For as long as I can remember, allegations and accusations about taxes and the rich and the poor have been a part of every election--well, except the current 2006 election which has not substantively addressed any issue other than Republicans prodding voters to "stay the course" and Democrats prodding voters to vote against Bush.

But in a normal election, Democrats inevitably accuse Republicans of promoting tax cuts that benefit primarily the rich, and the slogan "The rich got richer while the poor got poorer" is something that no election can go without. The same arguments are made election after election, so when someone recently made that accusation on a message board, I decided to investigate whether it is really true or if it's just been repeated so much that it's accepted as truth with no supporting evidence.

Do Tax Cuts Benefit Primarily The Rich?

In a word, yes. Now before anyone rushes to conclusions, it must fairly be pointed out that the reason the rich benefit most from tax cuts is because the rich are the ones that pay taxes. If I don't buy milk very often, I'm not going to see much benefit if there's a decrease in the price of milk. Likewise, if I don't pay much in taxes, I'm not going to see much benefit if there's a decrease in taxes. That doesn't mean a decrease in the price of milk or a tax cut is a bad thing, it simply means it will only effect those people that buy milk or pay taxes.

IRS data shows that in 2004, the richest 50% of the taxpayers paid 96.7% of all income taxes. From 1986 to 2004, the share paid by the richest half increased from 93.5% to 96.7%, and the share paid by the richest 1% increased from 25.75% to 36.89%. At the same time, the amount paid by the poorer half decreased from 6.5% in 1986 to 3.3% in 2004. While the poor's contribution was cut in half, the richest Americans saw their contribution increase by nearly 50%. When you get past the propaganda, for the last two decades the rich have been paying more and more while the poor have been paying less and less.

To put it simply, of the $832 billion in personal income taxes collected in 2004, the richest half of the country paid $804 billion while the poorest half only paid $27.4 billion.

Those that make the claim "the tax cuts help the rich" will claim that the reason why the rich paid so much more in taxes is because they made so much more money. There is truth to that, though the progressive nature of the tax code also insures that the rich pay more than they should, proportionally speaking. However, the reason for the rich paying so much more is irrelevant to this discussion: If the "rich" are paying 96.7% of the income taxes and the poor are only paying 3.3%, then it's simply common sense that most of any income tax cut will benefit those that are paying it. You can't reduce taxes on someone who isn't paying any.

Are the poor paying taxes? In 2005, a family of four was considered to be at the poverty level if they earned less than $19,350 . If you complete a 2005 1040 considering an income of $19,350 and four family members, you will find that the standard deduction for the couple is $10,000, and an additional $3200 deduction is given for each of the four family members for an additional $12,800. So, in all, the family earning $19,350 has $22,800 in income deductions which means they pay no federal tax. In fact, a family of four will not pay a single dollar in federal tax until the family earns at least $22,800. Since these people pay no taxes whatsoever, a tax cut will obviously not be of any direct benefit to them since they aren't paying taxes to start with. This doesn't make the tax cut a bad idea, but it stands to reason that it won't directly benefit anyone that isn't paying taxes any more than a price reduction in milk won't help anyone that isn't buying milk.

Update 4/10/2009: Two-and-a-half years later, The Washington Post reached a similar conclusion.



Based on these numbers, it would be hard to argue that the country doesn't already have a significantly progressive tax system. Taxes aren't just for suckers, with cashiers paying more of their income than corporate chief executives...

But there is a limit to how much the tippy top should bear. President Obama has promised that taxes will not be increased for families making under $250,000. That is a promise that will probably have to be dropped down the road. There just isn't enough revenue to be found above that figure unless we create a system so lopsided that voters would always want more government spending because it would come at such a low price.


In other words, we can't just keep extracting more and more money from the rich as if there were an endless supply of money. Everyone is going to have to pay for all of this spending eventually, not just the rich.

Update Tax Day 4/15/2009: CNN reached a similar conclusion.



