The debate rages over whether our country can afford to extend the Bush tax cuts for the rich. Progressives argue that the ballooning Federal debt is a legacy of these tax cuts.
There is one unreported flaw in this argument. As data from the IRS show, George Bush did not cut income taxes. He increased them. In fact, Bush increased income taxes not only for the rich but for at least half of all tax filers. Only the poor paid less income tax under George Bush than under Bill Clinton.
Go to the IRS Web site and add up the numbers for yourself. During the eight years of the Clinton Administration the Federal government collected a total of $5.66 trillion dollars in individual income taxes. During the eight years of the Bush Administration the Federal government collected approximately $7.45 trillion dollars in individual income taxes. The rich — that is, the top 1% of taxpayers — not only forked over a trillion dollars more to Uncle Sam under Bush than under Clinton, their share of the income tax burden increased from 33% to 38%.
Total Federal Income Taxes Collected (Millions of dollars)
Tax Years 1993-2000
Total — 5,657,497
Top 1% — 1,890,430 (share: 33%)
Top 5% — 2,957,244 (share: 52%)
Top 10% — 3,600,143 (share: 64%)
Top 25% — 4,634,457 (share: 82%)
Top 50% — 5,414,476 (share: 96%)
Bottom 50% — 243,021 (share: 4%)
Tax Years 2001-2008*
Total — 7,454,535
Top 1% 2,811,101 (share: 38%)
Top 5% — 4,309,349 (share: 58%)
Top 10% — 5,130,389 (share: 69%
Top 25% — 6,356,581 (share: 85%)
Top 50% — 7,214,305 (share: 97%)
Bottom 50% — 223,123 (share: 3%)
* IRS share data complete through 2007. 2008 share estimates proportional to 2007.
How can this be?
Blended vs. Marginal Rates
The explanation for this apparent paradox is simple. The problem is that no one wants to hear it. Not the pundits. Not the press. Certainly not the leaders of the Democratic Party. Oddly enough, even the Republicans are oblivious.
George Bush cut the marginal tax rates paid by the rich, and everyone else for that matter. These are the tax cuts that are about to expire. The marginal tax rate is the rate you pay on the last dollars you earn. The blended tax rate is the effective rate you end up paying across all of your income. The total amount of tax you pay equals your blended tax rate times your taxable income. And it’s the total amount of tax collected that finances the government.
As hard as this is for some people to accept, the rich change their behavior when their marginal tax rates are reduced. The working rich work harder and longer. They expand their businesses, creating jobs. The idle rich shift investments from lower yield tax-free government bonds into higher-return taxable investments, the kind of investments that finance companies that create jobs. Exactly the opposite happens when marginal tax rates go up, as they are scheduled to do unless Congress acts.
A Bigger Pie
The rich do not get richer because they are stupid. Being rational people, they are usually happy to pay more taxes if at the same time they also take home more after-tax dollars. And that’s exactly what they did under George Bush. The math works because the pie gets bigger.
So if social justice is your goal, go ahead and raise marginal tax rates for the rich. Making the rich poorer will certainly reduce inequality. Why should you care if the total amount of taxes paid by the rich goes down, economic growth goes down, fewer jobs get created, and the government falls deeper into debt? In fact, this is a perfect way to create a permanent crisis that never goes to waste. As a full-throated Progressive you can run for Congress claiming that you are looking out for the little guy because you are sticking it to the rich.
Meanwhile, when you asleep-at-the-switch Republicans finally learn how to tell the difference between nominal tax rates and actual tax collections, please fess up to the real source of the ballooning national debt. Your guy George Bush was the biggest spender in American history, at least until his incompetent presidency delivered Barack Obama to the Oval Office. Bush spent $5 trillion dollars more of our money than Bill Clinton. Had Bush frozen the federal budget when he came into office he would have left Obama a surplus. One of the saddest things about our broken two-party system is that every time Republicans gain power they spend like Democrats. Understand now why the Tea Party wants nothing to do with your incumbents?
Do these facts surprise you? Is this the first time you’ve heard that George Bush was the biggest tax collector in American history? Were you aware that the rich paid a higher blended tax rate under Bush than under Clinton? Since reporters seem more willing to parrot talking points than dig up facts, spend a little time on www.irs.gov and see for yourself. You can also ponder what this selective national blindness says about our dysfunctional politico-pundit complex and its handmaidens in the media.
Bill Frezza ([email protected]) is a partner at Adams Capital Management, an early-stage venture capital firm. To subscribe to his weekly column, contact pub[email protected]. A version of this column first appeared at RealClearMarkets.com. Used with permission.