Don't Mess With Taxes

The approach of the end of the year means, among other things, that it's time for numbers crunching.

While most of us are adding and mostly subtracting to see what we have left in our checking accounts and on our credit card limits to pay for holiday gifts, some wacky economists and accountants are parsing more elaborate data.

Case in point: "Analysis of the Distributions of Income, Taxes, and Payroll Taxes via Cross Section and Panel Data, 1979-2004" from Michael Strudler, Tom Petska, and Lori Hentz, Statistics of Income, IRS, and Ryan Petska, Quantitative Economics and Statistics, Ernst and Young LLP.

English translation: These folks have pored over 27 years of IRS data to discover just who makes just how much and how much it's changed over the years.

The findings: While all U.S. incomes over all the various taxpayer levels have increased over time, assisted or hindered by a multitude of tax changes in the examined time frame, the largest increases, both in absolute terms and on a percentage basis, were in the highest-income levels.

Pulitzer Prize winning tax writer David Cay Johnston has a very good analysis of the study in today's New York Times (registration required).

Further examination of the tax data by the newspaper staff found essentially flat income numbers for every income level except the very poor. Those 26 million taxpayers saw their average income go up 2.4 percent in 2004 from the 2000 levels.

Sounds good, right? Well, just look at the actual numbers. Those filers made less than $11,166 each in 2004 and had an average income of $5,743.

Sure that was $135 more than four years earlier, but who can live anywhere in the United States on less than six grand a year?

Meanwhile, the incomes of the very, very rich fell the most, 17 percent, in that four-year span. You know what's coming don't you?

The top one-tenth of 1 percent, that's a little more than 130,000 taxpayers, reported their average income, ahem, dropped, cough, cough, to just under $4.9 million each in 2004. They can at least be thankful that tax cuts implemented during that time took some of the hurt off, meaning their after-tax incomes fell by only 12.1 percent.

Tax breaks didn't matter that much to the bottom 60 percent of taxpayers. Why? Their income taxes were so small that the cuts made only fractional difference to their after tax incomes.

Quit picking on the rich! OK, I'm going to hear from folks who think I slam the rich way too much. They'll tell me that it takes money to make money. That rich people are the ones spending the money that drives our economy. That they hire the poorer among us to work at their companies.

On that last point, though, I just wish those benevolently provided jobs paid a bit more than $5,743 a year.

And I wish members of Congress would take a long, hard look at these numbers and then take even longer and harder looks in their mirrors before they vote to keep handing out tax breaks to those who really don't need any more help from Uncle Sam.

Just the stats, ma'am: The income paper, which you can read here, was presented at the 2006 annual meetings of the American Statistical Association. You also can check out the numbers yourself in this Excel spreadsheet.