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The Rich Getting Soaked

Mises Daily: Monday, April 17, 2000 by

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What was once a center stage, winning issue for Reagan-type Republicans now fails to strike a responsive chord with the electorate. As if to advertise the tax issue's demise, the GOP recently coupled a minuscule tax reduction with an increase in the minimum wage.

Pundits offer various reasons for the demise. One is the healthy economy. The "healthy economy" mantra is used to explain everything these days, regardless of whether it makes sense, which it doesn't here. A healthy economy increases tax bills. It also pushes people into higher tax brackets. How can higher tax bills and higher tax rates decrease sensitivity to taxes?

More plausible are those who say Americans oppose tax cuts because they want to pay down the national debt or that they value government programs. Whatever the plausibility, however, it's what these people don't say that's important. To wit: the reason so many Americans want government to do these things is that, for all practical purposes, most Americans don't pay income taxes. Why shouldn't they want less debt and more government programs? Someone else pays!

This table provides details about who paid the $727 billion collected in income taxes for 1997, the most recent year for which such data are available. The Washington, D.C.-based Tax Foundation compiled the data from Internal Revenue Service information.

For starters, note that the top 1% of income earners paid 33% of all income taxes. The 1.21 million returns in this highest income category surely were not all joint returns. So somewhere between 1.21 and 2.42 million American taxpayers (out of more than 270 million Americans!) picked up 33% of the income tax tab. Not quite what the Clinton/Gore media minions tell us about the rich not paying taxes, is it?

Each line in the table tells essentially the same story. For example, look at the top 10% of income earners. This group paid almost 2/3 of all income taxes---63.2% to be exact. Again, not all these returns were joint returns. Thus, between 12.15 and 24.30 million taxpayers paid almost 2/3 of the U.S. income tax bill.

Any way you slice the table, the conclusion is inescapable: America's elite income earners pay the bulk of Uncle Sam's income tax bill. And the implication of this conclusion is equally inescapable: beneficiaries of any meaningful cut in income taxes will be a relatively small percentage of Americans.

This is what makes the "tax issue" a hard sell politically. There's simply not enough votes out there for it to be a winning issue.

The above data also explain past left-liberal lip service to tax reductions. When pressed on the issue, left-liberals have always touted tax reductions for the poor and lower middle class. This is safe tax cut for big-spenders. It protects their spending boondoggles because the bottom 50% of all taxpayers paid only 4.3% of all taxes.

It is impossible to have a meaningful tax cut for these people because they pay so little taxes. You can't cut taxes that aren't collected. Nevertheless, the big spenders' media toadies shower them with praise for their compassion for the poor and middle class. I call it compassion on the cheap.

Skewing income tax liabilities toward America's elite income earners is no doubt emotionally satisfying to many. Covetousness is a powerful drive. No wonder the Tenth Commandment forbids it.

But nothing is free, even emotional highs. Here the cost comes in the form of the economic inefficiencies that arise when the "price" of government is reduced to zero for most Americans. These Americans quite naturally ask for more and more government. Why not? They don't pick up the tab. And they've got the votes to make their requests effective. The end result is a bloated public sector with all the attendant wastes, inefficiencies, and lower overall living standards.

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T. Norman Van Cott teaches in the Department of Economics, Ball State University, Muncie, Indiana. Send him MAIL