Myth: Tax cuts for the rich shift the tax burden upward.
Fact: Tax cuts enable the rich to pay more taxes because they make more; the poor pay less taxes because they make less.
Tax cuts on the rich increase income inequality, by giving the rich more money to make money. Although their individual tax bills fall, the number of rich people grow, and as a group they pay a larger share of all taxes paid. Unfortunately, this expanding group of newly rich people does not expand beyond the richest 1 percent -- which is too few to benefit most Americans. Furthermore, their increased share of the national income represents a decrease for the poor. In relative terms, the poor pay less taxes because they make less income. Only supply-siders would spin this as a success story for the poor.
A common supply-side argument is that tax cuts for the rich actually shift the tax burden upward. For example, during the 80s, the top federal income tax rate was cut from 70 to 28 percent. And during that time, the richest 1 percent increased their share of all income taxes paid from 17 to 28 percent. Supply-siders frequently cite this as evidence that tax cuts are beneficial to the poor, although this is a classic example of how to abuse statistics.
The first thing to note is that the tax bill of individual millionaires did not rise during the 80s. They went down. Over the whole decade, from 1980 to 1989, the average individual tax bill of those who made over $1 million a year fell from $980,869 to $634,196 -- a tax cut of 35 percent. (1)
Despite falling individual tax bills, the rich as a group paid a larger percentage of total federal tax collections in the 80s. That is because the group itself was rapidly expanding. Between 1980 and 1989, the number of people reporting annual incomes of $500,000 or more skyrocketed from 16,881 to 183,240 -- a tenfold increase. In 1980, this group paid $8.1 billion in taxes, or 3 percent of all federal income tax collections. By 1989, they paid $59.4 billion, or 14 percent of the total. (2)
Supply-siders greet these statistics with the following question: "What's wrong with creating more rich people? Sounds like a success story to me." But a few statistics kill this argument. The 183,240 people who reported half-million dollar incomes in 1989 still represented less than one-fifth of the richest 1 percent! Although we should be glad that the ranks of the rich grew, this growth occurred in a microscopically small group, and didn't even come close to benefiting the overwhelming majority of Americans. Meanwhile, middle class income stagnated or fell as most of the income gains went to the rich. The top 1 percent increased their share of the national income from about 8 to 12-13 percent in the 80s, an increase of 50 percent. Likewise, their share of all federal taxes paid grew from 18 to 27 percent, also an increase of 50 percent. (3) This latter figure should have been even higher, but the tax cuts kept the increase down to only half.
In short, the rich paid more taxes because they made more; the poor paid less taxes because they made less. No poor person in his right mind would accept this as a favorable development, and only a supply-sider would spin it that way.
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1. Internal Revenue Service, cited by Donald Barlett and James Steele, America: What Went Wrong? (Kansas City: Andrews and McMeel, 1992), p. 7. A very common mistake here is to assume that the effective rate fell from 98 to 63 percent. But those who made over $1 million include those who made $10 million, $100 million, $1 billion, etc.
2. Ibid., pp. 4-5.
3. Kevin Phillips, Boiling Point (New York: HarperCollins, 1993), p. 112.