Misleading on Tax Cuts That "Offer Most For Very Rich"

Middle-income earners saw their taxes "edge down" by a mere....42%!

Economics reporter Edmund Andrews throws more fuel onto the Times' class-war fire in his Monday report, "Bush Tax Cuts Offer Most For Very Rich, Study Finds," based on a new study from the Congressional Budget Office.

"Based on an exhaustive analysis of tax records and census data, the study reinforced the sense that while Mr. Bush's tax cuts reduced rates for people at every income level, they offered the biggest benefits by far to people at the very top - especially the top 1 percent of income earners."

Of course, in a progressive tax system, it's hard to design any kind of fair tax cut plan in which "the rich" don't see their taxes reduced, given that they're paying more than their share already.

Andrews manages to spin the inconvenient fact that the rich pay far more in taxes into a class war tidbit: "Though tax cuts for the rich were bigger than those for other groups, the wealthiest families paid a bigger share of total taxes. That is because their incomes have climbed far more rapidly, and the gap between rich and poor has widened in the last several years."

Isn't it always?

"Families in the middle fifth of annual earnings, who had average incomes of $56,200 in 2004, saw their average effective tax rate edge down to 2.9 percent in 2004 from 5 percent in 2000. That translated to an average tax cut of $1,180 per household, but the tax rate actually increased slightly from 2003."

(A slight increase indeed, as the actual figures from the CBO appendix show - a grand move of 0.1%, from 2.8% to 2.9%. So why even bring it up?)

"Tax cuts were much deeper, and affected far more money, for families in the highest income categories. Households in the top 1 percent of earnings, which had an average income of $1.25 million, saw their effective individual tax rates drop to 19.6 percent in 2004 from 24.2 percent in 2000. The rate cut was twice as deep as for middle-income families, and it translated to an average tax cut of almost $58,000."

The math is a bit tricky, but suffice to say that it's misleading to focus on the decline in percentage points of tax rates when what matters most to people is the decline in the percentage of actual taxes they pay. Andrews dismisses the "edge down" of the effective federal tax rate for middle-income earners from 5% in 2000 to 2.9% in 2004 (a reduction of only 2.1 percentage points). Yet that reduction marks a 42% decline in actual taxes paid.

Andrews seems bugged that the top 1% of earners went from paying an effective federal tax rate of 24.2% in 2000 to 19.6% in 2004 - a 4.6 percentage point reduction in their tax rate, which is indeed a larger reduction than the 2.1 percentage point reduction for middle-income families: "The rate cut was twice as deep as for middle-income families."

But as noted above, those middle-income families got a much steeper reduction in the amount of actual taxes paid - their effective federal tax rate fell 42%. By contrast, the top 1% of earners received only a 19% cut. The dollar amount of the tax cut amounted to more for the top earners only because they earned more money and thus paid more in taxes under America's system of progressive taxation.

Andrews does note later that the rich pay a huge share of federal income taxes, while bottom earners pay virtually none. "The top 1 percent of income earners paid about 36.7 percent of federal income taxes and 25.3 percent of all federal taxes in 2004. The top 20 percent of income earners paid 67.1 percent of all federal taxes, up from 66.1 percent in 2000, according to the budget office.

"By contrast, families in the bottom 40 percent of income earners, those with incomes below $36,300, typically paid no federal income tax and received money back from the government. That so-called negative income tax stemmed mainly from the earned-income tax credit, a program that benefits low-income parents who are employed."