Rand’s Atlas Is Shrugging With a Growing Load

I just read this article by Amity Shlaes on Bloomberg.com. It's about Atlas Shrugged and it discusses how some of the libertarian philosophy in the book relates to the current economic situation. It's a fairly good article overall, but there's a highly specious piece of logic in there that's just begging to be called out.

In the second paragraph under 'Back Ache', the article reads as follows.

In 1986, a year when “Atlas Shrugged” sold between 60,000 and 80,000 copies, the top 1 percent of earners paid 26 percent of the income tax. By 2000, that 1 percent was paying 37 percent, and “Atlas Shrugged” sales were at 120,000. By 2006, the top 1 percent carried 40 percent of the burden.

I think the author is trying to argue that the income tax burden in the U.S. has shifted more and more disproportionately toward the higher-income earners from 1986 to 2006. While this may or may not be true, the argument she advances for it doesn't hold water.

Here's why.

The top 1 percent of earners do not earn a fixed percentage of total gross income for all taxpayers. Rather, the percentage of total gross income earned by the top 1 percent of earners has been growing. Income tax is a percentage of gross income, so we would expect that as the total share of gross income increases for the top 1 percent of earners, their share of the income taxes paid would also go up in proportion.

Let's look at the numbers. Using the same source that the author cites for the numbers in the quote, we find the following. In 1986, when the top 1 percent of earners paid 26 percent of the income tax, those same 1 percent earned just over 11 percent of the taxable income reported. In 2000, the year when the top 1 percent paid 37 percent of the income tax, they earned almost 21 percent of the income. In 2006 the top 1 percent earned over 22 percent of the total income and paid 40 percent of the taxes.

We already know that the income tax share paid by the high-income earners is disproportionate to that paid by the low-income earners because that's how a progressive taxation system works. In order to decide whether the income tax burden on high-income earners is becoming more disproportionate over time, one needs to compare the growth in the share of income earned to the growth in the share of income tax paid. Unfortunately the article doesn't give us that information, and worse yet, it implies that we don't need it.

But since we do need it, let's have a look.

Table 1: Ratio of Adjusted Gross Income (AGI) Share to Total Income Tax Share for Top 1% of Income Earners

Year	Income Share	Tax Share	Ratio
1980	8.46%	19.05%	2.25
1981	8.30%	17.58%	2.12
1982	8.91%	19.03%	2.14
1983	9.29%	20.32%	2.19
1984	9.66%	21.12%	2.19
1985	10.03%	21.81%	2.17
1986	11.30%	25.75%	2.28
1987	12.32%	24.81%	2.01
1988	15.16%	27.58%	1.82
1989	14.19%	25.24%	1.78
1990	14.00%	25.13%	1.80
1991	12.99%	24.82%	1.91
1992	14.23%	27.54%	1.94
1993	13.79%	29.01%	2.10
1994	13.80%	28.86%	2.09
1995	14.60%	30.26%	2.07
1996	16.04%	32.31%	2.01
1997	17.38%	33.17%	1.91
1998	18.47%	34.75%	1.88
1999	19.51%	36.18%	1.85
2000	20.81%	37.42%	1.80
2001	17.53%	33.89%	1.93
2002	16.12%	33.71%	2.09
2003	16.77%	34.27%	2.04
2004	19.00%	36.89%	1.94
2005	21.20%	39.38%	1.86
2006	22.06%	39.89%	1.81

(Data taken from Tax Foundation page http://www.taxfoundation.org/news/show/250.html)

The ratio in the last column measures how disproportionate the tax burden is to the income share. If the top 1 percent earned 10 percent of the income and paid 10 percent of the taxes, the ratio would be 1. If they earned the same 10 percent of income but paid 20 percent of the taxes, the ratio would be 2. The higher the ratio, the more disproportionate the tax burden. According to these figures, the tax burden was more disproportionately skewed to the top 1 percent in 1986 (ratio of 2.28) than it was in 2000 (ratio of 1.8) and then it is almost unchanged from 2000 to 2006 (ratio of 1.81). In fact, the ratio for 1986, which is the article's 'low year' has the highest ratio of tax share to income share for any year listed!

Although they paid a larger share of income tax in absolute terms, the top 1 percent of earners paid a somewhat smaller share of income tax in 2000 and 2006 than they did in 1986 in proportion to the share of total income they earned. Based on this analysis, we must draw the opposite conclusion to what the article does! This aspect of the article is misleading at best, and disingenuous at worst. The moral of the story? Caveat lector -- let the reader beware.