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Their Fair Share

Washington is teeing up "the rich" for a big tax hike next year, as a way to make them "pay their fair share." Well, the latest IRS data have arrived on who paid what share of income taxes in 2006, and it's going to be hard for the rich to pay any more than they already do. The data show that the 2003 Bush tax cuts caused what may be the biggest increase in tax payments by the rich in American history.

The nearby chart shows that the top 1% of taxpayers, those who earn above $388,806, paid 40% of all income taxes in 2006, the highest share in at least 40 years. The top 10% in income, those earning more than $108,904, paid 71%. Barack Obama says he's going to cut taxes for those at the bottom, but that's also going to be a challenge because Americans with an income below the median paid a record low 2.9% of all income taxes, while the top 50% paid 97.1%. Perhaps he thinks half the country should pay all the taxes to support the other half.

Aha, we are told: The rich paid more taxes because they made a greater share of the money. That is true. The top 1% earned 22% of all reported income. But they also paid a share of taxes not far from double their share of income. In other words, the tax code is already steeply progressive.

We also know from income mobility data that a very large percentage in the top 1% are "new rich," not inheritors of fortunes. There is rapid turnover in the ranks of the highest income earners, so much so that people who started in the top 1% of income in the 1980s and 1990s suffered the largest declines in earnings of any income group over the subsequent decade, according to Treasury Department studies of actual tax returns. It's hard to stay king of the hill in America for long.

The most amazing part of this story is the leap in the number of Americans who declared adjusted gross income of more than $1 million from 2003 to 2006. The ranks of U.S. millionaires nearly doubled to 354,000 from 181,000 in a mere three years after the tax cuts.

This is precisely what supply-siders predicted would happen with lower tax rates on capital gains, dividends and income. The economy and earnings would grow faster, which they did; investors would declare more capital gains and companies would pay out more dividends, which they did; the rich would invest less in tax shelters at lower tax rates, so their tax payments would rise, which did happen.

The idea that this has been a giveaway to the rich is a figment of the left's imagination. Taxes paid by millionaire households more than doubled to $274 billion in 2006 from $136 billion in 2003. No President has ever plied more money from the rich than George W. Bush did with his 2003 tax cuts. These tax payments from the rich explain the very rapid reduction in the budget deficit to 1.9% of GDP in 2006 from 3.5% in 2003.

This year, thanks to the credit mess and slower growth, taxes paid by the rich may fall and the deficit will rise. (The nonstimulating tax rebates will also hurt the deficit.) Mr. Obama proposes to close this deficit by raising tax rates on the rich to their highest levels since the late 1970s. The very groups like the Congressional Budget Office and Tax Policy Center that wrongly predicted that the 2003 investment tax cuts would cost about $1 trillion in lost revenue are now saying that repealing those tax cuts would gain similar amounts. We'll wager it'd gain a lot less.

If Mr. Obama does succeed in raising tax rates on the rich, we'd also wager that the rich share of tax payments would fall. The last time tax rates were as high as the Senator wants them -- the Carter years -- the rich paid only 19% of all income taxes, half of the 40% share they pay today. Why? Because they either worked less, earned less, or they found ways to shelter income from taxes so it was never reported to the IRS as income.

The way to soak the rich is with low tax rates, and last week's IRS data provide more powerful validation of that proposition.

Stupidity and the State, Part II

Washington can be counted on to create a crisis -- usually by sheer incompetence. Then it rushes to the rescue, often doing more harm than good. Late last year, with an impending recession, Congress rushed forward to spend more money. The plan was to send $106 billion of Economic Stimulus Payments -- typically between $1,200 and $1,800 -- to millions of American families.

The planners predicted people would immediately spend the money on additional consumption and that increased demand, especially for consumer durables, would stimulate production, boost the economy, and forestall recession. In January, House Speaker Nancy Pelosi declared that 500,000 jobs would be created.

By the end of June, $86 billion was in the hands of 105 million households. By October, the remaining $20 billion will have been shoveled out the door. But people have not gone on a spending spree. Recent Commerce Department data indicate that less than 10% of the stimulus money is being spent on new consumption.

In a classic case of government working against itself, other more powerful government actions, including the Fed's extraordinarily loose monetary policy, have boosted inflation and caused families to restrict purchases, especially in the case of higher-priced consumer durables. Overall, compared to last year, the quantity of consumer durables purchased has declined by 1.5%. Retail sales are sluggish. Contrary to Ms. Pelosi's confident prediction, the economy has shed 460,000 jobs since December.

Thanks to an increased rate of inflation compared to last year, the basic CPI market basket is now 1.6% higher than it otherwise would be. As a result, even before receiving its $1,200 stimulus check, a typical two-earner family with income of $75,000 will have already experienced a $1,200 decline in its purchasing power since last year. So much for the stimulus plan; it's been wiped out by extra inflation. Worse, the hole in the family's budget from inflation is permanent. It will be there next year and thereafter, even if the rate of increase in future inflation slows -- although many economists predict higher, not lower, rates of inflation.

On net, members of Congress seem to be the only beneficiaries of the stimulus. They got to posture and pose, and send out to voters untold millions of press releases and mailings extolling themselves and the stimulus checks.

