Tax cuts and the rich

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The New York Times headline -- "Tax Cuts Offer Most for Very Rich" -- said it all. That claim was uncritically repeated by CNN, posted on Brad DeLong's blog and so on. But was it true?

The report by Edmund Andrews was about the latest "Historical Effective Tax Rates" from the Congressional Budget Office (CBO).

The CBO shows that from 2000 (the year before President Bush cut tax rates) to 2004, the after-tax income of the very richest 1 percent fell by 7.9 percent. After taking into account the Bush tax cuts, the 8.3 percent drop in after-tax incomes of the top 1 percent was even worse. From 2000 to 2004, average real incomes of the middle three-fifths rose 4.1 percent after-taxes, but only 0.5 percent before taxes. In other words, 88 percent of middle-income gains between 2000 and 2004 were due to those nefarious Bush tax cuts of 2003.

Those who rely on the New York Times (unlike readers of The Washington Times), will never find out what the CBO report reveals unless they go to cbo.gov and read it. To have any chance of his story appearing in the New York Times, Mr. Andrews had no choice but to dissemble.

He began by saying, "Families earning more than $1 million a year saw their federal tax rates drop more sharply than any group in the country as a result of President Bush's tax cuts, according to a new congressional study." But the top 1 percent of households (not families) are those earning more than $266,800 -- not more than $1 million. The average income for everyone earning more than $266,800 exceeds $1 million, but such a mean average is bloated by a small number of very high incomes, particularly distributed earnings of Subchapter S-corporations.

This is why we use median income to describe typical income in other cases, and should also do so when describing average income of top income groups (which differ from lower groups because income has no upper limit).

Mr. Andrews continued, "Though tax cuts for the rich were bigger than those for other groups, the wealthiest families paid a bigger share of total taxes. That is because their incomes have climbed far more rapidly, and the gap between rich and poor has widened in the last several years."

Unless "last several years" excludes 2000, the statement is brazenly false. It makes no sense to start with any year except 2000 because we can't possibly compare incomes and taxes before and after the Bush tax cuts unless we begin with the last year of the Clinton presidency. That is, after all, the tax regime congressional Democrats set up as their ideal when they criticize the Bush tax changes as unduly generous to the top 1 percent.

Measured in constant 2004 dollars, average income of the top 1 percent was $1,413,000 in 2000, but only $1,259,700 in 2004 -- a drop of 7.9 percent. Tax cuts did not help a bit. After-tax income of the top 1 percent fell from $946,300 to $887,800 -- an even larger 8.3 percent decline.

Mr. Andrews says, "Economists and tax analysts have long known that the biggest dollar value of Mr. Bush's tax cuts goes to people at the very top income levels." You don't need to be an economist to discern that "the biggest dollar value" of any equiproportionate tax cut must go to those with the "biggest dollar value" of taxes paid. Yet the top 1 percent did not get anything remotely close to a proportionate share of the tax cuts after 2000.