NCPA - National Center for Policy Analysis


August 2, 2004

John Kerry and John Edwards would have us believe that the federal budget deficit is largely due to tax cuts for the rich. But a July 29 New York Times report rebuts this idea, noting that those tax cuts mainly affecting the rich didn't take effect until 2003.

Says the Times, "Falling incomes, rather than tax cuts, appear to count for the greatest share of the decline in income taxes paid. That is because the higher one stood one the income ladder the greater the impact was likely to be from the stock market crunch."

This raises an important point about steeply progressive income tax rates, which are so strongly supported by liberals. According to Bartlett:

  • For every $1 increase in income by the wealthy, the government gets about 35-cents (so when the wealthy do well, so does the government).
  • That is why the share of total income taxes paid by the top two percent of taxpayers -- those targeted by Kerry and Edwards -- was 41.3 percent in 2001, according to the Internal Revenue Service, though their share of total income was 22.4 percent.

But this means that the converse is also true: When aggregate incomes fall, those of the wealthy are going to fall the most, meaning that federal tax revenues are going to fall much more. Even in taxation, it's live by the sword and die by the sword, says Bartlett.

For this reason, many economists favor a flat rate consumption tax to smooth tax collections. Since consumption varies less than income over the business cycle, government revenues would be far more stable from year to year, rather than skyrocketing up when times are good and collapsing when times are bad, explains Bartlett.

Source: Bruce Bartlett, National Center for Policy Analysis, August 2, 2004 and David Cay Johnston, "I.R.S. Says Americans' Income Shrank for 2 Consecutive Years," New York Times, July 29, 2004.


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