do the most to separate Obama from his GOP challenger. Rather than shying from the charge that he’s a tax-hiking Democrat, Obama explicitly vows to use reform to raise revenues—but says he’d get the money almost entirely from rich people. This promise alone will make for an interesting campaign.
In his State of the Union speech, President Obama’s called for a new law that would require high-income people to pay at least 30 percent of their income in taxes. In response, Senator Sheldon Whitehouse (D-RI) and Representative Tammy Baldwin (D-WI) have introduced the Paying a Fair Share Act of 2012, a proposal designed to meet the Buffett Rule: That the wealthy pay at least as much tax as middle-income households.
That sounds straightforward but it’s not.
First, there’s the matter of how to measure income. The rule would define income as adjusted gross income minus a modified measure of charitable contributions. The adjustment avoids discouraging charitable donations.
Measuring taxes is more complicated. The proposal defines taxes to include the regular income tax, the individual alternative minimum tax (AMT), the employee’s share of payroll taxes that finance Social Security and Medicare, and the 3.8 percent tax on investment income and the 0.9 percent tax on earnings imposed on high-income taxpayers to help finance healthcare. That’s a broader measure than what most people see on their tax returns today, but it still excludes other taxes that people pay indirectly like corporate income taxes and the employer’s share of payroll taxes.
If you make at least $1 million (by the act’s definition) and your tax is less than 30 percent of that, you’ll owe more tax, presumably yet another addition on your income tax return. That’s certainly not tax simplification.
The Tax Policy Center estimates the proposal would increase 2015 taxes for about 116,000 households by an average of more than $170,000, assuming the Bush-era tax cuts expire as scheduled and Congress stops patching the AMT. That’s an overall tax increase of about $20 billion, not chump change but less than a tenth of the projected 2015 deficit. If Congress extends tax law in place this year, about 217,000 tax units would owe an average of nearly $190,000 more, yielding about twice as much additional revenue but still less than a tenth of a larger deficit.
The Buffett rule sounds good in principle. High-income taxpayers should pay at least as large a share of their income in taxes as the rest of us. But most already do. On average, middle-income households will pay 2015 taxes totaling about 15 percent of their income (using the legislation’s definition). Without the Buffett rule, more than 99 percent of millionaires will pay more than that and only about 4,000 will pay less. Barely 10 percent of them will pay less than 20 percent.
The proposed legislation would certainly raise taxes on a lot of high-income taxpayers. But the price would be even more complicated tax code. There are better ways to raise taxes on the rich.
We’ve all seen the articles in Forbes, Kiplingers, or U.S. News trumpeting the best states to live in retirement. A key measure for them all: Low taxes. What you may not know is that states actively compete with one another to provide tax breaks to older residents—especially to wealthy seniors.
This competition is similar to the way states use tax subsidies to woo businesses. It may not make much sense, but it sure is trendy.
Not all states are headed in this direction. Michigan, which is in deep financial distress, recently rolled back some generous tax exemptions for pension income. But nearly every state offers some tax breaks for seniors.
Why? Many seniors have plenty of money to spend including Medicare dollars, and Social Security and pension benefits. Just as important, they use relatively few state and local services: The elderly don’t need K-12 education and spend relatively little time in jail. And their health care is largely funded by the federal Medicare program.
This tax race for seniors is described in a fascinating new paper that Karen Smith Conway of the University of New Hampshire and Jonathan Rork of Reed College presented last week at a Tax Policy Center/UCLA Law School conference on state taxes.
States offer seniors three buckets of tax breaks. They exclude some or all Social Security benefits from tax; grant seniors extra deductions, exemptions, or credits; and exempt at least some pension income from tax. Combined, these preferences cost states more than $24 billion annually. The biggest beneficiaries: middle- and upper-income elders–the very people states want to keep or attract.
For instance, Conway and Rork found that 12 states offer a modest tax exemption for pension income, three exempt income of $70,000 or more, and five exempt all pension income from tax.
Conway and Rork quote Georgia Gov. Sonny Purdue, who said his state’s plan to eliminate taxes on retirement income “will help attract retirees to our state and make our economy even stronger.”
Is he right? Do low taxes attract seniors and are they worth the revenue cost?
