NCPA - National Center for Policy Analysis

Trickle Down Taxes

August 1, 2000

Remember the luxury tax passed by Congress in 1990 on expensive jewelry, furs, automobiles and boats? Although aimed at the rich, it was repealed three years later because those most hurt were thousands of low- and middle-income workers who lost their jobs as the luxury goods and recreational boating industries went into a severe recession.

That experience should have served as a lesson that regardless of which taxpayers are targeted, high taxes impact all earners, one way or another.

Consider the following example:

  • An average two-income couple in the 31 percent tax bracket must also pay 12.4 percent in Social Security taxes, and 2.9 percent in Medicare taxes on each of the two incomes, as well as state and local income taxes -- amounting to a marginal tax rate which could easily exceed 50 percent.
  • That means a $30,000 college tuition really costs $60,000 -- and $250,000 put away toward retirement demands $500,000.
  • So say that if someone in this tax bracket wants to spend $20,000 to renovate his house, he must first earn $40,000.
  • Assuming the contractor is in a similar tax bracket, the contractor will take home only about $10,000 after income and other taxes are taken out.

Experts say that talking about tax cuts in terms of their impact on the "rich" only obscures the fact that in the final analysis all Americans pay.

Source: Charles W. Kadlec (J & W Seligman Co.), "How Taxes Trickle Down," New York Times, August 1, 2000.


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