Statement of Sen. Chuck Grassley
Finance Committee Hearing on Income Mobility, Purpose of Tax Code
Tuesday, May 03, 2011
The topic of today’s hearing -- whether the distribution of tax benefits and burdens is equitable -- is an important one. However, I would argue that there is a more important question we should be debating before we answer this question. That is: what is the purpose of the federal income tax? We can’t talk about whether taxpayers are paying their fair share if we don’t know why we want them paying taxes in the first place.
We are in a situation where people are talking about increasing taxes on higher income people because, supposedly, they can afford it -- and probably they can afford it. But I get sick and tired of the demagoguery that goes on in Washington of taxing higher income people. According to the Joint Committee on Taxation’s latest analysis, 49 percent of households are paying 100 percent of income taxes coming into the Federal government, while 51 percent of the people in this country don't pay any income tax whatsoever. How high do taxes have to go, generally, to satisfy the appetite of the people in this Congress to spend money? And particularly, how high do marginal tax rates have to go to satisfy those clamoring for higher taxes that the wealthiest in this country are paying enough money?
I ask unanimous consent to have printed in the Record an article from Investors Business Daily.
According to this article, even if the government confiscated all of the income of people earning $250,000 a year, the money would fund the Federal Government today for a mere 140 days.
Funding the government should be one of the – if not the – primary goals of the income tax laws. Note here that I am specifically focusing on income taxes. This is because payroll taxes are not used to fund the government per se. Social Security and Medicare taxes are, in fact, insurance premiums. Individuals who pay them expect a benefit when they are at the appropriate age.
It is clear that some believe that the tax code should be used to reduce the growing income disparity between the lowest and highest income quintiles. This assumes a key objective of the federal government, through the federal income tax laws, should be to ensure that income is distributed equally throughout the country. In other words, these folks believe that the federal government is the best judge of how income should be spent. Personally, I find it hard to believe that is what our founding fathers intended.
In addition to considering the purpose of tax revenue, we ought to have some principles of taxation that we abide by. I abide by the principle that 18 percent of the GDP of this country is good enough for the government to spend. That leaves 82 percent in the pockets of the taxpayers for them to decide how to spend, because if 535 of us decide how to divide up the resources of this country, we would not have the economic growth we have. We would be Europeanizing our economy, and we know that is bad.
In evaluating whether people are paying their fair share, experts frequently look at whether a proposal retains or improves the progressivity of our tax system. Critics of lower tax rates continue to attempt to use distribution tables to show that tax relief proposals disproportionately benefit upper income taxpayers. We keep hearing that the rich are getting richer while the poor are getting poorer. This is not an intellectually honest statement as it implies that those who were poor stay poor and those who are rich stay rich.
I ask unanimous consent to insert in the record a 2007 report from the Department of Treasury title “Income Mobility in the U.S. from 1996 to 2005”.
The key findings of this study include, and I quote:
• There was considerable income mobility of individuals in the U.S. economy during the 1996 through 2005 period as over half of taxpayers moved to a different income quintile over this period.
• Roughly half of taxpayers who began in the bottom income quintile in 1996 moved up to a higher income group by 2005.
• Among those with the very highest incomes in 1996 – the top 1/100 of 1 percent – only 25 percent remained in this group in 2005. Moreover, the median real income of these taxpayers declined over this period.
• The degree of mobility among income groups is unchanged from the prior decade (1987 through 1996).
• Economic growth resulted in rising incomes for most taxpayers over the period from 1996 to 2005. Median incomes of all taxpayers increased by 24 percent after adjusting for inflation. The real incomes of two-thirds of all taxpayers increased over this period. In addition, the median incomes of those initially in the lower income groups increased more than the median incomes of those initially in the higher income groups.
Therefore, whoever is saying that once rich, Americans stay rich, and once poor, they stay poor, is purely mistaken. Internal Revenue Service data supports this analysis. A report on the 400 tax returns with highest income reported over 14 years shows that in any given year, on average, about 40 percent of the returns were filed were not in the top 400 in any of the other 14 years
I ask unanimous consent that this IRS report be inserted in the record.
I welcome this data on this important matter for one simple reason: it sheds light on what America really is all about -- vast opportunities and economic mobility.
Built by people from all over the world, our country truly provides unique opportunities for everyone. These opportunities include better education, health care services, and financial security. But most importantly, our country provides people with freedom to obtain necessary skills to climb the economic ladder and live better lives.
We are a free nation. We are a mobile nation. We are a nation of hard-working, innovative, skilled and resilient people who like to take risks when necessary in order to succeed. We have an obligation as lawmakers to incorporate these fundamental principles into our tax system.