Dear Readers —
I really try to avoid anything that smacks of politics, but I can't help setting the story straight on a popular American myth — repeated with increasing frequency in this election year — that "The Rich" (whoever "they" are) don't pay their fair share of taxes.
A corollary to this is the assertion that The Rich received the biggest benefit of the so-called "Bush" tax cuts," the political catch-phrase for the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003.*
Neither position is supported by hard data taken from income tax returns. In fact, in both cases, the opposite is true.
In other words: The Rich not only pay a disproportionate share of taxes, this share has been increasing since 1990.
According to the most recent figures available (2001) the Treasury Department reports:
1- Since 1990, virtually ALL of the income tax collected by the federal government has come from taxpayers who fall in the top 50 percent in terms of income. In 2000 and 2001, this group paid over 96 percent of total taxes collected.
2-Most of this tax revenue comes from a very select group: The top 5 percent of taxpayers, defined as those who earned about a third (32 percent) of all national income, paid more than half of all individual income taxes (53.3 percent).
Those in the top 1 percent in terms of income, paid more than 30 percent of the total amount of income tax collected.
3-The tax cuts we received in 2001 and 2003 shifted an even larger share of the income tax burden to those with higher incomes.
How can this be, you ask, when the top tax rate was reduced from 39.6 percent to 35 percent? (An 11.6 percent tax cut.)
Simple. Income tax rates at the lowest end of the scale were reduced by a much greater extent. For once thing, we replaced the 15-percent bracket with a 10-percent bracket for the first $14,000 in taxable income for a married couple (that's the 2003 figure, this goes up to $14,300 for 2004).** That's a one-third reduction (33 percent). So, for this tax year, instead of owing $2,145 on their first $14,300 of income, a couple will now pay $1,430.
Because lower-income individuals are paying a smaller piece of the total tax revenue pie, the portion paid by those with higher income must, by definition, go UP.
It will be a couple of years before 2002 and 2003 income tax data are in a form that can be analyzed. Nevertheless, the Treasury Department estimates that this year the portion of tax paid by those with higher incomes will increase again. That's because tax provisions such as marriage penalty relief have a bigger impact on taxpayers with lower
incomes. In addition, some tax breaks phase out once your income hits a certain level. Those with higher incomes see no benefit at all from, for instance, the increased child tax credit.
When they crunch the actual numbers for 2004, the folks at Treasury predict the average tax rate for the bottom 50 percent of all taxpayers will fall by 16 percent, compared to a 12 percent decline for those in the top 1 percent of income.
In fact, according to the Treasury Department, nearly 5 million additional Americans will end up paying NO income tax at all in this year, thanks to the tax breaks ushered in by the 2001 and 2003 Acts.
The data are also broken down by state. For instance, thanks to changes in the tax code, 12.4 million Californians will pay less (federal) income tax. More than a million Pennsylvania taxpayers will benefit from the reduced tax rates (15 percent) on dividends and capital gains. Nearly 4.2 million Illinois residents will pay less because of the new 10 percent income tax bracket. 1.6 million New Yorkers will see their taxes reduced thanks to the increase in the child tax credit from $600 to $1,000.
In this country we have what's called a "progressive" tax system. It means that those who can theoretically afford to pay more in taxes, do. But it's important to understand that this doesn't merely refer to the number of dollars that are collected from those with higher incomes. It means that, as your income goes up, so does the tax rate on that income.
For 2004, a married couple filing jointly pays only 10 percent income tax on the first $14,300 of taxable income. But on income from $14,300 to $58,100, the tax rate is 15 percent. When their income exceeds $58,100, the amount over this is taxed at 25 percent, meaning they give up 25 cents of every dollar of income over $56,800. Once a couple's income reaches $117,250, they lose 28 cents per dollar, and so forth until you hit the top tax rate where 35 cents per dollar goes to taxes.
In other words, as your income climbs, taxes eat up a progressively larger chunk of each additional dollar you earn.
That's how the system works. My point is, it IS working, contrary to the political rhetoric you hear.
Hey, I understand why politicians make a scapegoat out of The Rich — this group can't be defined by race, gender, lifestyle, or any other convenient demographic characteristic. Besides, are The Rich actually going to unite and take a stand? Can you just see a thousand well-dressed individuals holding a press conference on the steps of the U.S. Capitol to proclaim, "We're rich and we think it's unfair that we pay a larger portion of income taxes?"
In other words, it's safe to pick on The Rich because: 1) they're easy to resent; and 2) they're not going to defend themselves.
Just remember that politicians don't have to adhere to any rules about being "fair and balanced."
Gail
*Interesting, don't you think, that one side of the current political debate conveniently forgets that it took votes by Republicans and Democrats in Congress to approve the 2001 and 2003 tax cut legislation?
**$7,150 for someone who files as a single taxpayer.
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The views expressed in this article are those of Ms. Buckner or the individual commentator, and do not necessarily reflect the views of Putnam Investments Inc. or any of its affiliates. You should consult your own financial adviser for advice regarding your particular financial circumstances. This article is for information only and is not an offer of the sale of any mutual fund or other investment.
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