Our guest blogger is Seth Hanlon, Director of Fiscal Reform at the Center for American Progress Action Fund.
An article in The Hill today describing the results of a new poll inaccurately reports that voters want “a lower tax bill” for wealthy individuals and businesses. If anything, the poll shows the opposite.
In tax policy, it’s critical to distinguish between marginal tax rates and effective tax rates. Marginal rates are the rate paid on a person or corporation’s last dollar of income. Effective rates are the overall share of income paid in taxes.
Effective tax rates are the better measure of what taxpayers actually pay: They take into account the numerous tax breaks that individuals and corporations use to lower their tax bills, and the fact that people in top tax brackets have income in lower tax brackets.
The Hill article fails to sort out this very basic distinction, then proceeds to make a number of apples-to-oranges comparisons that paint a misleading picture of what wealthy people and corporations are paying in taxes now and what people want them to pay. For example:
– The article’s lede asserts that, “three-quarters of likely voters believe the nation’s top earners should pay lower, not higher, tax rates.” That’s not what the poll reveals. The poll apparently asked respondents to identify the “most appropriate top tax rate” for families earning more than $250,000, a vague formulation that is very likely to prompt most respondents to say how much of their income these families should pay in taxes — in other words, what their effective rate should be. Fully 60 percent of respondents who expressed an opinion said that the “most appropriate” rate for families earning $250,000 or more should be 25 percent or higher. That is, in fact, higher than what the average effective income tax rates are today for all levels of income. And it is significantly higher than many extremely wealthy households now pay.
– Next, the article says that: “Only 4 percent thought it was appropriate to take 40 percent, which is approximately the level that President Obama is seeking from January 2013 onward.” But President Obama is not proposing to “take” 40 percent from anyone. He wants to roll back the Bush tax cuts for top earnings, restoring the marginal rate for the highest bracket (which now applies to taxable income above $388,350) to the Clinton-era 39.6 percent. But even doing that and rolling back all of the other Bush tax cuts would only bring effective income tax rates to levels that are lower than the levels garnering majorities in The Hill’s poll: about 24 percent for millionaires, 20 percent for people earning between $500,000 and $1 million, and even less for people below $500,000.
– The article also states that “73 percent of likely voters believe corporations should pay a lower rate than the current 35 percent.” But again, the poll failed to specify whether it was referring to marginal corporate rates, or explain to respondents that the current marginal rate is 35 percent but that most corporations actually pay nowhere near that. It simply asked them what the “most appropriate top tax rate” should be. In response, 67 percent of respondents who expressed an opinion said the corporate rate should be 25 percent or higher, and 40 percent said it should be 30 percent or higher. Those rates are much higher than what corporations actually pay on average. In fact, if corporations were actually paying 25 percent — as 67 percent of poll respondents said they wanted — then by one measure that would be double what they are paying now.
Having repeatedly confused marginal and effective rates, the article misinterprets the poll results to conclude that people want “a lower tax bill” for individuals and corporations. It suggests that one explanation for that “dramatic” result is that “voters may not know how much the nation’s top earners are already being taxed.”
Here’s a better explanation: Voters understand what The Hill does not — that wealthy people and corporations actually pay taxes at much lower rates than the top marginal rates on the books. And when asked what they think the “most appropriate” rates should be, a majority of people cite rates that are higher than what the wealthy and corporations are actually paying now.