March 21, 2007

The Myth of Bush's "Progressive" Tax Cuts

The Center on Budget and Policy Priorities has a great paper out refuting the claim made by the Bush Administration and its allies that the tax cuts enacted over the previous six years actually made the tax code more progressive. The richest Americans received the largest percent increase in income due to the tax cuts. The largest drop in federal income tax rates in percentage points went to the wealthiest one percent.

We might add that CTJ's latest figures show that if Congress went along with the President's budget proposal, over 50% of the benefits of the tax breaks will actually be flowing the to richest one percent. (Assuming that the AMT is "fixed," which the President's budget does not assume but which is likely to happen, over 53 percent of the benefits would still go to the richest 5 percent and over 40% of the benefits would still go to the richest 1 percent.)

So how can the administration claim that the tax cuts are progressive? Well, they've latched on to one particular statistic that really has nothing to do with the effects of their tax breaks: the percentage of income taxes paid by the richest one percent, which increased from 36.5% in 2000 to 36.7% in 2004.

The Center on Budget explains that this in no way shows progressivity in the Bush tax cuts.

1. The richest one percent saw their share of pre-tax income rise in those years, so of course their share of the income taxes paid is going to rise, and that has nothing to do with changes in the tax code.

2. Taxes paid by the wealthiest one percent did drop a great deal, and their share of income taxes paid was able to rise because the total amount of income taxes paid dropped.

3. These tax breaks are deficit-financed, and when you take into account how we're going to have to pay the bill at some point down the road, it's almost certainly the case that lower-income and middle-income people will lose out more.

A paper from CTJ made this point last year. We found that when you make some very basic assumptions about how the Bush tax cuts will eventually be paid for, that cost will be greater than the benefit Americans receive from the tax cuts. This is true except for the richest one percent, since their tax cuts were so huge and so much bigger than everyone else's.

There's one important point that I would add to this.

The fact that the richest one percent pay over 36 percent of the income taxes does NOT mean that our tax code is wildly progressive because this fails to account for all the other types of taxes - which hit poor people harder.

Social Security taxes, for example, don't even cover income beyond a certain cap (set at $97,500 in 2007) and only cover wages. For many poor and middle-class people, the payroll tax (which includes the Social Security tax and the Medicare tax) is the more significant (or the only) federal tax that applies to them. State taxes are often quite regressive, particularly sales taxes, which take a much larger percentage of income away from the poor and middle-class families than they take from wealthy families.

A couple years back, CTJ analyzed just how much of the total tax burden (meaning federal and state taxes, income taxes and other types of taxes) were paid by different income groups compared to their shares of total income. It turned out that the richest one percent of families had 19.1 percent of all the income in America and paid 20.8 percent of all the taxes in America. From that perspective, our tax system as a whole is essentially flat, or just barely progressive. It would be highly regressive if not for the progressive rates in the federal income tax that counter the regressivity of the federal payroll tax and many state taxes.


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