For three decades, we have conducted a massive economic experiment, testing a theory known as supply-side economics. The theory goes like this: Lower tax rates will encourage more investment, which in turn will mean more jobs and greater prosperity – so much so that tax revenues will go up, despite lower tax rate. The late Milton Friedman, the libertarian economist, who wanted to shut down public parks because he considered them socialism, promoted this strategy. Ronald Reagan embraced this idea and made it policy when he was elected President in 1980. For the past decade, we have doubled down on this theory of supply – side economics with the tax cuts sponsored by President George W. Bush in 2001 and 2003.
You would think that whether this grand experiment would be settled after three decades. As millions of Americans file their annual taxes, they do so in an environment of media-perpetuated tax myths. Here are a few points about taxes and the economy to consider during this tax season.
1.) Poor Americans do pay taxes. Gretchen Carlson, the Fox News host, said last year “47 percent of Americans don’t pay any taxes.” Ari Fleischer, the former Bush White House spokesman once said, “50 percent of the country gets benefits without paying for them.” Data from the Tax Foundation show that in 2008, the average income for the bottom half of taxpayers was $15,300. This year the first $9,350 of income is exempt from taxes from singles and $18,700 for married couples. That means millions of the poor do not make enough to owe income taxes. But we still pay plenty of other taxes, including federal payroll taxes, gas taxes, sales tax, utility taxes and other taxes. When it comes to state and local taxes, the poor bear a heavier burden than the rich in every state except Vermont.
2). The wealthiest Americans don’t carry the burden. This is a common myth told by the wealthy. Sen. Rand Paul, the Tea party hero from Kentucky, told David Letterman that “the wealthy do pay most of the taxes in this country.” The internet is full of statements that the top one percent pays, depending on the year, 38 percent or more than 40 percent of taxes. It’s true that the top one percent of wage earners pay around 38 percent of the federal income taxes. But people forget that income tax is less than half of federal taxes and only one fifth of taxes at all levels of Government. Social Security, Medicare and unemployment insurance taxes are paid mostly by the bottom 90 percent of wage earners. That’s because, once you reach $106,800 of income, you pay no more for Social Security. Warren Buffet pays the exact same amount of Social Security taxes as someone who earns $106,800.
3), In fact, the wealthy are paying less taxes. Despite skyrocketing incomes, the federal tax burden on the richest has been slashed, thanks to a variety of loopholes, allowable deductions and other tools. The actual share of their income paid in taxes, according to the IRS, is 16.6. percent. Adding payroll taxes barely nudges that number. Compare that to the majority of Americans, whose share of their income going to federal taxes increased from 13.1 percent in 1961 to 22.5 percent in 2007. by he way, during seven of the eight George W. Bush years, the IRS report on the top 400 taxpayers was labeled a state secret, a policy the Obama administration overturned almost instantly after his inauguration.
4). Many of the very richest pay no income taxes at all. John Paulson, the most successful hedge fund manager of all, bet against the mortgage market one year then with Glenn Beck in the gold market the next. Paulson made $9 billion in fees in just two years. His tax bill on that $9 billion? Zero. Hedge fund managers earn all they can now and pay their taxes years from now. Hedge fund managers don’t even pay 15 percent in taxes. So long as they leave their money, known as “carried interest,” in the hedge fund, their taxes are deferred. They only pay taxes when they cash out, which could be decades.
5). Since Reagan, only the wealthy have gained significant income. The Heritage Foundation, the Cato Institute and similar marketing organizations tell us relentlessly that lower tax rates will make us all better off. When Reagan was elected the top marginal tax rate was 70 percent. He cut it to 50 percent and then 28 percent starting in 1987. Since 1980, when Reagan won the Presidency promising prosperity through tax cuts, the average income of the bottom 90 percent of Americans – has increased a meager $303, or one percent, for each dollar average Americans made in 1980, in 2008 their income was up to $1.01.
The richest did much better. The top one percent’s average income more than doubled. The really rich, each enjoyed almost $4 in 2008 for each dollar in 1980. The top 300,000 Americans now enjoy almost as much income as the bottom 150 million.
6). Corporations story is much the same – less taxes. Corporate profits in 2008 were $1,830 billion, up almost 12 percent from $1,638.7 billion in 2000. Yet corporate tax revenues fell to $230 billion from $249 billion – an 8 percent decline, thanks to a number of loopholes.
7). Some corporate tax break destroy jobs. Despite all the crying that America has the world’s second highest corporate tax rate, the actual taxes paid by corporations are falling because of the growing number of loopholes and companies shifting profits to tax havens like the Cayman Islands. American’s corporations are sitting on $2 trillion in cash that is not being used to build factories, create jobs or anything else, but acts as an insurance policy for managers unwilling to take the risk of actually building the businesses they are paid so well to run. The 2004 American Jobs Creation Act, followed more than 800 companies to bring profits that were untaxed but overseas back to the United States. Instead of paying the usual 35 percent tax, the companies paid just 5.25 percent.
8). Republicans like taxes too. President Reagan signed into law 11 tax increases, targeted at people down the income ladder. He called the increases “revenue enhancers.” Reagan raised Social Security taxes so high that by 2008 the government had collected more than $2 trillion in surplus tax. George W. Bush signed a tax increase too, in 2006. Despite his written pledge never to raise taxes on anyone. It raised taxes on teenagers by requiring kids up to age 17, who earned money, to pay taxes at their parents’ tax rate, which would almost always be higher than the rate they would otherwise pay. In fact, thanks to Republicans, one in three Americans will pay higher taxes this year than they did last year. The Republicans regained control of the House of Representatives, and killed Obama’s making work pay credit while extending the Bush tax cuts for two more years. By doing so, congressional Republicans leaders increased taxes on a third of Americans, virtually all of them the working poor.
Here is the question to ask yourself this election year: We started down this road with Reagan’s election in 1980 and upped the ante in this century with George W. Bush, how long does it take to conclude that a policy has failed? And as you think of that, keep in mind George Washington, when he fell ill his doctors followed the common wisdom of the era. They cut him to remove bad blood.
As Washington’s condition grew worse, they bled him more. And like the repeated tax cuts for the rich, they kept applying the same treatment until they killed him.
Luckily we don’t bleed the sick anymore, but we are bleeding our country to death.