"Tax Cuts for the Rich"

The Providence Phoenix's Ian Donnis doesn't quite call the Bush tax cuts "tax cuts for the rich", but comes awfully close...

[Steve Laffey] ultimately revealed his core conservatism when he lauded President George W. Bush’s $1.5 trillion in tax cuts, the vast majority of which have benefited the rich.

In our society's current political debate, three separate items are thrown together when trying to determine who benefits from a tax cut…

1. Who pays less after a tax cut and by how much?
2. Do tax cuts stimulate economic growth?
3. Who gets the benefits of tax-cut stimulated economic growth?

In analyzing the Bush tax cuts, I'll start with the first question: how were they distributed?

The non-partisan Factcheck.org website provides a chart compiled by the Tax Policy Center that evaluates the effect of the Bush 2001 and 2003 tax cuts for different income levels and family sizes (full table below the fold). The TPC data makes a pretty convincing case that the Bush tax cuts leave a meaningful chunk of change in both rich and middle class pockets. (The Laffey campaign frequently cites the TPC figure of $1,897 less in taxes for a family of four making $35,000 as evidence that Bush's tax cuts have provided meaningful middle-class relief.)

It is true that when evaluated in terms of percentage of income, the tax cut amounts are skewed towards the highest incomes. But evaluating a change to an already progressive system by looking purely at the percentages of incomes ipresents a picture that is incomplete. Here's a simple example of why. According to the IRS (using 2003 data available from the National Taxpayers Union), the top 50% of the taxpaying households in the US pay 95% of all income taxes collected. This means that any tax cut can be spun as providing little benefit to the bottom 50% of households in the US and be called a "tax cut for the rich". (To see an example of a group that employs this kind of propagandistic analysis, check out the Center for Budget and Policy Priorities evaluation of the President's health savings account plan).

The phenomenon scales progressively. Again, according to the IRS via the NTU, the top 1% of American households pay about 34% of all income tax and the average household in that top 1% pays more than 60 times the tax paid by an average household in the $25,000-$50,000 income range. That means to keep the system exactly as progressive as before, the $1,897 tax cut for the familiy of four making $35,000 would have to be matched by average tax cut of over $100,000 for a top 1% family of four. The top 1% starts at about $300,000 in income per year (according to the IRS) yet a household with $1,000,000 in income hasn't come close to getting a $100,000 tax cut (according to the TPC). The numbers cast serious doubt on the idea that the Bush tax cuts have made the system substantially less progressive.

So, we have tax cuts 1) that continue to exempt the bottom 50% of households from having to pay anything at all and 2) that leave an already progressive system about as progressive as it was before. I think this implies that the Bush tax cuts are "tax cuts for the rich" only if you define everyone with enough income to pay taxes as "the rich".

Here is the Tax Policy Center's analysis of the benefits 2001 and 2003 Buish tax cuts. Their title is "amounts by which federal income taxes would rise if cuts are repealed". The S column is for "single" people. M0 is "Married filing jointly" with 0 kids, M1 is "Married filing jointly" with 1 kid, etc...

	S	M0	M1	M2	M3
$10,000	$110	$76	$0	$0	$0
$15,000	$350	$142	$610	$661	$661
$25,000	$350	$702	$1,210	$1,661	$1,579
$35,000	$350	$932	$1,433	$1,897	$2,245
$50,000	$669	$773	$1,272	$1,773	$2,271
$75,000	$1,318	$1,714	$1,817	$1,938	$2,437
$100,000	$2,001	$2,596	$3,004	$3,413	$4,510
$125,000	$2,695	$3,277	$3,435	$4,094	$4,571
$150,000	$3,460	$4,010	$3,918	$3,827	$4,735
$200,000	$5,218	$5,623	$5,531	$4,918	$4,364
$500,000	$15,585	$12,328	$12,328	$12,328	$12,328
$1,000,000	$37,713	$38,426	$38,426	$38,426	$38,426