The Tax Story Media Invariably Bury
By INVESTOR'S BUSINESS DAILY
Posted Wednesday, June 13, 2007 4:30 PM PT
Journalism: One of the assertions that the media make most often about the U.S. economy is that President Bush's tax cuts didn't do what he promised. But the data clearly show nothing could be farther from the truth.
Bush lowered taxes in both 2001 and 2003. During the debate for both rounds of reductions, it was repeatedly asserted that tax cuts would lead to lower revenues and not pay off with higher economic growth.
Wrong on both counts.
A cursory look at the data — and that's really all it takes, so shame on the media for misreporting — show tax revenues have surged since the tax cuts went into effect. And this is the case whether you you count them on a nominal basis, an inflation-adjusted basis or as a share of GDP.
Look at the chart. Democrats argue that the government has been starved of revenues and that higher taxes are needed to make up for it. But this is arrant nonsense.
Tax revenues will be about 18.5% of GDP this year — above the average of 18.2% since 1960. As for inflation-adjusted tax revenues — a little-used but equally telling statistic — they'll reach an all-time high of $2.013 trillion. That's higher even than in the last year of the dot-com boom. And by the way, it's an astounding 26% gain since 2003 — after inflation.
What about the claim that tax cuts "lose" revenues for the government? Also not true.
What is true is that by creating a dynamic of powerful economic growth, lower taxes expand the economy and, therefore, overall tax revenues. They do this by giving people more incentives to work, save, invest and innovate — all drivers of long-term economic growth.
If that's not true, how could taxes as a share of GDP — a sign that tax revenues are growing faster than the economy — go up?
The same is true for capital gains tax cuts. One of the greatest canards of tax-cut criticism is that capital gains taxes are a "giveaway" to the rich.
A few points need to be made here. First, those with incomes less than $40,000 a year pay, on average, no federal income tax. None.
As for the "giveaway" to the rich, it's a fact that many middle-income people today own stocks through 401(k), IRA or mutual fund plans. There are, in fact, about 80 million Americans who own shares. They also have potential capital gains tied up in businesses and homes.
In 2003, taxes on capital gains were reduced from 20% and 10% to 15% and 5%. As Heritage Foundation tax analyst Brian Riedl recently noted, the Congressional Budget Office expected capital gains revenues to rise from $50 billion in 2003 to $68 billion by 2006.
The reality was far more substantial. Cap gains revenues jumped to $103 billion, a gain of 106%. Yes, capital gains tax cuts paid for themselves — and they always have.
By far the worst misconception of Bush's tax cuts is that they did nothing for economic growth. This is just plain silly.
As we've noted repeatedly on these pages, tax cuts by President Coolidge in the 1920s, President Kennedy in the 1960s, President Reagan in the 1980s and, now, President Bush in the 2000s all show the same thing: Lower taxes mean faster economic growth.
Doubts about this are amply refuted by recourse to actual data.
Since the last tranche of Bush's tax cuts in May 2003, real GDP has grown 13% — or a bit more than 3.2% a year. Before that, from President Clinton's final year in office, growth averaged 1.5%. It basically doubled after the tax cuts.
As we also have noted, this is common. From 1921 to 1929, the era of Coolidge's tax cuts, real GDP rose 59%. It rose 42% from 1961 to 1968, the Kennedy tax-cut era. It added 31% during the Reagan boom, even though Keynesian economists assured us that the U.S. was a "mature" economy and incapable of such growth.
Tax cuts mean growth — particularly when coming from a period of high taxation. They also mean jobs. Since the tax cuts went into effect in 2003, the U.S. economy has added nearly 9 million new jobs — a phenomenon the media, after talking up the "jobless recovery" all the way through 2004, have since tried hard to ignore.
Moreover, amid a boom in revenues and growth, another myth has been dispelled — that of tax cuts being for "the rich."
This is the most pernicious notion, because it leads average Americans to think the tax code somehow punishes them while favoring fat cats. This is at best a distortion of the truth, and at worst an outright lie.
As mentioned, 45 million taxpayers now pay nothing at all in taxes. Another 15 million don't even have to file.
A recent study by the respected and nonpartisan Tax Foundation found that the typical low-income household each year pays a total of $1,684 in federal taxes (including Social Security) but receives on average $17,724 in federal transfer payments.
At the same time, the so-called "rich" now shoulder virtually all of the federal tax burden. The top 1% of filers in 2004, the most recent year for which data are available, paid 36.9% of all taxes. The top 5% paid 57.1%, — in other words, more than the remaining 95%.
As for those fat cats, the average person reporting income of more than $1 million paid $743,000 in taxes. Those in the $500,000 to $1 million range paid an average $164,701.
Critics say this still understates the tax burden of the poor. For instance, they pay 15.3% of their income on Social Security and Medicare taxes. Because those taxes phase out at higher incomes, it's a regressive tax, hitting the poor hardest.
In fact, even when you add in Social Security taxes, those in higher incomes pay more. The top 20% of incomes, according to CBO data, paid 67.1% of all federal taxes in 2004, even though they had 53.5% of all income.
Truth is, the tax code has become more progressive, not less, after successive major tax cuts. In 1979, according to economist Bruce Bartlett, the top 20% of all earners paid 64.9% of all income taxes. By 2004, they paid 85.3%.
At the same time, those we call rich today might not be rich tomorrow. As data produced recently by Congress' Joint Economic Committee clearly show, the U.S. has extraordinary income mobility — something you'd expect from an entrepreneurial nation.
Breaking U.S. incomes into five levels, or quintiles, the JEC found that from 1996 to 1999, 47.9% of all U.S. households moved to a different income quintile.
Among the wealthiest quintile in 1996, 33.9% had dropped to a lower income level in just three years. Meanwhile, 38% of the bottom quintile in 1996 moved up.
So, as it turns out, "rich" is very much a moving target. This is what economists call "dynamism," the hallmark of an economy that rewards risk-taking and hard work.
Even as Americans get sucked in by the class-warfare rhetoric of the mainstream media and their Democratic Party allies, they actually understand the subject pretty well.
For instance, a Harris Interactive poll of 2,012 adults found that a majority of American taxpayers feel taxes are too high and that the tax code is in need of "major changes or a complete overhaul."
Another poll, this from the American Enterprise Institute, found that most people think they should be paying from 10% to 25% of income on taxes. Right now, the actual number is over 30%. So it's not a stretch to say that most people feel they're overtaxed.
This is why Bush's tax cuts are so popular. And why they need to be kept in place.
If they're allowed to lapse, as Democrats would like, it could be big trouble for the economy. A study earlier this year by economists Tracy Foertsch and Ralph Rector found scrapping Bush's tax cuts would:
• Deprive GDP by $75 billion a year.
• Cost 709,000 jobs annually.
• Lower personal incomes by almost $200 billion.
Note to the tax raisers in Washington and the media who carry their water: Tax cuts work. They did for Coolidge, they did for Kennedy, they did for Reagan. Now they're doing so again for Bush.
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