NCPA - National Center for Policy Analysis

TAXES AND ECONOMIC GROWTH

October 12, 2005

New York Times editorial board member Teresa Tritch believes our tax system should serve one purpose and one purpose only -- to soak the rich. Any reduction in tax rates, especially on saving and investment, has nothing to do with raising growth, but is nothing but a give-away to the ultra-wealthy.

The reality is that the wealthy pay almost all of the federal income tax and there is clear and compelling evidence that our tax system - especially its misguided redistributive elements - impose a heavy cost in terms of growth that is ultimately paid by the non-wealthy in the form of lower productivity and, hence, lower wages and incomes, says Bruce Bartlett, a senior fellow with the National Center for Policy Analysis.

According to the latest Internal Revenue Service data on distribution of the tax burden:

  • The top 1 percent of taxpayers paid 34.3 percent of all federal income taxes in 2003, although they earned just 16.8 percent of adjusted gross income.
  • The top 5 percent of taxpayers paid more than half of all federal income taxes, the top 10 percent paid two-thirds, and the top half of taxpayers paid 96.5 percent, meaning that the bottom half paid just 3.5 percent.

According to a new report from the U.S. Government Accountability Office, we pay a very heavy price for the heavy taxation of saving, investment, corporations and estates that Tritch strongly favors. It found that the efficiency cost of the tax system -- the output that is lost over and above the tax itself -- is between 2 percent and 5 percent of the gross domestic product. In short, we lose between $240 billion and $600 billion every year just because of the way we raise taxes, says Bartlett.

Source: Bruce Bartlett, "Taxes and Economic Growth," National Center for Policy Analysis, October 12, 2005.

For GAO text:

http://www.gao.gov/docdblite/summary.php?rptno=GAO-05-878&accno=A34598

 

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