Saturday, January 13, 2007

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 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.

The article says “the wealthiest families paid a bigger share of total taxes,” but what is remarkable is that they even paid a larger share than they did in 2000, although their before-tax incomes were 7.2 percent smaller. That explains why the top 1 percent’s after-tax income fell even more than their before-tax income. The top 1 percent ended up with 14 percent of after-tax income, down from 15 percent in 2000, and that includes one-time capital gains and a seriously exaggerated share of corporate profits.

Mr. Andrews added that “two of [the president’s] signature measures, tax cuts on investment income and a steady reduction of estate taxes, overwhelmingly benefit the wealthiest households.”

That sentence is half irrelevant, half mistaken.

The CBO does not attempt to assign the estate tax by income group. To do that, they would have to know who received the money, not who died. Dead people cannot receive more income, before or after taxes, just one reason death is a highly undesirable tax avoidance strategy. If Hugh Jassets dies and leaves $10 million to be split among 10 young grandchildren, those youngsters are likely to be either invisible or poor in terms of income showing up in CBO tax data.

Second, taxes on capital gains and dividends are surprisingly hard on older retirees with low incomes. Those with incomes below $15,000 paid more than 7 percent of the federal taxes on dividends in 2002, and those with incomes below $200,000 paid 62 percent of that tax.

Third, lower tax rates on taxable dividends and capital gains generally result in investors paying more taxes on their investment income, not less. Nobody has to hold dividend-paying stock in a taxable account, and nobody has to report capital gains by selling assets from a taxable account.

The amount of dividend income reported to the IRS doubled from 2002 to 2004. Upper-income taxpayers are bound to be reporting relatively less income from tax-exempt bonds than they did before 2003. Moving income from nontaxable to taxable investments looks like an increase in top incomes in the CBO estimates, but it isn’t.

There has been a lot of chatter lately about raising Social Security taxes only on those with incomes above $100,000 while cutting the same group’s Social Security benefits again (their benefits were deeply slashed in 1993 through an extra tax on benefits). Can anyone really pretend that sounds “fair”?

The CBO calculates the effective tax rate for all federal taxes — including Social Security and Medicare taxes, income taxes and excise taxes. For the bottom 80 percent as a group, that total federal tax fell from 14.1 percent in 2000 to 11.4 percent in 2004 — a 19.1 percent tax cut.

The tax cut was deepest among the poorest fifth (29.7 percent), largely because of the Bush administration’s refundable tax credit for children. For the middle fifth, the total tax rate fell from 16.6 percent to 13.9 percent — a 16.3 percent cut. As for the top 1 percent, their overall tax rate was merely trimmed from 33 percent to 31.1 percent — a 5.8 percent cut

A courageous (willing to be fired) New York Times ombudsman would insist on the following correction to Mr. Andrews’ upside-down article: “Households earning more than $266,800 a year saw their federal tax rates drop less sharply than any other group in the country as a result of President Bush’s tax cuts, according to a new Congressional Budget Office study.”

Alan Reynolds is a nationally syndicated columnist and a senior fellow with the Cato Institute.

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