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8/13/04 A Democratic Fish Story Here we go again. The media wing of the Democratic National Committee (DNC), represented in this case by the Washington Post, has posted one of the DNC's talking points as a headline. The Post story on the Congressional Budget Office report on the effects of the tax cuts enacted under the leadership of the Bush Administration bears the headline "Tax Burden Shifts to the Middle". The headline suggests that Bush's tax cuts have increased the burden on taxpayers in the middle class. That suggestion is categorically false. The only people who pay more income taxes than they did before the tax cuts are people who fall into the Alternative Minimum Tax (AMT), and they can't be saved from that fate until someone does something about that stupid and outdated provision in the tax law. No one in any class, middle, upper, upper middle, or lower middle upper, pays more in federal taxes in 2004 than they did in 2001, assuming they make the same amount now that they did in 2001. Not one person. John Kerry and anyone else who states or implies differently is a fraud. With or without the AMT, when you take the averages across the various segments studied in the CBO report tables, the effective federal tax rates for all groups are lower under the Bush tax cuts than they would have been under the tax law in the year 2000. Now, not many people are making now what they made in 2000 or 2001, and it is this simple fact (among many others) that allows the Democrats (and reporters) to play the shell game they always play with the economic facts. Let's try to inject a little clarity here: If I make twice as much in 2004 as I did in 2001, and the President cut my taxes in half (assume a flat tax for simplicity's sake), I will pay the same amount in taxes in 2004 as I did in 2001. The Democrat (or reporter) may imply that this means I have not received a tax cut, even though the truth is that if Bush hadn't cut my taxes I would today be paying twice as much as I am actually paying! (This from the same people who call a 15% increase in spending a cut if there was ever a plan to increase spending by more than 15%.) That by itself would be enough to show why the Democratic-talking-point-turned-headline is fraudulent. After all, the only evidence presented to support the headline is the fact that people making a median income of around $75,600 annually (in 2001) are paying one percent more of the total tax burden in 2004 than they were in 2001, while the people making a median income of $182,700 annually (in 2001) are paying two percent less of the burden than they were. What the Democrats (and reporter) have missed in their apparently careless perusal of the report is that the numbers in the reports are based on quintiles, not on incomes. The report bases its numbers on a 14% increase in income in each quintile between 2001 and 2004 (so the $75,600 and $182,700 figures in 2001 would be $86,000 and $208,300 in 2004). Since the people in the $75,600 quintile are moving up, and many of them into a higher tax bracket, some of the marginal increase will be taxed at a higher rate (but not as much higher as it would have been without the tax cuts!), so it stands to reason that their marginal contribution to the total receipts will be rising somewhat for that reason alone. More importantly, most of the added income in this group is still taxable under SSI (which the Democrats and the reporter have failed to mention is included in the calculation they are using). If we assume half of the income will be subject to this payroll tax, that would mean about a 6% additional "tax increase" on this group because they are making more money (not because any tax rates have been raised). Thus their 14% increase in income will result in slightly more than a 15% increase in the taxes they pay on those dollars. The richest group also got a 14% increase in income, on average, but very few, if any of them have moved into a higher bracket (their top levels of income were already in the highest bracket), and very little of the increase in income, if any, would be subject to SSI. Thus their taxes will increase by basically the same percentage as their income: 14%. As you can see, by factoring the payroll taxes in, and by ignoring the fact that a much larger number of the second-highest group are moving into a higher tax bracket as their income rises, the Democrats (and reporter) can deceive the unwary reader into thinking that some burden that used to be shouldered by the wealthy has been shifted to the slightly-less-wealthy. The fact is that what the report shows is that a rising tide is lifting all boats, but some are being weighed down by the ballast of SSI and the progressive tax system, so they rise more slowly. The rest of the tables the Democrats (and reporter) should have studied more closely bears out this assessment, even though my numbers are all approximations. In 2005, the share paid by the slightly-less-wealthy goes down again by half a percentage point, and the share paid by the wealthiest group goes up again by a full percentage point, where their distribution basically stabilizes, once most of the slightly-less-wealthy have cleared the SSI ballast and made it to the highest bracket. It is a fact that the share of individual income taxes being paid by the richest fifth of 2001 earners goes down over the long haul, while the share being