Like Pavlov's dog, we've been successfully trained by our politicians how to fill in that blank. It requires no thought; it's a reflex. It fits on a bumper sticker, it evokes powerful emotions, it's a mental shortcut for sorting our politicians into the good guys and the bad guys, and it supposedly fingers the culprits responsible for the cancerous, grandchildren-eating deficit.
For those of you who have been vacationing incommunicado in Antarctica for the last twenty-five years, the word that correctly fills in the blank is “rich.” More specifically, “Tax cuts for the rich” is the politically correct answer. It's part of our culture. For example, it only takes Google a scant two tenths of a second to find 307,000 instances of that phrase on the web.
However, I am personally far more interested in the economically correct answer, as opposed to the politically correct one. I’ve learned through experience to check the facts, instead of taking our politicians’ rhetoric at face value—so I checked the government’s official data, and assembled a few charts. Unsurprisingly, I’ve come to the conclusion that “rich” is not the most descriptive word for filling in the blank. I’ll reveal the better term after I explain my discovery process.
My first question was, “Who pays the taxes?” That led to the following chart.
The largest portion of federal tax receipts comes from Individual Income Taxes (F). [Although totals are available through 2004 from several sources, the IRS only provides IIT breakout data (A-E) through 2003. Too bad.]
The next largest source of tax receipts comes from workers’ contributions to social insurance (G). (“Contributions” is a key word, by the way; “taxes” is incorrect, according to Franklin D. Roosevelt. As he stressed, “We must not allow [social] insurance to become a dole through the mingling of insurance and relief. It is not charity. It must be financed by contributions, not taxes.” I thought he was a great president; consequently, I will respect his wishes.)
After IIT and Social Insurance Contributions, the rest (H-K) are peanuts, comparatively: corporate income taxes, excise taxes, and last but not least, “all other” taxes.
Final takeaway from the chart above: When the economy does well or poorly, income taxes—both individual and corporate—follow along in tandem. Duh.
My next question was, “Of the government’s Individual Income Tax receipts, what portion is extracted from the rich vs. middle class vs. poor taxpayers?” That led to the following chart.
The top one percent of the tax returns yield 35 percent of the IIT revenue, up from 23 percent in 1985. The bottom fifty percent of returns yield 4 percent of the IIT revenue, down from 7 percent in 1985.
At this point, it was starting to look to me as if the rich, especially the super-rich, are shouldering more and more of the income tax burden—and that the bottom 50% of taxpayers are shouldering less and less. [That’s good, isn’t it?]
My next question was, “What portion of the taxpayers’ incomes are we extracting in taxes—rich vs. middle class vs. poor?” That led to this last chart.
The super-rich paid 25% of their adjusted gross income to the government. Every other group paid less than 17%. The bottom 50% of taxpayers paid 3% of their AGI. [Is that good, too? Seems to me the hierarchy is just what you’d expect in a progressive taxation system.]
Lastly, it’s obvious that everybody got a tax cut, not just the rich. The bottom 50% paid about half of the portion they were paying before the “tax cuts,” and the top 1% are paying about 90% of the portion they paid before—but every taxpayer, every single taxpayer, got a tax cut. Notice how every line on the chart starts dropping in 2001.
Interestingly, even though every taxpayer is paying a smaller portion of his or her income in Individual Income Taxes, the economy has grown enough to cause the government’s revenue dollars to start increasing dramatically (as the graph of total revenues in this article illustrates).
Calling it “Tax cuts for the rich” is not accurate enough. Why? Because not all the rich pay taxes, and not everyone who got a tax cut was rich. That’s what I learned from the discovery process above.
In short, because (1) only a taxpayer can get a tax cut, and (2) every taxpayer did in fact get one, the economically accurate phrase is not “Tax cuts for the rich,” but:
• “Tax cuts for the taxpayers.”
And, for those of you who are real sticklers for pinpoint accuracy, I’ll add one more word to the phrase:
• “Tax rate cuts for the taxpayers.”
That concluded my discovery process on this topic. Anyone who is more interested in political persuasion than economic truth is now free to revert to “Tax cuts for the rich”—tried-and-true political dynamite.