Liberal myth

The 2001 and 2003 tax cuts mean that middle class Americans pay more than their share of taxes, while the richest Americans pay less.

The facts

President Bush’s tax cuts benefited all Americans who pay income taxes. Critiquing the distribution of tax payments is a fundamentally misguided way to discuss tax policy, not least because these tax cuts did little to alter the tax burden on each income group.

Almost no shift in burden

While the share of taxes paid by the very wealthiest Americans declined by a few percentage points after the tax cuts, the top quarter of all taxpayers is paying almost exactly the same share as in 2000 and two percentage points more than in 1997. Meanwhile, the share paid by the bottom half of all income earners is declining.

• In 2003, the latest year for which complete data is available, the top one percent of taxpayers paid just over 34 percent of all income taxes, compared to over 37 percent in 2000 and 33 percent in 1997
• The top 10 percent of taxpayers paid almost 66 percent of income taxes in 2003, compared to 67 percent in 2000 and 63 percent in 1997
• Middle 50 percent of taxpayers paid a roughly even share of the taxes in 2003, 2000 and 1997: 12.6 percent, 12 percent and 14 percent, respectively
• The bottom 50 percent of taxpayers bore less of the burden in 2003 compared to 2000, paying almost 3.5 percent of taxes compared to over 4 percent three years earlier. The bottom half of taxpayers has paid a decreasing share of taxes since 1980.

A misguided critique

Overall, the intense focus on “income distribution” is misguided, because:

• It assumes that the economy is a fixed pie and that one group’s wealth causes another group’s poverty. In reality, the economy is expanding, and all income classes are getting wealthier. Some incomes will grow faster than others, yet the vast majority of Americans enjoy rising incomes throughout their lifetimes. Even America’s “poor” would be considered middle-class in Europe and upper-class almost anywhere else. By contrast, socialist countries (e.g., North Korea, Cuba, and the former Soviet Union) have achieved relative income equality--everyone is equally poor.
• People often move across income ranges. Much of the bottom half consists of younger, unmarried workers who move into the top quarter as they marry and enter their peak earning years before dropping back down after retirement. Accordingly, lifetime incomes (and taxes paid) are much more equal than one-time “income distribution” snapshots would show.
• The term “income distribution” implies that the nation’s wealth simply falls from the sky and that Washington has a duty to distribute this bounty fairly. But wealth and income are not “distributed,” they are created. When Microsoft turns sand into computer chips, it is creating wealth where none existed. A farmer who grows a field of corn is creating wealth. These workers and businesses should have the right to keep much of the wealth they create.

Small businesses benefit

• Most of those who benefited from the 2001 and 2003 tax cuts are actually small business owners, who are assuming more of the tax burden every year. Since they are not corporations, small businesses do not pay taxes—but their owners do.
• Small businesses, with fewer than 100 employees, represent 98 percent of all businesses and create a third of all jobs. So raising taxes on the top one percent really raises taxes on small businesses. They are the engines of new job creation, and taxing them out of business only eliminates jobs.
• In 2000, small business owners earned 21 percent of the gross national income and paid 37 percent of all individual income taxes. Businesses also bear nearly all the cost of the 15.3 percent payroll tax, including the half that is removed from their employees’ paychecks.

Related Heritage research

• Brian Riedl, “Ten Common Myths About Taxes, Spending, and Budget Deficits,” June 13, 2003

Other resources

• Gerald Prante and William Ahern, “Summary of Federal Individual Income Tax Data,” The Tax Foundation, October 11, 2005