Taxes: Myths and Realities

When talking about taxes, conservatives present themselves as champions of beleaguered average wage-earners and characterize opponents of their tax policies as “socialists” whose efforts to "soak the rich" would drag down the economy. Here are some facts you should know about the impact of tax policies enacted by the Bush administration and the realities behind conservative arguments about taxation.

Fairness

During the Bush years, wealth was redistributed—upward. Under the Bush administration, the incomes of middle-range households have stagnated. Workers with earnings in the lower range have lost ground and, taking inflation into consideration, on average they now earn less than they did in 2000. [U.S. Census Bureau [1]] All the income these workers lost went directly to the top 20 percent of households, the only group whose share of income rose over the last eight years. [U.S. Census Bureau [2]] Income inequality in the United States has skyrocketed since Bush took office, making America the world’s third-most economically unbalanced country, behind only Mexico and Turkey. [Organization for Economic Co-operation and Development [3]]

It’s the wealthy, not working Americans, who avoid taxes. Conservatives claim that more than 40 percent of Americans pay no income taxes right now, as if it’s low-income workers who are skipping out on their tax responsibility. But it's the wealthy who enjoy most of the income generated by capital investments—and that income is taxed at a lower rate than the income middle-class workers earn. Warren Buffett pointed out that it is unjust for him to pay taxes at a lower rate than his secretary does. [Raw Story [4]]

Progressive tax policies benefit all of America; conservative policies have failed. Conservatives accused President Clinton of “tax and spend politics” when he raised income taxes on the very wealthy to pay for investments in economic development, education, and new technology. [Washington Post [5]] But Clinton’s policies yielded 23 million new jobs—nearly five times more new jobs than Bush created with his tax cuts for the super-rich. [Bureau of Labor Statistics [6]]

Conservative tax policies contribute to the extreme inequality we now face—and they want to make it worse. Instead of giving everyone an equal tax cut, conservative proposals would give the richest people in America a cut that is as much as five times larger than what Republican presidential candidate John McCain promised the middle class. [Tax Policy Center [7]] John McCain’s tax policies are even more unbalanced than George W. Bush’s: Bush gave 31 percent of the benefits of his tax cuts to the wealthiest one percent, but McCain would give them 58 percent of benefits. [Center for American Progress [8]]

A progressive tax proposal is the best bet for small businesses. One such proposal would be to strengthen the earned income tax credit that is claimed by 14 percent of small-business owners. Doing so would help seven times as many small-business owners as would decreasing tax rates for the richest Americans. [Center for Budget and Policy Priorities [9]]

The Capital Gains Tax Argument

Cutting the capital gains tax again would provide a huge payoff to the rich. Both the far-right Republican Study Committee and most Republicans in the U.S. House have called for cutting the capital gains tax in response to the financial crisis. Bush and conservatives in Congress already reduced the capital gains tax rate from 20 to 15 percent in 2003. [H.R. 2 [10]] The chief beneficiaries would be households earning over $200,000 a year; they would receive 93 percent of the benefits from the tax cut. Two-thirds of the tax cut would go to individuals earning over $1 million a year. [Tax Policy Center [11]] Put another way, the average American household would receive $4 as a result of the proposed cut, while households earning over $1 million would receive $72,255. [Jared Bernstein [12]]

One result: billionaires and hedge fund CEOs pay lower tax rates than their secretaries do. The 400 U.S. taxpayers with the very highest incomes pay income taxes worth only 18 percent of their income on average, compared to 25 percent for the typical American. Because of reduced capital gains taxes, the top 400 taxpayers cumulatively saved $10 billion between 1995 and 2005. [CBPP [13]] Billionaire Warren Buffet famously criticized our tax system for taxing him at a substantially lower rate than his secretary. [Raw Story [4]]

