Top earners are carrying more of the tax load than ever

Conventional Wisdom

Bush unfairly cut taxes only for the rich.

Typical Headlines

Bush Priorities Will Swell Deficit

--Forbes, Jan. 10, 2006

"Tax Cuts Offer Most for Very Rich, Study Says"

--New York Times, Jan. 8, 2007

"Democrats in Debate Urge Taxes on Rich"

--AP, Dec. 14, 2007

Facts

The fact is, just 1% of taxpayers pay 40% of federal income taxes in this country. This is an all time high and it is up from 34% in 2002, and 26% in 1986. An all time high 86% of taxes are paid by the top 25% of income earners. This is up from 83% in 2001, and 76% in 1986. And it's equally impressive to note that an all time high 97% of taxes are paid by the top 50% of earners. This is up from 94% in 2002 and 93.5% in 1986.

       Obviously, taxes cannot be reduced without a disproportionate reduction--in absolute dollars--for top earners, since they pay a massively disproportionate amount of the dollars to start with. Since most taxes are paid by the wealthy, even a tax cut that would result in a more progressive schedule has a higher dollar savings for high-income taxpayers than for low-income taxpayers. A more progressive tax rate is one that proposes to cut tax rates for low-income taxpayers by more than the reduction for high-income taxpayers.

       Federal taxes, as a percent of total income, have increased during the Bush administration compared with the end of the Clinton administration.  

      How is this possible? We have heard endlessly about Bush's tax cuts. While it's true that tax rates were reduced for the top earners, from 39% to 35%, the good news is that lots of people benefited from the healthy economy and moved up into the top 35% bracket--so many, in fact, that tax revenues have gone up significantly. Additionally, significant increases in U.S. corporate profits have led to increases in the taxes paid by corporations.

      From 2000 to 2007, tax receipts from individuals increased by $164 billion. The tax amount paid by the top 25% of earners increased by $167 billion, while the remaining 75% of taxpayers paid $3 billion less in 2007 than in 2000.

Any way you slice it, these are not "huge tax cuts for the rich."

Assessment

The principle is simple:

1.  With lower tax rates, more money goes into the economy. Money is spent; people are hired; money is invested; salaries go up. Things work.

2.  With higher tax rates, more money goes to the government--a graveyard of bureaucracy and inefficiency.

The evidence has never been clearer. The U.S. economy grew by $3.8 trillion in six years. The federal government takes in about 20% of that increase, or $760 billion per year. If spending had been held constant, the deficit, which peaked at $412 billion, would never have appeared.

      The amount of money being taken in by the U.S. government is insane. It is much more than what is needed to do what a federal government ought to be doing. There is, therefore, no good reason for today's large budget deficit. It can and should be fixed simply by curbing spending rather than economy damaging tax increases. The line-item veto would be one important step to help achieve that objective by cutting pork-barrel spending from the federal budget, and reducing wasted time, energy, and money. In our view, more Americans should be pushing for these spending reforms.

      The national debt is a disgrace given America's prosperity. There is no way a country this rich should be in debt. The problem should be fixed. Nevertheless, it is not the cause for alarm that many would have us believe.

Sources

SOI Bulletin, Individual Income Tax Rates and Tax Shares (1986-2005) ⁶

GAO: Federal and State and local government current receipts and expenditures, national income and product accounts (NIPA), by major type (1959-2007) [http://www.gpoaccess.gov/eop/tables08.html]. Note also that the data shown here reflect 2005 Census data with 2007 tax amounts.