The-rich-get-richer theme -- a think-tank economist adds some fresh figures

The rich, says Brookings Institution economist Joseph A. Pechman, pay ``very moderate taxes.'' Mr. Pechman noted this 10 years ago in his book ``Who Bears the Tax Burden?'' It showed that the poor, the middle class, and the rich pay almost the same shares of their income to municipal, state, and federal governments. The rich are not soaked.

``Not many people know about that,'' Pechman said in a telephone interview. ``It didn't sink in. I hope it does now.''

Pechman has just come out with a sequel, ``Who Paid the Taxes, 1966-85?'' which shows that the tax system has become even less progressive in those two decades. The total tax burden of the poorest 20 percent has gone up, while the proportion of taxes paid by the wealthiest 10 percent has declined.

That study, published by Brookings, received considerable publicity late last month, and Pechman got quite a bit of what he jokingly calls ``fan mail.'' This pleases him, not so much because of any fame, but because he believes the tax system should be more ``progressive'' -- making the well-to-do, who can presumably afford it better, pay a somewhat higher share of their income in taxes than they do now.

Some supply-side economists have argued that a flat-tax system -- everyone paying the same share of his or her income in taxes, no matter what income level -- would be more efficient and encourage faster economic growth. That ``may be more efficient,'' Pechman says, ``but not more equitable.''

Pechman, too, favors tax reform as advocated by the Treasury, a plan that would eliminate many loopholes in the federal tax system. It would make less likely the Internal Revenue Service (IRS) news item of a month ago which showed that 299 couples and individuals with incomes over $200,000 avoided paying any US federal taxes in 1982. Some did pay taxes abroad, which they used dollar for dollar as credits against their American taxes. But 153 of the high earners paid no taxes anywhere (except sales taxes, and other such indirect taxes), using various deductions or tax credits to dodge them legally. Indeed, the number of such fortunates could be considerable higher because a favorite legal way of avoiding taxes is to invest in tax-free state and local bonds. The interest on these is not reported to the IRS.

The Treasury reform, if it survives the attacks on it, would make the nation's tax system ``just a bit'' more progressive, largely because it would shift the federal tax burden slightly from individuals to corporations. Because the bulk of privately held corporate shares are in the hands of the relatively well-to-do, some portion of corporate taxes is indirectly paid by them.

Economists have debated for decades just who is actually hit hardest by such taxes as the corporate tax -- shareholders, because of reduced profits that can be used to pay dividends? Customers, because the taxes are covered by higher prices? Or employees, because taxes cut back on take-home pay?

Although Pechman favors progressivity, he does not use his book to sound off on personal views. He merely analyzes the tax burdens for different income groups. Some individuals unable or unwilling to use various legal tax dodges may be hit harder. Others may enjoy even lower taxes than average. Some findings:

Under the most progressive assumptions (corporate and property taxes hit capital heavily), effective tax rates for all levels of government in 1980 ran from about 20 percent at the lowest end of the income scale to 27 percent at the top.

Under the least progressive assumptions, effective tax rates declined from more than 30 percent for the poorest taxpayers to 25 percent for those in the second decile (those between the bottom 10 and 20 percent of the poorest) in income distribution. Then the tax burden remains at the 25 percent level until it declines to 22 percent for the richest 10 percent.

Mr. Pechman concludes that the tax system ``has very little effect on the distribution of income.'' In other words, the government -- from the standpoint of taxes -- is not taking much from the rich to give to the poor. The nation's system of transfer payments, however (social security benefits, unemployment insurance, medicare, medicaid, food stamps, welfare, workers' compensation), does redistribute income to the poor.

Because of the rise in payroll taxes (social security taxes) and the decline in importance of corporate income tax and property tax, the overall tax system has become less progressive since 1966. Federal tax cuts in 1981 contributed to the drop in progressivity.

In other words, the tax burden on the poor increased sharply; that on the rich decreased sharply. For example, the tax rates paid by the bottom 10 percent of income earners rose from 16.8 percent in 1966 to an estimated 21.9 percent this year. By contrast, the effective tax rate for the highest 10 percent of people on the income scale declined from 30.1 percent to 25.3 percent.

In 1966, the tax burden on income from capital was substantially higher than the burden on income from labor. This pattern was reversed by 1985 because of the tax changes mentioned above.

The distribution of income before taxes remained about the same in 1966 and 1985. This is because transfer payments rose dramatically during those years. So, notes Pechman, the distribution of income from market activities (wages, salaries, interest, dividends, rents, and windfall profits) must have become more unequal.

Because the tax system became less progressive, distribution of income after taxes and government transfers has become less equal today: The well-to-do are better off, the poor worse off.

That shift may have been intentional. In his famous interview with William Greider published in The Atlantic in 1981, Budget Director David A. Stockman held that supply-side economics -- the theory behind the 1981 tax changes -- was just a disguised version of the old trickle-down theory. This theory holds that if the rich are allowed to get richer, they will save and invest more than those with lower incomes. This will ``trickle down'' money to the middle class and poor by providing more-productive, better-paying jobs.

Politically speaking, the idea of redistributing income to the wealthy is not popular. But Pechman's study indicates that may have actually happened.

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