Rich Pay More When Tax Rates Fall

Published August 1, 2004

Claiming that too many rich people and corporations aren’t paying their fair share of taxes seems to be a sure way get applause on the campaign trail. But this populist appeal is based on two economic fallacies:

  • that higher tax rates cause rich people to pay more in taxes; and
  • that corporations rather than individual workers and consumers pay corporate taxes.

Lower Rates Bring Higher Revenues

When President Ronald Reagan cut taxes in 1981 through 1983, his opponents said it was a “giveaway to the rich.” But Internal Revenue Service data show those tax cuts actually increased the amount of federal revenues paid by taxpayers in upper income brackets.

In 1981, before the Reagan tax cuts could take full effect, the top 1 percent of income earners paid 17.58 percent of all income taxes in the United States. By the time Reagan left office in 1989, that same group paid 25.24 percent of all incomes taxes in the U.S.–almost a 50 percent increase in the share paid by the rich.

Conversely, after the Clinton administration pushed for tax hikes in 1993, the top 1 percent saw their share of income tax revenues drop from 29.01 percent in 1993 to 28.86 percent in 1994.

In other words, when rates are cut, the rich spend less time looking for ways to hide their income. It’s only when taxes go up that upper-income taxpayers go running for the shelters.

Consumers Ultimately Pay

In 2002, corporations paid $211.4 billion, compared with individual income tax revenues of more than $1 trillion. So are the corporations cheating the rest of us by paying so little?

Of course not. Any serious economist knows the workers in this country ultimately pay all taxes. The money corporations pay in taxes must first come from consumers. Higher corporate taxes mean higher consumer prices. It’s that simple. Therefore, cutting the tax burden on corporations actually cuts the tax burden on individuals.

Since cutting tax burdens across the board actually results in an increase in the amount of taxes “rich” people pay, one would expect advocates of more income redistribution to propose cutting tax rates on all individuals and corporations. That they are not suggests their real concern isn’t how much the rich pay in taxes, but instead how to raise the total amount of taxes collected. “Fairness” has nothing to do with it.

This article was adapted from a TaxBytes commentary by Sonia Hoffman, who does marketing and media relations for the Institute for Policy Innovation. Her email address is [email protected].