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It has long been said by the political left that the tax cuts of President Reagan and current President George W. Bush have favored the rich at the expense of the poor. Critics claim the rich are not paying their fair share of the tax burden while middle and lower class citizens are struggling to pay for health care, education, and other basic necessities. The obvious solution for big government advocates to level the playing field is to raise taxes on the rich. However, despite the political rhetoric denouncing the Bush tax cuts as a windfall to the rich at the expense of the poor, recent empirical evidence finds the rich do actually pay a substantial amount of the federal tax burden.
The Tax Foundation recently announced Tax Freedom Day fell on April 11 this year. Tax Freedom Day is the day when Americans will finally have earned enough money to pay off their total tax bill for the year. The April 11 date is the earliest Tax Freedom Day since 1967 and continues the downward trend in tax burdens enjoyed by Americans under the Bush administration. Tax Freedom Day had hit an all-time high in the last year of the Clinton administration, falling on May 2.
What do recent tax figures show about who is paying these taxes? The Congressional Budget Office has released a new study on the distribution of the tax burden. The CBO study measured the percentage of share of total federal tax liabilities inclusive of individual income, payroll (social insurance), corporate, and excise taxes. Instead of proving “tax cuts for the rich”, the CBO study, Effective Federal Tax Rates: 1979-2001, found something altogether different. From 1979 to 2001, those in the bottom quintile of income saw their share of total federal tax liability fall from 2.02 percent to 1.10 percent. During the same time period, the middle class’s share of total tax liability fell from 12.99 percent to 10 percent. The top income quintile’s share of total tax liability actually increased from 56.8 percent to 65.3 percent over the same time period.
Breaking the data of the top income quintile further, the numbers show the wealthiest Americans shouldering more of the federal tax burden. The wealthiest 10 percent of Americans (average income of $259,000) bear an even 50 percent of the total federal tax liability. This is an increase from the 40.53 percent of total federal tax liability shouldered between 1979 and 1990. The top 5 percent of Americans (average income of $379,800) pay 38.5 percent of the total federal tax liability, an increase of 9 percent from the levels between 1979 and 1990. The richest 1 percent of Americans (average income of $1,050,100) pay 22.7 percent of the total federal tax liability. This is an increase of 7 percent from the total federal tax liability they paid between 1979 and 1990. As the federal tax burden for the lower and middle class has fallen, it has increased for the wealthy.
More broadly, the results show a tax system that has become more progressive since 1979, even with the flattening of the marginal tax schedule. In 1979, the top income tax rate was 70 percent. In 2001 (the last year in the CBO study), the top tax rate was 39.1 percent. The recent tax cuts have reduced it to 35 percent. The top income quintile earned more than 65 percent of the nation’s income and paid 77 percent of every dollar collected by the federal income tax. Even with the decrease of the top marginal tax rate, the share of the total federal tax liability paid by the wealthy has increased.
The federal tax burden has also increased for taxpayers who live in areas with a high cost of living compared with taxpayers who live in areas with a low cost of living. Taxpayers from high-cost, high-salary areas are bumped to higher tax brackets because federal taxes are adjusted for inflation but not cost of living. Additionally, exemptions and credits are given in dollar amounts and apply nationwide making them worth comparatively more in low-cost, low-salary areas.
Despite these findings by the CBO, John Kerry and other advocates of big government continue to play the tired class-warfare game. Kerry has pledged to “take on the Bush tax cuts for the wealthiest Americans….which are a proven failure.” Adding to the attack on the Bush tax cuts of 2001 and 2003, the Washington Post wrote in an April 8 editorial that tax cuts for the wealthy should be eliminated for increased health care and education spending. (The same Washington Post ran an editorial on March 25 complaining the prescription drug bill signed into law by President Bush cost too much.) Increasing spending in health care would add to the already heavy tax burden faced by individuals. According to the Tax Foundation, the average American tax payer already works a total of 28 days to pay social insurance taxes.
Raising taxes threatens the current economic recovery that was helped by the Bush tax cuts. Since end of the recession in November 2001, the economy has shown signs of strength. The unemployment rate is 5.7 percent, below the average of the 1970s, 1980s, and the 1990s. The recent Labor Department’s household survey showed a record high level of total employment. As of March, the employment level was 138.3 million, 600,000 more working Americans than when President Bush took office. The Bureau of Labor Statistics reported a gain of 308,000 payroll jobs in March. Real earnings have risen by 3 percent, jobless claims are 10 percent below their historic average, and productivity is on the rise. Real GDP growth in the fourth quarter of last year was 4.1 percent.
Opponents of the recent tax cuts make noise about the weak economy and the jobless recovery but the facts tell a different story. Instead of raising taxes on the rich and hurting the economy, politicians should embrace the positive results of recent tax cuts. Thanks to the tax cuts, the economy is growing, the labor force is strengthening, the tax burden is lowering, and the tax man is taking less and less. Perhaps the idea of April 15 being just another day on the calendar is realistic after all.