The capital gains tax is already ridiculously low. The current capital gains tax rate of 15 percent is the lowest it’s been in years. The 1986 Tax Reform Act set the top rate at 28 percent and later legislation lowered it to 20 percent in 1997 and to 15 percent in 2003. Today, the top federal income-tax rate for ordinary income is 35 percent, meaning that earned income is taxed at a rate 2-1/3 times higher than income from capital gains. That’s simply unfair. There is no good reason for wealth to be taxed at a lower rate than work. [Citizens for Tax Justice [14]]

The Truth About Corporate Taxes

The problem is not that corporations are overtaxed. In fact, a whopping two-thirds of American corporations and foreign corporations doing business in the United States pay absolutely no federal income taxes—despite taking in $2.5 trillion in sales. [Government Accounting Office [15]] In 2005, 28 percent of large foreign companies doing business in the United States (those with more than $250 million in assets or $50 million in sales) paid no taxes.

Compared to our competitors’ corporate tax rates, the U.S. rate is low. According to the World Bank and PricewaterhouseCoopers, the United States’ total corporate tax burden ranks 76th of over 100 countries. [World Bank [16]] When conservatives claim that the U.S. tax rate is high, they’re talking about the “statutory rate.” But corporations treat the statutory rate as just a guideline—they use offshore tax havens and accounting loopholes to pay much lower actual rates. The tax rate corporations actually pay is lower than the rates of economic competitors such as China (15th highest tax rate), India (19th), and Mexico (51st). [World Bank [16]]

The U.S. collects less in corporate taxes than other wealthy countries do. Measuring tax collections as a share of GDP is a good way to put a country’s tax rate in the context of its economy’s size. In the last seven years, the U.S. has collected an average of 2.4 percent of its GDP in corporate taxes—less than the average 3.4 percent collected by other industrialized nations. If laws remain the same, U.S. corporate taxes will be only 1.9 percent of GDP in less than 10 years. [U.S. Treasury Department [17]]

Corporations should pay their fair tax share. American workers increasingly carry more of the tax burden than corporations do. In the 1950s, corporate income taxes accounted for about a quarter of federal tax revenues; now they account for just one-tenth, leaving workers to pay the difference. [Economic Policy Institute [18]]

"Death Tax" Realities

Conservatives enacted a warped estate tax law in 2001. The federal estate tax—which has been in effect since 1916 but in recent years has been dubbed the "death tax" by the right—applies only to the estates of extremely wealthy people. In 2001, the Bush Administration and some of the richest families in America pushed to enact a law that has lowered the tax and will eliminate it entirely in 2010. However, to get around Senate rules, the entire law sunsets in 2011 when the tax will theoretically return to 2001 levels. [Public Citizen [19]] As a result, Congress will have to pass a new estate tax law, most likely next year.

The federal estate tax doesn’t affect the middle class—it applies only to the very wealthiest taxpayers. In 2009, any estate worth less than $3.5 million ($7 million per couple) will be passed on to heirs and heiresses estate-tax free. [Center on Budget and Policy Priorities [20]] In fact, only one of every 300 estates is subject to the tax. [Center for Economic and Policy Research [21]]

The idea that the estate tax hurts farmers and small businesses is a myth. The Congressional Budget Office found that the estate tax threatens almost no farmers or small businesspeople. [CBO [22]] In fact, the American Farm Bureau Federation has never cited a single example of a farm having to be sold to pay estate taxes. [New York Times [23]]

We can’t afford this enormous tax break for the rich. The total cost of permanently repealing the estate tax would average about $110 billion per year (including increased interest payments on the national debt). [Center on Budget and Policy Priorities [24]] That’s more than twice as much as we pay for everyone’s Social Security benefits. [Social Security Administration [25]]

America’s wealthiest families lobbied hard to abolish the estate tax. The campaign to repeal the federal estate tax was financed by 18 of the richest families in America—including 23 billionaires—who spent nearly $500 million to enact this special interest legislation. That’s because these families, which include the heirs of fortunes from Wal-Mart, Campbell’s soup, and Mars candy, stand to reap over $70 billion from the estate tax’s repeal. [Public Citizen [19]]