"Soak the rich" is a popular concept among some groups. Raise taxes on the wealthiest among us, and we'll raise revenue and be rolling in surplus cash, right? Everyone's got a story about some bazillionaire who picks his teeth with hundred dollar bills and never pays a red cent in taxes. But setting anecdotes and politics aside, a quick look at the facts will tell you, the notion that the U.S. can tax its way to prosperity is all wrong.
Now that the 2006 IRS figures are out, we know that almost all taxes that were collected were paid by people labeled as "the rich." Supporters of tax cuts have been claiming for years that it is the rich who pay the lion's share of taxes. But this time, the news is even more telling. Thanks to President Bush's 2003 tax cuts, total tax payments by the rich have never been higher… and not because of inflation.
According to the Treasury Department, the number of millionaires in the U.S. nearly doubled between 2003 and 2006, from 181,000 to 354,000. Part of the reason for that increase is that favorable capital gains rates encouraged Americans to invest more, and corporations that pay lower tax rates are more able to pay dividends. But also, history shows that when taxpayers feel tax rates are fair, they are less likely to invest in tax shelters or to simply hide income, and more likely to report what they actually earned. John Kennedy and Ronald Reagan both knew and proved that theory.
President Kennedy said, "It is a paradoxical truth that tax rates are too high today and tax revenues are too low and the soundest way to raise revenues in the long run is to cut rates now." Under his administration, the top tax rate was cut from a high of over 90 percent to 70 percent causing many naysayers to swoon. The result? Tax revenues climbed from $94 billion in 1961 to $153 billion in 1968, an increase of 62 percent. During this time, the rich saw their share of taxes increase from 11.6 percent to 15.1 percent. Under Ronald Reagan, tax revenues in the 80s climbed 99.4 percent. For the top 1 percent of taxpayers, their share of total tax rose from 17.6 percent in 1981 to 27.5 percent in 1988.
In 2003, millionaire households paid $136 billion in taxes, or 19 percent of all taxes. Then tax rates were cut, and naysayers including those in the Congressional Budget Office and the Tax Policy Center woefully predicted that a trillion dollars in lost revenue would result. Instead, in 2006, millionaire households paid $274 billion in taxes, about 40 percent of all taxes. In the same period, the deficit as a percentage of GDP fell from 3.5 percent in 2003 to 1.9 percent in 2006.
The same naysayers that wrongly predicted a trillion dollar loss didn't learn from their error. Now they predict that if the Bush tax cuts are repealed, the federal coffers will rake in a cool extra trillion.
Time will tell, but if history is an indicator, the naysayers will not be laughing all the way to the bank, but the ones who qualify as "rich," that is, with incomes of at least $108,904, will be hocking their jewels to pay their own tax bills, if they aren't too busy hunting for tax shelters.
Here's how the figures break down.
The top 1 percent of taxpayers (those with incomes of at least $388,806) earn 22 percent of all U.S. income, but pay 40 percent of the total tax.
The top 5 percent of taxpayers (with income of at least $153,542) earn 37 percent of all U.S. income, but pay 60 percent of all tax.
The top 10 percent of taxpayers (those with incomes of at least $108,904) earn 47 percent of all U.S. income, but pay 71 percent of the total tax.
The top 50 percent of taxpayers (those with incomes of at least $31,987) earn 87 percent of all U.S. income, but pay 97.1 percent of the total tax.
The lower 50 percent of earners in the U.S. (those making below $31,987) earn less than 13 percent of all U.S. income, collectively pay only 2.9 percent of the total tax. Because of refundable credits like the Earned Income Credit, many pay nothing yet get refunds. In 2006, taxpayers who earned less than $32,001 and had at least one child or those who did not have children, earned less than $12,120 and met other criteria were eligible for the EIC. The IRS reports that in 2006, $43.7 billion was paid out in Earned Income Credits.
- Internal Revenue Service: Individual Statistical Tables by Tax Rate and Income Percentile
- Internal Revenue Service: Earned Income Tax Credit Statistics
- The Heritage Foundation: The Historical Lessons of Lower Tax Rates
- The National Taxpayers Union: Who Pays Income Taxes?