The top fifth of households made 56% of pre-tax income in 2006 but paid 86% of all individual income tax revenue collected, according to the most recent data available from the Congressional Budget Office...

The Tax Policy Center estimates that for 2009, 43% of tax units (most of which are lower income households that may or may not file a return) will have no income tax liability or will have a negative income tax liability, meaning the government will actually pay them.

A tax cut cannot be given to someone who is not paying taxes. The poor do not pay taxes so, by definition, a tax cut won't help them.

Saying that "a tax cut favors the rich" is either based on ignorance (given that you can only give a tax cut to someone that pays taxes, and that the "rich" are really the only ones that pay taxes in any substantial manner) or is disingenous (because the person knows this to be true, but makes the accusation anyway). The statement "a tax cut favors the rich" should be reworded "a tax cut favors those that pay taxes." It would be just as accurate but obviously without the class warfare undertones. Unfortunately, those that state "tax cuts favor the rich" are usually hoping for those class warefare undertones, so hoping for them to use the more accurate and less divisive words is probably utopian.

Do the Rich get Richer and the Poor Poorer?

First, we should agree that there's nothing wrong with the rich getting richer. It would require a selfish, ignorant, and hateful person to want anyone to get poorer. I might not be rich, but I have no vindictive anger that desires that those who've had better fortune do poorly just because I've not done as well myself. That kind of trite material jealousy is best left in grade school.

Second, we should agree that even if the rich are getting richer and the poor are getting poorer, the good fortune of the rich is only objectionable if it came at the expense of the poor. It is not honest or useful to complain about some people doing well simply because other people aren't doing as well unless it can be shown that one's success came at the expense of other people's failure.

So what do the numbers say? As usual, the numbers can pretty much say whatever you want them to say. If you check the U.S. Census Bureau , we can see that in 1967 the lowest fifth of wage earners earned 4.0% of the total national income and in 1998 they earned 3.6%--a decrease of 0.4% over 20 years. In the same time, the highest fifth of wage earners went from 17.5% to to 21.4%. Using these numbers, you might make the argument that the rich did indeed get richer while the poor got poorer.

However, this is--in and of itself--a shallow argument. It's entirely possible that everyone got richer, but the rich got a larger portion of the new wealth. For example, perhaps the poor earned $100 and the rich earned $1000 while a few years later the poor earned $150 and the rich earned $2000. In this case, even though the poor person is earning 50% more, his share of total income will have dropped from 9.1% to 7.0%. The fact that their share of total income dropped doesn't mean they got poorer.

In fact, that's exactly what appears to have happened. Referring to the chart on page 5 of the same link, we see that the top of the lowest fifth bracket went from $13,471 in 1967 to $16,116 in 1998, a growth of 19.6% in real terms. During the same time, the top fifth of wage earners went from a minimum of $53,170 in 1967 to $75,000 in 1998, a growth of 41.1%. Similar increases can be observed in each of the income brackets.

Everyone got richer, but the rich got richer faster.

This is hardly surprising. Someone that is rich is going to have more extra money that they can invest which, in turn, creates more money. Money generates money and no-one disputes that being rich is, by definition, a financial advantage in a capitalistic society. Short of draconian wealth redistribution, this will always be the case. However, the macro-economic data from 1967 to 1998 does not support the assertion that the rich got richer and the poor got poorer. The data supports the position that everyone got richer. While there may be year to year variations in a negative direction, the long-term trend is that all Americans are getting richer.

Conclusion

As has been shown above, the claim that "tax cuts benefit the rich" is true inasmuch as the rich are the ones that pay taxes in the first place. The statement is true but could be more accurately (and less divisively) stated as "tax cuts benefit those who pay taxes." The assertion that the rich have gotten richer while the poor have gotten poorer is patently false and is simply not supported by the evidence.

I hope readers will keep this in mind as they evaluate the current and future assertions made by politicians.