The intensifying tax-cut debate needs a reality check.
When critics allege that the Bush plan is a “tax cut for the rich,” they conveniently neglect to say that three-quarters of all federal income taxes are paid by fewer than one-seventh of the nation’s households. About 19.5 million tax-return filers in 2000 had adjusted gross incomes of $75,000 or more and earned 63% of total U.S. taxable personal income. Even though these taxpayers accounted for just 15% of all tax returns, they paid 75% of total federal income taxes.
The class-warfare warriors further fail to mention that fewer than 240,000 households making $1 million or more pay almost one-quarter of all federal income tax. Bush’s opponents never explain that one-quarter of U.S. earners pay no federal income taxes at all. And the beggar-thy-neighbor supporters of double taxation ignore the fact that more than one-third of all dividends’ recipients make less than $40,000 a year in adjusted gross income.
The charges being leveled at the Bush plan, in actuality, say more about the progressivity of the federal income tax system — especially after the 1993 tax hikes — than they do about the proposed tax cuts themselves. Progressivity is the reason higher-income earners would benefit substantially from tax cuts — because they pay most of the taxes.
Thus, saying that the Bush plan is a “tax cut for the rich” makes about as much sense as decrying antibiotics as “medicine only for the sick.”
Here are some additional tax facts extrapolated from “Individual Income Tax Returns, 2000” in the Fall 2002 issue of the IRS’s Statistics of Income Bulletin:
• Nearly 33 million households that filed tax returns in 2000, or 25% of the total, paid no federal income tax. • Almost 110 million households making under $75,000 represented 85% of all filers of tax returns and earned 37% of taxable income nationwide in 2000, yet they paid just 25% of total federal income taxes.
• Roughly 9 million households (or 7% of all federal tax returns) earned $75,000 to $99,999 in 2000, grossing 12% of national taxable income but paying only 10% of total federal income taxes.
• About 11 million households (or 8% of total tax returns) earned $100,000 or more in 2000, representing 51% of total taxable income and 65% of federal income-tax receipts.
• Some 3 million households (or 2% of tax-return filers) had incomes of $200,000 or more in 2000 and many of them were taxed at the then-top marginal rate of 39.6%, which kicked in at $288,350. They earned 33% of national taxable income but paid 46% of all federal income taxes.
• Nearly 636,000 households (or 0.5% of tax returns) earned $500,000 or more. They accounted for 22% of total taxable income yet supplied 31% of federal income tax revenues.
• Around 240,000 households (or 0.2% of tax returns) had $1 million or more in income, representing 16% of the national total, and paid more than 23% of all federal income taxes in 2000.
As for dividend earners, one-quarter had adjusted gross incomes of less than $25,000 in 2000, and one-sixth earned less than $15,000. Nearly 12% of dividend earners had incomes of less than $10,000 and 7% had incomes below $5,000. Matter of fact, more than 2.4 million tax-return filers with no adjusted gross income or incomes below $5,000 received $2.7 billion in dividends in 2000.
About two-thirds of all dividends’ recipients had incomes below $75,000 and only 7% had incomes of $200,000 or more.
Dividends are an important source of income for many low-income (and presumably elderly) households. More than 2 million households with adjusted gross incomes of $1 to $4,999 were paid over $1.1 billion in dividends in 2000, with dividends representing 49% of their total taxable income.
There were 1.6 million households with incomes of $5,000 to $9,999 that received $1.9 billion in dividends, providing 14% of their taxable incomes, and another 1.6 million households with incomes of $10,000 to $14,999 were paid $2.7 billion in dividends, representing 7% of their taxable income.
Dividends play a less important role for middle-to-upper-income earners. Those with incomes of $20,000 to $74,999 received more than $31 billion in dividends in 2000 but the payments made up just 2% of taxable income. Earners making between $75,000 and $199,999 had total dividends of $29 billion, representing less than 3% of taxable income. Households with incomes of $200,000 and above received $92.6 billion in dividends in 2000, representing 4% of their taxable income.
The “rich man, poor man” critics of the Bush tax plan are taking a leaf out of Bill Clinton’s book. The Clinton tax hike of 1993 transferred much of the federal tax burden to upper-middle and upper income earners, representing about one-seventh of American earners. This helps to explain why the public outrage over the largest tax hike in U.S. history was so muted — only a relatively small fraction of earners were adversely affected.
Most important, of course, is the Bush plan’s effect on the economy. Economic growth is based on the availability of finance to underwrite business creation and fund capital spending on productivity-boosting equipment and technology. Productivity gains, in turn, result in lower prices, higher incomes, and improved living standards.
To the extent that income taxes reduce personal disposable income, both consumption and investment suffer. And since the propensity to save rises with income, a progressive tax that especially penalizes higher incomes undercuts new investment.
High marginal tax rates, particularly on those who save more than they spend, impair the dynamics of economic growth, leaving us all the poorer.
— William P. Kucewicz is editor of GeoInvestor.com and a former editorial board member of The Wall Street Journal