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Do taxes really drive Americans crazy? Amity Shlaes thinks so. Her new book, The Greedy Hand: How Taxes Drive Americans Crazy and What To Do About It, argues that America is on the verge of a civic tax revolt. Voters, she writes, "cry out for tax relief," and when tax breaks are given to them they "discover the puny size of the break" and "turn angry." But the book demonstrates only that taxes have driven Shlaes crazy. The notion that citizens must pay some price for government has rendered her incoherent, irrational, and convinced that everybody else shares her obsession.
This kind of pathology is a job requirement for Shlaes, who writes on tax policy for the Wall Street Journal editorial page. Shlaes' book is a longer exposition of the Journal's supply-side theology, which holds that tax cuts for upper-income earners can produce almost magical economic results. The book preaches this now familiar creed to the multitudes; Shlaes uses folksy lingo and homespun anecdotes to give her message a warmly populist glow.
The problem, of course, is that the ever-rising tax burden is not driving Americans crazy. One reason for this disappointing stoicism may be that for the middle class the tax burden isn't in fact rising. All credible sources (the nonpartisan Congressional Budget Office, for instance) agree that the median tax burden has fallen in recent years--that is, middle-income taxpayers are paying less. And opinion poll after opinion poll shows that only a tiny minority supports using the budget surplus for tax cuts. So, like the Journal editorial dogma it recycles, The Greedy Hand must resort to distortion, hypocrisy, and illogic to create the illusion of incipient tax revolt.
To do so Shlaes trots out the same phony numbers used by anti-tax members of Congress. The book relies on dodgy statistics from the Tax Foundation that supposedly show a rising average tax burden but are based on inflated estimates and miscounting (to review the many egregious flaws in the Tax Foundation study, see a previous Crapshoot).
In fact, Shlaes cites only one nonphony piece of evidence--but even that doesn't mean what she thinks it does. Americans are suffering, she writes, from "real bracket creep." Bracket creep used to be a problem: Before the 1980s, tax brackets were based on fixed income thresholds that didn't account for inflation. So when prices and wages rose quickly, taxpayers were pushed into higher tax brackets even though their real wages weren't rising at all. President Reagan fixed this by indexing tax brackets for inflation.
So bracket creep doesn't exist anymore. But Shlaes tries to resurrect it by discussing "real bracket creep"--the process of people shifting into higher tax brackets as their real income climbs. This has happened recently; the strong economy and booming stock market have produced big gains in income and, hence, in income taxes. To dramatize this point, Shlaes recounts the Beatles song "Taxman," written in 1966, just as the group was beginning to enjoy its greatest success. Their financial situation is a representative sample--"we are all Beatles now," she writes mournfully.
But Shlaes doesn't explain why this is a problem. Yes, when the Beatles sold a skillion albums a year, they paid higher taxes than they did when they struggled in anonymity. And yes, some people are paying tax rates they "never expected would apply" to them, but only because they're earning more money than they ever expected. Tax rates are marginal. When higher income moves you into a higher tax bracket, you pay the higher rate only on the extra income. If Microsoft accidentally added a few extra zeroes to the end of my paycheck, I would end up paying a higher tax rate than I had anticipated, but you wouldn't hear me complaining about it.
Shlaes' analysis is also full of astonishing omissions. She denounces the payroll tax as regressive, which it is. But she doesn't mention that its effect is partly offset by the Earned Income Tax Credit, a tax rebate for low-income workers. Indeed, she takes several swipes at the EITC, writing, for instance, that it "has morphed into a $30 billion project that shapes millions of Americans' lives." It has shaped their lives by reducing or eliminating their taxes. Amity, this is what you're supposed to be for, remember? Unless, of course, she is for reducing taxes on the rich but not on the working poor and near poor who benefit from the EITC.
Shlaes claims that the entire notion of a progressive tax code is a fraud. "Progressivity," she maintains, "doesn't do what it says it does: tax the rich." This is because the wealthy use loopholes to avoid their nominal rates. For instance, she notes, the super-rich can take their salary in the form of stock options, which are taxed at a lower capital gains rate. Technically, she's wrong about that. In most circumstances, employee stock option profits are taxed as ordinary income. But her broad point that special breaks for things such as capital gains undermine the tax code's progressivity is true enough.
This is hardly a sincere indictment of the current system, however. The Wall Street Journal editorial page lobbies for lower capital gains rates on an almost daily basis and has been doing so for more than two decades. Shlaes and her colleagues have long championed the loopholes that have compromised the tax code's progressive structure. Despite the Journal's best efforts, though, the tax code is progressive. That is, the effective rates--the actual taxes paid as a proportion of income--on the rich are higher than those on the middle class.