It Almost Makes You Want to Raise Tax Rates

The standard left-wing argument against tax rate reductions is that doing so will starve government of needed revenue. That, of course, is the best reason to cut taxes. Starve the beast, as they say.

But it just doesn’t seem to be true. Congress cut taxes at the behest of President George W. Bush and the revenue keeps pouring in. Of course, there are lots of reasons for continuing economic growth and rising incomes. But tax cuts, at least the modest ones typically enacted, have proved to be a terribly inefficient way to cut government revenue.

Moreover, tax rate reductions turn out to be a very effective “soak the rich” mechanism. The wealthy keep paying a larger and larger share of total income tax collections. If one hasn’t been convinced by leftish propaganda on how tax cuts are intended to help the rich, one might suspect that the supply siders are correct about how improved incentives encourage the wealthy to invest more and consume less, generating more income…and taxes due.

Observes The Wall Street Journal (subscription required):

Last week the Congressional Budget Office joined the IRS in releasing tax numbers for 2005, and part of the news is that the richest 1% paid about 39% of all income taxes that year. The richest 5% paid a tad less than 60%, and the richest 10% paid 70%. These tax shares are all up substantially since 1990, and even somewhat since 2000. Meanwhile, Americans with an income below the median — half of all households — paid a mere 3% of all income taxes in 2005. The richest 1.3 million tax-filers — those Americans with adjusted gross incomes of more than $365,000 in 2005 — paid more income tax than all of the 66 million American tax filers below the median in income. Ten times more.

For the political left and most of the media, this means only that the rich are getting richer, so of course they’re paying more taxes. And it is true that the top earners have increased their share of total income. Yet, as the nearby table shows, the rich showed more rapid gains in reported income shares in the 1990s than in the first half of this decade. The share of the richest 1% jumped to 20.8% of total income in 2000, from 14% in 1990, but increased only slightly to 21.2% in 2005. This makes it hard to pin their claim of “rising inequality” on the Bush tax cuts, though the income redistributionists are trying. By this measure, the Clinton years were far worse for “inequality.”

Notably, however, the share of taxes paid by the top 1% has kept climbing this decade — to 39.4% in 2005, from 37.4% in 2000. The share paid by the top 5% has increased even more rapidly. In other words, despite the tax reductions of 2001 and 2003, the rich saw their share of taxes paid rise at a faster rate than their share of income. How could this be?

One explanation is that the Bush tax cuts reduced the income tax liability of middle and lower income households by more proportionately than the rich. The average family of four with an income of $40,000 saw its income tax liability fall by about $2,052 a year from the 2001 and 2003 tax cuts.

The IRS statistics also tell a more complicated economic story than the media claim. First, America continues to be a society of upward income mobility. Over the past decade, millions of Americans have joined the once highly exclusive club of six- and seven-figure earners. Some 304,000 Americans earned $1 million or more in annual income in 2005, compared to 110,000 in 1996 and 176,000 in 2000. Because there is no cap on the top income share, this increase in millionaires pushes the top income (and taxes paid) share higher. The number of millionaire households in net worth also increased to nine million in 2006, up from six million in 2001, according to TNS, a global market research firm.