Lots of prior research suggests Purdue is engaged in little more than wishful thinking. Last year, fewer than one percent of seniors moved from state to state after age 65 for any reason. And very few appear to do so to reduce their taxes.
This limited mobility may result in another major downside for states. About 70 percent of seniors will eventually require long-term care services in old age, and 20 percent will need this assistance for five years or more.
Many are middle-income seniors who spend down their assets on personal care and eventually become eligible for Medicaid. About one-third of Medicaid dollars are spent on long-term care services and the program is a growing burden on state budgets.
Thus, while states may benefit in the short-run from attracting a few relatively young, healthy, and wealthy pensioners, they may end up paying a substantial price when middle-income seniors become frail, go broke, and require Medicaid long-term care services.
When that happens, states such as Georgia may regret giving up revenue to subsidize seniors. Of course, the price for that mistake will be paid by some future governor who has the misfortune of serving years from now.
Investment manager James Ross last week told New York Times columnist James Stewart that his combined federal, state, and local tax rate was 102 percent. No doubt, Ross did pay a lot of tax to the feds and the two New Yorks, city and state. But did he really pay more than all of his income in tax?
No, he did not.
As Stewart made clear past the wildly misleading headline (“At 102%, His Tax Rate Takes the Cake”), Ross’s tax bills totaled 102 percent of his taxable income, a measure that omits all exclusions, exemptions, and deductions. Using that reduced measure of income inflates Ross’s effective tax rate far above the share of his total income he paid in taxes.
Deeper into his column, Stewart explains that Ross’s tax bill was just 20 percent of his adjusted gross income (AGI), a more inclusive measure that does not subtract out exemptions and deductions. Because he took advantage of many preferences, Ross’s taxable income was only a fifth of his AGI, resulting in that inflated 102 percent tax rate. But even AGI doesn’t include all income. Among other things, it leaves out tax-exempt interest on municipal bonds, contributions to retirement accounts, and the earnings of those accounts. Ross almost surely paid less than 20 percent of his total income in taxes
Stewart’s article demonstrates the common confusion about effective tax rates, or ETRs. There are many ETRs, depending on which taxes you count and against what income you measure them. Including more taxes drives up ETRs. Using a broader measure of income drives them down. And interpreting what a specific ETR means requires a clear understanding of both the tax and income measures used.
The Tax Policy Center has just released new tables that demonstrate what happens to ETRs when you include more taxes and or use alternative income measures. In 2011, for example, the federal individual income tax averaged 11.5 percent of AGI but just 9.3 percent of total cash income, the much broader measure of income that TPC generally uses for its analyses. Adding payroll taxes boosted those ETRs to 20.4 percent of AGI but just 16.5 percent of cash income.
The highest income 20 percent of households paid an average of 17.3 percent of AGI in individual income taxes in 2011. That’s the measure the media used recently when they reported the tax rates paid by Mitt Romney (13.7 percent), Newt Gingrich (31.5 percent), and Barack Obama (24.1 percent). Measured as a share of the broader cash income measure, ETRs for the top 20 percent are lower—just 14.9 percent. We don’t know total cash income for Romney, Gingrich, or Obama so we can’t compare their ETRs under this measure.
Add in payroll taxes—both employer and employee shares—and the highest income households paid 20.9 percent of their cash income in taxes. And if you tack on their shares of the corporate income tax and the estate tax, their effective tax rate hit 24.5 percent.
Now look at middle-income households. In 2011, they paid 4.1 percent of their AGI in income taxes but just 3.2 percent of their cash income—nearly 12 percentage points less than the rich. The income tax is quite progressive. Include regressive payroll taxes and their ETR jumps to 12.1 percent, about 9 percentage points less than the highest income households. Add their (relatively modest) share of corporate income and estate taxes, and their ETR is only slightly higher—12.6 percent, or about half that for the top 20 percent.
The bottom line is you can use these numbers to tell many different stories, some more valid than others, depending on the taxes you include and the income measure you use. The broadest measure of income provides the most meaningful gauge of the relative impact of taxes on households. Narrower measures can yield absurd results—James Ross didn’t pay 102 percent of his income in taxes—and ignore important differences in households’ ability to pay.
It’s fine to tell those different stories but essential that any analysis compares equivalent ETRs, calculated for the same taxes using the same income measure. Combining apples and oranges may make a good fruit salad but it yields poor analysis.