None mentioned the government's low interest rates which touched off the housing bubble that's led to the economic turndown, or the inflation that's undermined the very expensive remedy that hasn't worked as planned. But that didn't stop Ms. Pelosi from proposing another $50 billion "stimulus" package on Thursday.

By ERNEST S. CHRISTIAN and GARY A. ROBBINS

Jerry Brown's War on California Suburbs

In the 1960s, California Gov. Edmund Gerald "Pat" Brown laid the foundation for building modern, suburban California with massive new highway projects and one of the most significant public water projects in history. The resulting infrastructure gave us broad, low-density developments with room for millions of Californians to have a home with a backyard and two cars in the driveway.

Those were the good old days. Today, Pat Brown's son Jerry is waging war on the very communities his father helped make possible. Why? Global warming. Jerry Brown has been a fixture of the state's politics for more than three decades. He was elected governor in 1974 and four years later earned the moniker "Governor Moonbeam" for his interest in creating a space program in California. In 1998, he was elected mayor of Oakland, a working-class city across the bay from San Francisco. And in 2006, he was elected attorney general. Today he is mulling a run for governor in 2010, when he will be 72.

In the meantime, Mr. Brown is taking aim at the suburbs, concerned about the alleged environmental damage they cause. He sees suburban houses as inefficient users of energy. He sees suburban commuters clogging the roads as wasting precious fossil fuel. And, mostly, he sees wisdom in an intricately thought-out plan to compel residents to move to city centers or, at least, to high-density developments clustered near mass transit lines.

Mr. Brown is not above using coercion to create the demographic patterns he wants. In recent months, he has threatened to file suit against municipalities that shun high-density housing in favor of building new suburban singe-family homes, on the grounds that they will pollute the environment. He is also backing controversial legislation -- Senate bill 375 -- moving through the state legislature that would restrict state highway funds to communities that refuse to adopt "smart growth" development plans. "We have to get the people from the suburbs to start coming back" to the cities, Mr. Brown told planning experts in March.

The problem is, that's not what Californians want. For two generations, residents have been moving to the suburbs. They are attracted to the prospect, although not always the reality, of good schools, low crime rates and the chance to buy a home. A 2002 Public Policy Institute of California poll found that 80% of Californians prefer single-family homes over apartment living. And, even as the state's traffic jams are legendary, it is not always true that residents clog roads to commute to jobs in downtown Los Angeles or other cities.

Ali Modarres, associate director of the Edmund G. "Pat" Brown Institute of Public Affairs at California State University Los Angeles, believes the density-first approach is ill-suited for areas like L.A. County, where most residents and jobs are dispersed among subregional "nodes." Research by Mr. Modarres, co-author of the powerful book "City and Environment," demonstrates that people living in nodes -- Pasadena, Torrance, Burbank and Irvine -- often enjoy considerably shorter average commutes than do a lot of inner-city residents. Many of these people commute through tangled traffic to get to jobs on the periphery.

"I have no problem trying to find solutions on global warming," Mr. Modarres told me, "but I doubt these kinds of solutions are going to do anything. The whole notion that through physical planning you can get a lot of people to abandon their cars is pretty iffy."

Mr. Modarres also points out that forcing developers to build near transit lines, a strategy favored by "smart-growth advocates," does not mean residents will actually take the train or bus. A survey conducted last year by the Los Angeles Times of "transit oriented development" found that "only a small fraction of residents shunned their cars during rush hour."

There is also little punch behind the science used to justify the drive to resettling the cities -- and plenty of power behind the argument that suburbs are better for Mother Earth. Several prominent scholars -- including University of Maryland atmospheric scientist Konstanin Vinnikov, University of Georgia meterologist J. Marshall Shepard and Brookings Institution research analyst Andrea Sarzynski -- have found there is little evidence linking suburbanization to global warming, pointing out that density itself can produce increased auto congestion and pollution.

The antisuburbanites also ignore evidence that packing people together in cities produces "heat islands." Temperatures in downtown Los Angeles sometimes reach as much as three degrees centigrade higher than outlying areas. Recent studies in Australia have shown that multistoried housing generates higher carbon emissions than either townhomes or single-family residences because of the energy consumed by common areas, elevators and parking structures, as well as the lack of tree cover.

In the short run, while being "tough" on climate change appears popular, an assault on the preferred lifestyle of suburban voters may not. These voters aren't likely to appreciate being castigated as ecological evildoers, especially by people who generally house themselves in spacious splendor.

A report by the Los Angeles Weekly's Dave Zahniser -- entitled "Do as We Say, Not as We Do" -- found that a lot of prominent "smart growth" advocates in Los Angeles live in large single-family homes, some of them long hikes from mass transit. Mr. Brown himself, not long ago, moved from a loft in crime-ridden downtown Oakland to a bucolic setting in the Oakland Hills.

At a time when political trends favor Democrats, a hypocritical jihad against basic middle-class aspirations may not be the best strategy. Mr. Brown would be better off embracing telecommuting and other ideas to cut suburban commutes that accommodate the majority's dreams and preferences. He might have learned that from his father. Instead he's gone from wanting to launch people into space to opposing people who move to the suburbs.

By JOEL KOTKIN