Liberals repeat ad nauseam the campaign mantra about “Bush tax cuts for the rich.” The facts don’t match that picture.
Wall Street Journal columnist David Wessel observes what liberal-progressive-socialists can’t grasp: the economy isn’t a static “thing” that can be carved up and apportioned in accord with “social justice” to make us all equally poor. As in physics, for every action, there is a reaction. Results are counterintuitive.
Liberals ignore it, but the rich pay almost all of the income taxes, while the bottom half of taxpayers pay very little of them. Moreover, the administration’s tax cuts changed the distribution of wealth and taxes almost not at all.
For those who are not paid subscribers to the Wall Street Journal’s online publication, the following are some of Mr. Wessel’s points.
FACT ONE: Federal taxes make the distribution of income more equal, even after the Bush tax cuts. Taxes don’t undo all market forces pushing income toward the top—and there are good reasons they shouldn’t.
Before taxes, the bottom 40% of U.S. households got 13% of the nation’s income in 2004; after federal taxes of all sorts they got about 15%, according to the Congressional Budget Office’s latest estimates. Because of the Earned Income Tax Credit, a cash bonus the government offers low-wage workers, many Americans at the bottom get money from the government, rather than having to pay income taxes; they still face payroll taxes on their wages.
Before taxes, the top 1% got about 16% of income; after taxes they ended up with 14%. (Yes, you read that right: The 1.2 million best-off households got about as much income, even after taxes, as the 45.5 million worst-off.) That top 1%, by the way, pays about a quarter of all federal taxes.
CBO estimates aren’t perfect, but they represent the best available attempt to combine Census Bureau and Internal Revenue Service data to get a comprehensive picture of who pays taxes.
FACT TWO: The Treasury benefits more when CEOs get bigger raises than when ordinary workers gain, and that, along with the buoyant economy, is a big reason for today’s surge in federal revenue.
It’s simple: Taking all federal taxes into account—including payroll as well as income taxes, and allocating corporate profits and taxes paid on them to those who hold shares—the CBO says those in the bottom fifth pay an average of $4.50 in taxes for every $100 they take in. Those in the top 1% pay $31.10 in taxes for every $100 they take in.
FACT THREE: The Bush tax cuts reduced income-tax rates across the spectrum. Some saved a lot more dollars than others—namely, the ones who make a lot of money. But, strangely, the percentage of taxes paid by different groups hasn’t changed very much.
Consider this calculation by James Poterba, a Massachusetts Institute of Technology economist: If the Bush tax cuts had never happened, and President Bill Clinton’s tax rates were applied to the 2004 economy, American households would have paid about 3% more of their income in taxes. (Mr. Poterba quickly adds that people would have behaved differently had taxes remained at Clinton levels. They would have sold fewer shares of stock, for instance, because capital-gains tax rates would have been higher. That means the 3% estimate overstates the actual effect somewhat.)
But Mr. Bush did cut taxes. So, Mr. Poterba looks at how that smaller tax bill was sliced—what percentage was paid by the best-off 1%, by the middle class, etc. It turns out the share of the income-tax tab actually picked up by each group in 2004 is close to what it would have been had Mr. Bush’s tax never happened. The CBO numbers show the same thing: The top 1% paid 25.5% of all federal taxes under Mr. Clinton’s tax rates and 25.3% under Mr. Bush’s.
How can that be? Clearly the well-off saved many bucks. For one thing, tax rates were cut for the bottom and middle as well as the top, a fact often lost in public debate over taxes on the rich. Second, there’s so little income earned and so little tax paid at the bottom that a tax cut of $100 is a big change in the taxes that group pays, and conversely at the top.
FACT FOUR: Rising spending on government retirement and health benefits almost surely will force tax increases in the next decade or so; the issue is who will be taxed.
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