On Tax Day: What’s Fair?

Jared Bernstein is a senior fellow at the Center on Budget and Policy Priorities in Washington and a former chief economist to Vice President Joseph R. Biden Jr.

Tax day is upon us and with it comes a lot of buzz about tax fairness.  That’s a broad concept, for sure, with many different meanings.  One of its meanings has been quantified as the share of taxes paid by various income groups. And that leads to claims of unfairness over the alleged disproportionate share of taxes paid by those at the top of the income scale.

For example, The Wall Street Journal cites the Tax Policy Center’s findings that “overall federal tax receipts from the top 1 percent of earners rose by 1.3 percentage points to 29.3 percent of all federal tax revenue.”  Meanwhile, the center’s data show that middle-income families’ tax share is around 10 percent.

If that sounds unfair, consider the following: The taxpayers whose liabilities and share of total taxes paid are going up also happen to be pretty much the only people whose incomes have been rising.  Certainly another dimension of fairness, especially in a progressive tax system within an increasingly unequal income distribution, is assigning the burden to those who’ve made the gains, especially when they’re such a small group.

There is considerable evidence to support this case.

- The inequality expert and Berkeley professor Emmanuel Saez recently wrote that from 2009 to 20012, the “top 1 percent incomes grew by 31.4 percent while bottom 99 percent incomes grew only by 0.4 percent.” He noted that “the top 1 percent captured 95 percent of the income gains in the first three years of the recovery.”

- As The New York Times pointed out Sunday, “the median compensation of a chief executive in 2013 was $13.9 million, up 9 percent from 2012.”  Bureau of Labor Statistics data show that median weekly earnings for regular old full-time workers â€" not those from the executive suites, but making around $40,000 a year â€" rose about 1 percent last year. After inflation â€" about 1.5 percent â€" they actually fell behind.

- Over the recovery, which began in mid-2009, G.D.P. is up 11 percent, corporate profits are up 50 percent, the S&P 500 is up almost 80 percent, and median household income is down 3 percent (all changes inflation adjusted).

Now, to be clear and fair, there are other factors to be considered.  First, while the rich appear to have largely recovered from the downturn and are once again speeding ahead of the rest, they did get severely whacked by it.  The most comprehensive data on this  â€" the Congressional Budget Office’s household data series â€" shows real, pretax losses by the top 1 percent of 26 percent from 2007 to 2010 (the most recent year for this series), as the financial implosion led to large capital losses.

But even in these data, from 2009 to 2010, the average income of the top 1 percent rose 16 percent, or about $200,000 (from $1.2 million to $1.4 million). Middle incomes rose a mere 0.3 percent, up $200, to $65,400.  So, in that year, the gain in pretax income to the wealthiest households was about three time the level of middle-class incomes.

Second, the only recent federal tax increases legislated, those from the fiscal cliff deal at the end of 2012, raised taxes solely on the wealthy.  That said, the tax deal also locked in 82 percent of the sweeping Bush tax cuts. That’s one reason we’re collecting less revenue than we will need to in order to meet our longer term fiscal challenges.

Like I said, there are lots of ways to measure fairness in the tax code, but one pretty intuitive measure, especially in a progressive system, is the share of taxes paid by each income group compared with their share of pretax income. Thankfully, the excellent analysts at Citizens for Tax Justice present that very comparison, and even better, they do so including all levels of taxation: federal, state, and local.

Most of the bars are about of equal height for each income group, implying all-in tax shares are about the same of income shares.  At least by this metric, one I think most would view as reasonable, tax shares seem broadly fair.  And given where all the growth has been going, along with stagnating middle and low pretax incomes, even more progressive tax changes may be fairly envisioned.

However, over the longer term, we cannot sustain our revenue needs solely by increasing the tax liabilities of those at the very top of the income scale. The United States remains a low-tax country and if incomes would only start growing more broadly, it would be reasonable, in the interest of meeting future fiscal challenges, to raise more revenue from more households.  The alternative, of course, would be large spending cuts in social insurance, public goods, defense, and nondefense programs across the board, cuts the majority of the public does not want, for good reason.