Tinkerbelle Economics

Copyright 1997 by Liberty Issues and Michael J. Hihn. All rights reserved.

"Cato doesn't know what tax rate we pay now.  ... Moore also confuses gross income with taxable income.  I'm not making this up, as you can see for yourself."

Readers will recall Hihn's Law (Tax Quacks):  It's impossible to replace the federal income tax with a single-rate tax on income or consumption -- without either (a) ballooning the deficit, or (b) creating huge tax increases on the middle class.

Cato does both.  Their sales tax creates a massive tax shift to the middle class.  Their Maxtax would increase deficits by nearly $200 billion per year.  Both plans suffer from the same fallacy:  Cato doesn't know what tax rate we pay now.

Over 70% of all taxpayers now pay no more than the 15% marginal income tax rate.  But Moore states  a tax rate of 17.5% ''would lower marginal tax rates for virtually all taxpayers.''  This is a major blunder -- and deceptive.  It would reduce effective tax rates for only those with over $100,000 in gross income.

Moore also confuses gross income with taxable income.  I'm not making this up, as you can see for yourself.

Moore says:  ''The current income tax rate of 28% for middle-income households earning $40,000 per year would fall to 17.5% ...''  There is no such current tax rate for those households..

It's income-tax time, so pull out your 1040 Instruction Booklet. Turn to page 53.  The marginal tax rate for joint filers starts at $40,100 of taxable income -- after deductions from gross income.  (The 28% bracket began at $39,000 for 1995.)

At the very least, $40,100 in taxable income requires gross income of $49,350 -- two Personal Exemptions, Standard Deduction (no itemized) for joint filers and widow(er)s.

In that bracket, IRS data show deductions and exemptions averaging 33% (1992 - See Table, next paragraph).  So, on average, the 28% marginal rate applies only to those with gross incomes in excess of $59,850 -- roughly the top 12% of all taxpayers.



Don't take my word for it.  You can check tax brackets in your 1040 booklet.  For the distribution of taxpayers by income level, see Table 534 in the 1995 Statistical Abstract.

Look also at effective tax rates,  the column labeled ''Tax as Percentage of AGI.''  Moore's effective maximum tax rate would be 17.5% -- which is tax cut for only those with over $100,000 in Adjusted Gross Income (AGI).

This is yet another feature of Tinkerbelle Economics:  falsely describe a tax cut for the so-called rich as a tax cut for ''virtually all taxpayers.''

Yet another feature:  Moore claims his plan will be subjected to ''ferocious opposition of Washington's army of special interests.''  Dick Armey said virtually the same thing, and you've also seen how bogus his plan is.

They flunk the math, so they instead demonize special interests lurking in the Beltway's darker alleys.  Then, when their plan gets attacked as ''another tax cut for the rich'' -- which it is -- conservatives will instead see some dark conspiracy at work.

HOW IT WORKS

Moore's strategy is sound enough.  Instead of replacing the tax code, and battling every cherished exemption, provide an alternative income tax.  Taxpayers could then pay either the current income tax, or Moore's Maxtax, whichever creates the lowest tax obligation.

With the Maxtax alternative, you'd pay 25% of gross income, minus a tax credit for the payroll tax.  For wage earners with less than the maximum FICA-taxed income ($62,000), the income tax would fall to 17.5% -- 25%, less the employee share of FICA taxes.  If you're self-employed, paying both halves of FICA, then your income tax would fall to only 10%.

So the primary beneficiaries of Cato's Maxtax are the so-called rich, and/or the self-employed.  Perhaps coincidentally, those are also the primary contributors to Cato.

If you support tax cuts for the highest-income taxpayers -- as I do -- then be honest enough to say so.

There are only two ways sell that kind of tax cut.  Include a tax cut for middle-class voters, which Moore fails to do despite rhetoric to the contrary.  Or start attacking that one trillion dollars in middle-class loopholes, which only Liberty Issues seems willing to do (more on that next time).

Oh yeah, you also have to cut spending.