Wealth for the Common Good

Originally published 15 June. Linked from the New York Times blog, Economix.

By Nancy Folbre

We live in a country where the most visible support for raising taxes on the rich comes from … the rich. So much for the seeming dictates of economic rationality and the logic of class war.

The Wealth for the Common Good Web site features pictures of some of our most economically successful citizens calling for higher taxes on themselves.

Reed Hastings, chief executive of Netflix, published an commentary in this paper calling for an increase in the top federal marginal tax rate to 50 percent on all income over $1 million a year. He insisted it would not reduce his incentive to work.

At the opposite end of the income spectrum, passionate opposition to the estate tax is expressed by men and women who face no risk of ever paying it. The progressive group Citizens for Tax Justice observes that the percentage of households with income under $30,000 complaining that federal income taxes are too high exceeds the percentage even paying federal income taxes.

Such patterns could be explained by false consciousness (a misperception of one’s economic interests) or moral conscience (the fortitude to rise above such interests). Maybe the media just like man-bites-dog stories; maybe powerful political interests distort media coverage. None of these possible explanations is mutually exclusive.

The tax system in this country is pretty complicated, and nobody knows how well people understand their place in it. David Brooks once claimed that 19 percent of Americans thought they were in the top 1 percent of the income distribution in 2000.

A more accurate interpretation of the polling data he was referring to suggests that 19 percent thought they would benefit from tax cuts to the top 1 percent. This is almost equally implausible.

On the other hand, households with an income of $250,000 are sometimes described as having more in common with the poor than with the very rich even though they sit squarely in the top 5 percent of the income distribution.

Misreporting of tax issues is widespread. The watchdog group Media Matters documents a major error on ABC News last March, when commentators mistakenly implied that a proposed increase in marginal tax rates (applying only to income over $250,000) would apply to all income.

The Center on Budget and Policy Priorities points to superficial reporting on Tax Freedom Day, a term copyrighted by the Tax Foundation to describe the day by which the average taxpayer has earned enough money to cover his or her tax liability for the year. About 80 percent of Americans pay less than the average, which is pulled up by a relatively small number of very high payers. As a result Tax Freedom Day comes earlier in the year for most Americans than for the average.

Differences in federal income tax rates are greater in theory than in practice. Warren Buffett famously observed that he paid a lower percentage of his income in federal taxes than his office staff in 2007, largely because income from capital in the form of dividends and capital gains is taxed at a lower rate than income from labor in the form of earnings.

The highly educated as well as the highly rich can probably work the tax system better than others. Justin Wolfers, an economist at the University of Pennsylvania, reported in a Freakonomics post that he also paid proportionately less in taxes than his administrative staff.

Mr. Buffett offered to wager $1 million with anyone on the Forbes’s richest 400 individuals list that the average share of their income paid in taxes was lower than the average share paid by their receptionists and secretaries. He got no takers.

Mr. Buffett has peeved many of his fellow billionaires by giving much of his money away as well as advocating higher taxes for the rich. The man has so much class that he can talk about class war. (He explained, in 2006, that his class was winning).

But our tax system itself confounds class interests by its complexity as well as by taxing income from labor so much more heavily than income from capital. Maybe some rich people recognize a good deal when they see one.

Nancy Folbre is an economics professor at the University of Massachusetts Amherst.