New Study Suggests Bush's Tax Cuts Didn't Favour Investor Class

by Mike Godfrey, Tax-News.com, Washington

25 January 2008

A new report by a non-partisan research institute offering a revisionist view of Bush's tax cuts has argued that they don't, as is commonly thought, benefit the wealthy more than low- and middle-income groups.

As Congress debates whether to renew tax cuts enacted early in the George W. Bush presidency, as well as various economic stimulus plans, critics have labelled the measures as "tax cuts for the rich". But a new report from the National Center for Policy Analysis (NCPA) claims that the Bush tax cuts have, by all measures, made the tax code more progressive.

In fact, the report concludes that every major tax change, under Republicans and Democrats, over the past two decades has increased the share of taxes paid by the wealthiest Americans.

"It is politically popular to say that tax cuts benefit the wealthy," commented Michael D. Stroup, a Stephen F. Austin University economist who authored the NCPA report. "The accusation does not match the reality."

According to the report, the progressivity of the tax system can be measured in four ways: (1) The share of taxes paid by different income groups, (2) The share of income paid in taxes, (3) The change in taxes relative to the change in income over time, and (4) A comparison of inequality of income to the inequality of taxes over time.

Looking at the first three measures, the report found that:

- The top 1% of income earners pay more than one in every three dollars the IRS collects in taxes. From 1986 to 2004, the total share of the income tax burden paid by the top 1% of earners grew from 25.8% to 36.9%, while the total share of the tax burden paid by the bottom half of earners fell from 6.5% to only 3.3%.

- During the same period, the percentage of income the top 1% of tax filers paid in federal income taxes rose from 18.3% to 19.6%. By contrast, the percentage of income the bottom fifth of tax filers paid in federal income taxes dropped from 0.4% to zero.

- The income share of the top 1% rose 7.7 percentage points, from 11.3% to 19%, while their income tax burden rose even more, by 11 percentage points, from 26% to 37%.

The final measure compares the inequality of income to the inequality of taxes paid over time among all income groups. This measure is the 'progressivity index', and is a numerical representation between 0 and 1. The closer the index value is to 1, the more progressive the tax system. According to the report, from 1990 to 2000, the progressivity index increased from 0.476 to 0.617, during a period where marginal tax rates increased but capital gains tax rates fell. From 2001 to 2004, under George W. Bush's tax reforms, the tax progressivity index continued to rise from 0.608 to 0.664.

"Its important when discussing tax reforms to consider how the system reacts, because of the great discretion high earners have in how they earn income and therefore pay taxes," observed Stroup, concluding by suggesting that: "Bush's reforms have helped diminish the income gap between rich and poor, rather than make it worse."

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