Krugman points us towards a table that, in his view, proves that quite a lot of billionaires do pay a lower rate of tax than their secretaries.
And we’re not talking about one or two exceptional guys, either. Look at the IRS data on returns for the 400 highest incomes in America (pdf) — specifically, Table 43. If you look at the numbers since 2004, you’ll see that in a typical year between 30 and 40 percent of those super-high-income players paid an average tax rate of less than 15 percent; most of them paid less than 20 percent. Bear in mind that for the very wealthy the payroll tax — the main burden on working-class Americans — is trivial, because of the cap on Social Security and the fact that it only applies to earned income. And what becomes clear is that the Obama/Buffet claim is absolutely, totally true.
It may be true to Krugman in America, but it's definitely not true in the UK, no matter what tax campaigners would have you believe. And we know this because of a very helpful publication produced by the Office for National Statistics called The effects of taxes and benefits on household income. Table 14 of this document shows, by decile, incomes and direct and indirect tax payments, so you can work out for yourself whether the UK tax system is progressive .
At first glance, the figures are mixed. The poorest decile pays direct taxes of £1,113 on total income (including benefits) of £9,275, an effective rate of 12.0%, whereas the richest decile pays direct taxes at an effective rate of 25.3% . However, when you add in indirect taxes, the poorest decile pay total tax at a rate of 43.3% compared to the richest decile's 33.6% . So, on a total tax basis, there's an argument to be made that the poorest decile pays a higher tax rate than the richest decile.
It's a weak case - when most people talk about tax rate, they mean income tax, not all the other forms of tax. Remember, indirect taxes include all sorts of sin taxes such as gambling taxes and tobacco/alcohol duties. These will obviously be regressive on the poor, but the case for them not being so is very weak.
However, there is another major problem with the tax campaigners' case. And that's the benefits system. You see, a massive slug of the poorest decile's income derives from the benefit system. Where do benefits come from? That's right - from other taxpayers. So when calculating the effective tax rate, we have to eliminate cash benefits, otherwise we don't get a true picture.
Once we remove cash benefits, we get the following picture:
So we can see that the poorest decile's income of £9,275 comprises £5,388 benefits and £3,887 of income. The cruel state then takes £1,113 of income tax from this income, at an effective rate of 28.6% (again, this is higher than the effective direct tax rate on earned income for the richest decile of 25.7% . However, on a net basis, the state in fact gives the poorest decile £1,369. For each of the four poorest deciles, the state gives them more benefits than it takes back in direct and indirect taxes. It's only the richest 60% that are net taxpayers, the rest are tax spenders.
Looking at the figures this way, it's clearly total nonsense to describe this as a situation where the rich pay a lower rate of tax than the poor: the poor don't pay tax, they spend it.