The Middle Does Pay A Larger Share, Contrary to Mankiw

Claims, like mine, that middle-income workers are now paying a larger share of their incomes than people at or near the top “don’t hold up under close examination,” says Gregory Mankiw in today’s New York Times. (Mankiw was an adviser to President Bush and is now advising Mitt Romney in his campaign.) Mankiw relies on a study by the Congressional Budget office that finds the top 1 percent paying 31 percent of their income in federal taxes while the middle fifth pay 13.9 percent.

But Mankiw ignores three very important things.

First, although he acknowledges the existence of people like Warren Buffet, the second-richest man in America, who by his own admission pays only 17.7 percent of his income in taxes, Mankiw attributes this to the fact that Buffet’s earnings are made up largely of dividends and capital gains, which are taxed at 15 percent. But isn’t this also true for a large portion of the very wealthy? Mankiw asserts that “many other” top earner pay the maximim ordinary income tax rate of 35 percent. Some may, yet there’s reason to doubt that they comprise anywhere near a majority. Indeed, the financial pages of late have been filled with the doings of private-equity fund managers (who comprise a not insignificant portion of the top one-tenth of one percent) whose incomes continue to be treated as capital gains and taxed at 15 percent.

Secondly, by Mankiw’s own admission, the CBO analysis assumes that corporate taxes are borne entirely by shareholders – 9.3 percentage points of 31.1 percent tax rate allegedly paid by the very rich are assumed to come from taxes that corporations pay on their behalf. But as anyone who has studied the corporate income tax knows, shareholders don’t bear all of it. Some is passed along to consumers in the form of higher prices and some to employees in the form of wages lower than otherwise.

Finally, Mankiw fails to figure in state and local taxes, notably sales taxes and so-called “sin” taxes on cigarettes and alcohol, both of which eat up a far higher percentage of the incomes of middle-class and poor families than those of the wealthy.

On close examination, then, it seems likely that middle-income workers do in fact pay a larger share of their incomes in taxes than do people at the top.