Have Average Taxpayers Become Freeloaders?

Opponents of the proposal for a 5.4 percent health care reform surtax on America’s wealthy seem to be getting a bit desperate. They've even turned their fire onto middle-income Americans.

Friends and fans of privilege have been striking their indignant pose the last two weeks. They’re shocked, simply shocked, that House Democratic leaders would dare advance a health care reform plan that sets a 5.4 percent surtax on households making over $1 million a year.

Affluent Americans, flacks for grand fortune are fuming [1], already pay the bulk of the nation’s income taxes. They'll pay virtually all of it, these critics charge, if the surtax becomes law and Congress lets the George W. Bush tax cuts for the comfortable expire, as scheduled, after 2010.

Amid all this, the most indignant [2] of fortune’s defenders now seem to believe, average Americans have become irresponsible freeloaders, ever eager, as conservative columnist Caroline Baum puts it [3], to “encourage their elected representatives to vote ‘yes’ on every new benefit that comes down the pike.”

Fulminates David Harsanyi, a Denver Post columnist outraged [1] by the health surtax notion: “President Barack Obama once promised to spread the wealth. How about spreading the responsibility, as well? Let the everyday citizen feel the cost of these gazillion-dollar legislative miracles.”

In reality, of course, everyday American citizens are pulling their weight and then some. They actually pay a higher share of their incomes in taxes — total taxes, not just federal income tax — than super rich Americans.

Maverick billionaire investor Warren Buffett has been trying to make this point for some time now. He and his fellow billionaires, Buffett notes, pay taxes at a lower overall rate than their receptionists do.

Two years ago, Buffett bet a million dollars to back up that proposition. He challenged [4] any billionaire in the Forbes 400 to prove him wrong. So far not one has.

Those Forbes 400 billionaires and their cheerleaders live in a fantasy land where average folk who work hard enough can always “succeed” and get rich. In our real world, here early in the 21st century, average people work hard and watch the rich get richer.

The latest evidence of this dynamic comes from an enterprising Wall Street Journal analyst who just completed some fascinating crunching of payroll data from Social Security.

“Executives and other highly compensated employees now receive more than one-third of all pay in the U.S.,” the Journal’s Ellen Schultz observed [5] last week, and that’s without counting billions in executive pay “that remains off federal radar screens that measure wages and salaries.”

Schultz defines as “highly compensated” any employed American who this year will take home over $106,800. That income figure represents the 2009 Social Security payroll tax ceiling. Any wage or salary income under that figure faces Social Security payroll tax. Any income above doesn’t.

Back in 2007, the payroll tax ceiling stood at $97,500. In that year, only 6 percent of Americans collected paychecks over the ceiling. But this affluent 6 percent took in 33 percent of America’s total pay.

Five years earlier, in 2002, Americans making more than the federal payroll tax ceiling collected only 28 percent of the nation’s pay.

Over the five years than ended in 2007, the Journal’s Schultz goes on to add, earnings for the top 6 percent jumped up twice as fast as earnings for the bottom 94 percent.

This growing inequality in the rewards from work has no legitimate justification. Absolutely no evidence exists to indicate that gaps in skills or productivity between earners in the top 6 percent and the bottom 94 percent have widened over the past five years, or the past 50 years for that matter.

This growing inequality in the rewards from work, on the other hand, does have consequences. Here's one: In 2007, America’s top 6 percent collected a whopping $1.1 trillion in earnings not subject to payroll tax. The payroll tax break for high-income earners, the new Wall Street Journal analysis estimates, is now costing the federal Treasury $115 billion a year.

But the Journal’s focus on the top 6 percent doesn’t tell the full story. America’s most affluent 6 percent haven’t all been prospering at the same rate. In fact, most top 6 percent income-earners have more in common with those below them than those above.

Between 2000 and 2006, data from economists Emmanuel Saez and Thomas Piketty document [6], America’s top 1 percent saw their incomes increase eight times faster than the next most affluent 4 percent.

These particular Saez-Piketty figures don’t count income from capital gains, the profits from the buying and selling of stock and other assets. Capital gains income goes overwhelmingly to the richest Americans — and none of it faces Social Security payroll tax.

The federal government now collects nearly as much revenue from payroll tax as income tax. Payroll taxes, as University of Chicago economist Casey Mulligan pointed out [7] last week, bring in “almost 90 percent of individual income tax collections,” and two-thirds of Americans pay more in payroll taxes than income taxes.

These average Americans aren’t freeloading. They’re working — and not getting rewarded enough for their labor. That remains our deeply unequal economy’s dirty little secret. If fans of fortune keep blaming average taxpayers for our nation's fiscal ills, maybe that secret will begin to get out.  

Sam Pizzigati edits Too Much [8], the online weekly on excess and inequality.