paid by the other four quintiles (the lowest of which has a negative share across the board because of the Earned Income Tax Credit which essentially pays them back taxes they never paid!) increases slightly. This is because the income of the other four quintiles, as it rises, is taxed at higher and higher rates, increasing the percentage of the increases in income that are being paid in taxes. But if we stop muddying the waters (which the Democrats and reporters don't want to do--they only benefit from muddied waters where economics are concerned) by talking about shares, and just talk about rates, the fact is this: Every year (until the tax cuts are eliminated by the sunset provisions in 2011) the effective rate on every quintile is lower than it was in 2001, so each group on average pays a lower rate on every dollar earned in 2004, 2005, 2006, all the way to 2010, than it would have paid on that same dollar in 2001. No matter how much the individual's income rises, the taxes on the new income are lower than they would have been in 2001 (or they are exactly the same if that unlucky person runs into the AMT). Here are some more muddy facts the Democrats (and reporter) don't want you to understand, with the real explanations and facts for your information: The effective federal tax rate of the top 1 percent of taxpayers has fallen from 33.4 percent to 26.7 percent, a 20 percent drop. Remember that this value includes the payroll taxes, which skews the gaps. But even using this figure, the top 1 percent pays a tax rate that is nearly twice that of the group the reporter compares next: In contrast, the middle 20 percent of taxpayers -- whose incomes averaged $51,500 in 2001 -- saw their tax rates drop 9.3 percent. Funny how you can try to make that sound like a bad thing. They pay just over half the rate (even including SSI) that the top 1 percent pays, which means they give up far less of every dollar they earn than the wealthy do. The poorest taxpayers saw their taxes fall 16 percent. That's pretty good considering that they pay SSI on every dollar they earn (which includes any increase in their income). But if we look at their effective income tax rate in 2004 (since only income taxes have been reduced), they pay a whopping -5.7% of their income in income taxes; this means that for every dollar they earn, the federal government gives them 5.7 cents back, which is better than the 5.6 cents it gave them back in 2001. Let me say that again, just in case you didn't catch it: If a poor person earns a dollar, then after income taxes, they have nearly $1.06 in the bank. It's hard to argue that that income tax rate is harsh. Ask them if they want it cut, and I'm sure they'll say no, since that would mean getting less than 5.7 cents back when they haven't paid anything in at all! I wish I was subject to their effective income tax rate... Republican aides on Capitol Hill, speaking on condition of anonymity, said the tax cuts actually made federal income taxes -- as opposed to total taxes -- more equitable. This proves that the reporter is not unaware that there is a difference between total taxes and income taxes. It shows that he is not interested in exploring the question of whether or not the Republican aides might be right and Kerry and the Democrats might be feeding the public a pack of distortions and outright lies. If he were interested in exploring that question, he would have analyzed those data which he chose to relegate to apparently pointless objections of the Republicans. ...The ranking Democrats on the House Ways and Means Committee, the Senate Finance Committee, the House and Senate budget committees and the Joint Economic Committee asked Holtz-Eakin -- the former chief economist of Bush's Council of Economic Advisers -- to estimate the distribution of the tax cuts among income levels, and compare that to tax levels if none of the cuts were passed. This was clearly a fishing expedition, and the Democrats are now claiming they caught something. But, as usual, it's just another fish story from the liberals. The Democrats (and reporters) don't want you thinking about the real effects of the tax cuts, such as job creation, stimulation of the economy, and a healthy but not overheated recovery. They want you to focus on whether you or your neighbor got a bigger tax cut. Envy is the tool of the demagogue, who tries to motivate one class of people to hate another and to view the demagogue as its guardian and savior. But envy the rich at your peril. One day you might be successful and rich yourself, and face the future repercussions of today's class warfare. The rich already bear most of the burden of income taxes, and that is not going to change significantly. They pay higher rates of every tax except the SSI that only applies to the first $83,000 or so of income. They bankroll our government and through their purchasing power they juice up the economy. It won't generate much revenue if we increase their taxes (certainly not enough to pay for the billions upon billions of dollars worth of new programs Kerry promised in his acceptance screed), but it might tighten their wallets enough to slow the economy and curtail the job growth we've enjoyed in the past year. That would be stupid. But that's what the Democrats want you to think we should do. This is one fish story we definitely don't want to buy. Modified: 09/10/2004 |
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