Harvey Golub is a very rich man filled with righteous indignation. The former CEO of American Express (and briefly the Chairman of AIG), Golub directed his umbrage at Warren Buffett and President Obama, for suggesting that the rich in general, and by implication Mr. Golub in particular, should pay somewhat higher income tax rates than they do now. In Golub's own words, from his recent Op-Ed piece on this subject in the Wall Street Journal:
I deeply resent that President Obama has decided that I don't need all the money I have not paid in taxes over the years... I certainly don't feel 'coddled' because the various governments have not imposed a higher income tax. After all, I did earn it.
Golub's Op-Ed relies on critical mischaracterizations of fact. Setting the record straight is not an exercise in nitpicking, but rather is needed to keep public discourse on this important topic from being derailed by inflammatory half-truths. Perhaps even more important, Golub's article accurately reflects the ethos of a large swath of the privileged classes, but in doing so reveals unexamined forms of arrogance that lie at the heart of our deteriorating ability to govern ourselves.
First, the facts. Golub writes that about half of all filers "pay no income taxes at all." From this Golub argues that nonpayers "should pay something and have a stake in our government ... too."
Let's put to bed for all time this trope that half of Americans have no "skin in the game." The income tax is simply one of a suite of federal taxes imposed on rich and poor in different proportions and collected through different mechanisms. The nonpartisan staff of the Congress's Joint Committee on Taxation -- the official scorekeepers to Congress for all tax matters -- looked at this question last year. They projected that in 2010 about 37 percent of all income tax returns would show no federal income tax liability. But when all federal taxes borne by individuals were toted up, the JCT staff found that every stratum of society -- even those making less than $10,000/year -- paid federal taxes. (The details of the study are available online at www.jct.gov -- it's document JCX-19-10. The study excludes dependents on someone else's returns, so the data are not skewed by the children of the affluent earning a few thousand dollars from a summer job. It also excluded estate tax, which did not apply in 2010.) Everyone has skin in the game.
When one includes state and local taxes, many of which are notoriously regressive, the effective tax rate on the poor is surprisingly high. In a 2010 study, Citizens for Tax Justice calculated that those in the lowest income quintile (with an average cash income of $12,400) paid about 16 percent of their income in tax. The top 1 percent, with an average income of $1,328,000, paid at an all-in rate of about 31 percent.
Turning to the fortunate affluent, Golub writes that the 250,000 American families who earn $1 million or more pay 20 percent of all federal income taxes. The same nonpartisan JCT study actually projected the number of 2010 tax returns showing incomes of $1 million or more to be 336,000 (good news for Mr. Golub!); that group (just 1/500 of all returns) was projected to earn about 11 percent of total personal income in the United States, and pay 26 percent of all federal income taxes -- but less than 14 percent of all federal personal taxes in the aggregate.
The simple lesson here again is that the income tax is just one of a suite of taxes; by design, it burdens higher incomes in particular, just as others are borne disproportionately by the poor or middle class. It's the aggregate tax burden that's relevant, and here one discovers that the U.S. federal tax system in its entirety is not nearly as progressive as many believe. In fact, it's taxpayers with incomes in the $200,000 -- $500,000 range, not Mr. Golub and his crowd, who get the worst of the deal; their all-in federal tax rate is significantly higher than that borne by those earning over $1 million.
Looking at federal income taxes alone, the JCT staff found that the over $1 million club faces effective income tax rates of a little over 24 percent -- hardly the punitive rates implied in Golub's Op-Ed piece. And when one gets to the superrich, effective federal income tax rates actually decline further, because so much of their income is taxed as long-term capital gain, at a 15 percent rate. The IRS publishes data annually on the 400 highest-income tax returns for the year. For 2008 (the most recent year), their effective federal income tax rate was only 18.1 percent. If one measured their tax liabilities against their true economic income (including items like tax-exempt municipal bond income and capital gains not yet harvested through a sale), that rate would decline still further.
Finally, let's return to the underlying themes that really tick Mr. Golub off. First, referring to his many tens (hundreds?) of millions of dollars, he observes that "he earned it." Of course that's true, in the sense that he apparently inherited very little wealth, is highly intelligent, has worked very hard his whole life, and in return has been paid extremely well for his labor. But is it really possible that Golub and his ilk are blind to how lucky they also have been? Many of those without tens of millions of dollars also work very hard, and many are as smart as Mr. Golub. The nature of life is that we do not control it; both our native talents and our good fortune are distributed through processes that we cannot fathom and do not "earn."
The income tax in particular is a kind of insurance policy. Imagine that we are all sentient disembodied beings, waiting to be born. We know the full range of possible paths that any new life might take, including the great probability that we will end up struggling to make ends meet. But we know nothing about our future selves. We do not know who our parents will be, how healthy we will be, or with what native endowments we will embark on life. We are offered insurance, in the form of a promise of some minimum level of support if we are unfortunate -- but being disembodied beings, we have no cash with which to pay the premium. The deal is we can pay in arrears -- if we hit the jackpot, we kick in a fair chunk of money, and if we end up with the short end of the cosmic stick, we get helped out enough to mitigate the most abject misery. Who among us would be so foolish as not to sign up?
Second, Mr. Golub writes that the federal government today violates "the implicit social contract between me and my government that my taxes will be spent -- effectively and efficiently -- on purposes that support the general needs of the country." Here Golub betrays the unconscious great arrogance that he shares with many other successful people. There is no contract, express or implied, between the United States of America and Harvey Golub. "The consent of the governed" does not mean that Harvey Golub, or any citizen, gets to pick and choose which government spending programs are smart, and therefore deserve his funding, and which are dumb, and from which he therefore can opt out. I happen to agree with many of his criticisms of wasteful tax expenditures and the like, but that's not by itself a principled basis for not contributing an appropriate share to fund whatever government our democratic system has delivered to all of us.
To date, Mr. Golub and I both have failed to convince our fellow Americans, and through them those rascals in Congress, that these programs are indeed wasteful. Instead of driving a wedge between Americans on the false issue of income tax statutory rates, or suggesting that he won't play ball until Congress meets his demands, Mr. Golub should apply his formidable talents and some of his considerable wealth to rallying support for his generally sensible list of spending and tax reforms.