One of the inconvenient facts for the foes of the Bush tax cuts is that the percentage of total taxes paid by the rich rose after the economic stimulus plan was put into effect. This consequence of the Bush tax cuts is highly damaging to the case by the Bush-haters that his tax cuts disproportionately benefit Halliburton executives and Bill Gates. Moreover, the Bush tax cuts took some 2 million low-income taxpayers off the tax roles entirely, so it’s hard to argue that working families didn’t get a financial benefit.
But the Left continues to work as best it can around these facts. The Kerry-Edwards campaign is now touting a new study by the Congressional Budget Office which purportedly finds that last year’s tax cut was tilted to the rich. There’s just one problem with this class-warfare whine: It just isn’t true.
What the CBO report did conclude was that the total tax share by the richest 1 percent declined modestly from 2001 to 2004. But that wasn’t because of the tax cut. It was because of the recession. When the economy contracts and incomes fall as they did in 2001 and 2002, tax payments by the wealthy fall the fastest. This is because of the progressive rate structure of the income tax. In other words, if everyone’s income falls by 10 percent, the overall percentage of taxes paid by the wealthy falls, because they pay a higher marginal tax rate.
What this means is that the best way to get the rich to pay more taxes is to incentivize their incomes to rise. For every extra dollar the rich person earns, about 30 to 40 cents goes into the government coffers. And since the Bush tax cuts have helped put the economy back on track, as evidenced by the 4.5 percent real growth rate of the economy since May 2003, the share of taxes paid by the rich has started to rise again.
Those who actually read the CBO study will discover that it confirms exactly this point. From 2001 to 2004 incomes have fallen sharply for the highest income groups. IRS data shows that in 2002, taxable income fell by about 4.3 percent, with declines steepest among the highest income groups. In 2002, income fell for the second year in a row. Prior to 2000, annual incomes hadn’t fallen since 1953. The New York Times recently reported that income fell 63 percent from 2000 to 2002 for the highest income bracket. When the rich make less; so does the government. So why do members of the Left hate the rich so much? Without them, there would be no money to finance the government.
A recent report from the Treasury Department confirms that the rich are paying a bigger share of taxes than they would if the Bush tax cuts hadn’t passed. The Treasury estimates that the top 1 percent of earners will pay about 32.3 percent of taxes this year, which is the same as the CBO estimate. The Treasury also estimates, however, that absent the tax cuts, the top 1 percent would be paying only 30.5 percent of taxes, down 10 percent from 2001.
The Treasury data confirm that the real impact of the tax cuts on the rich has been precisely the opposite of what the CBO study suggests. By resuscitating the economy and spurring a turnaround in income growth, the tax cuts have increased the share paid by the rich. Real income growth has increased significantly since the 2003 tax cuts were passed, increasing at faster than a 6 percent rate in the first two quarters of 2004. With the economy now growing more quickly, we can expect the tax shares paid by high-income groups to increase.
There is another reason to suspect that as the Bush tax cuts continue to kick in, they will increase tax payments by the wealthy. People are much more likely to work harder, engage in entrepreneurial activity, and make investments when the government is confiscating less of the monetary rewards for these activities. When you tax something, you get less of it.
This is obvious to most people. It’s why we tax socially undesirable activities like smoking and drinking. It’s why we fine people for traffic violations. Similarly, when we tax income, people tend to have less of it — either from working less or spending their time, effort, and money on tax-avoidance schemes. JFK understood this, writing that “Middle and higher-income families are both consumers and investors — and the present rates not only check consumption but discourage investment, and encourage the diversion of funds and effort into activities aimed more at the avoidance of taxes than the efficient production of goods.”
Those who argue that the Bush tax cuts were a “give-away” to the rich assume that incomes grow at a constant rate, regardless of how heavily they are taxed. That is the fallacy of the recent CBO study. The report concedes: “Our analysis does not account for incomes changing in response to the tax cuts.” It’s like assuming that you’re not going to take off any weight if you stop eating hot fudge sundaes with whipped cream and cherries on top. This is the same whimsical logic that compelled the tax accountants on Capitol Hill to famously estimate that a 100 percent income-tax rate would bring in billions of dollars in federal revenue.
One final point: The CBO study confirms that the rich carry the bulk of the tax burden on their shoulders. The CBO estimate says that the share of income taxes paid by the richest 20 percent of earners fell from 82.5 percent to 82.1 percent in 2004. The report also states that the top 10 percent of earners will pay “only” 66.7 percent of 2004 taxes, with the top 1 percent paying 32.3 percent. Fully 80 percent of Americans pay less than 18 percent of total income taxes. Not even Al Sharpton could look at this data and say the rich are getting a free ride.
How much exactly does the Kerry-Edwards team want the rich to pay? Seventy percent? Eighty percent? One hundred percent? Does the Left want rich people like Barbara Streisand, George Soros, Teresa Heinz, and Ted Kennedy to pay all the taxes? Hey, now there’s an idea . . .
–Stephen Moore is president of the Club for Growth. Phil Kerpen is a research assistant at the Club for Growth.