Taxes: Myths And Realities

$604
The average tax cut the working poor got in 2009 under President Obama.

$22
The average tax cut the working poor got under President Bush’s tax cuts.

4.6
The percentage of income that a family of four in the exact middle of the income spectrum will pay in income taxes this year, according to the Center for Budget and Policy Priorities. That’s the second-lowest percentage in the past 50 years.

10 percent
The increase in the average tax return that most working families are receiving this year due to tax cuts enacted under President Obama.

66.7 percent
The percentage of U.S.-owned corporations that paid no income tax in 2005, according to the Government Accountability Office.

President Obama’s tax cuts benefitted more than 95 percent of Americans.

The average American is receiving a refund of nearly $3,000—up more than 10 percent over last year—thanks to the Obama tax cuts for 95 percent of Americans [The White House]. Tax reductions that benefit working families include the Making Work Pay tax cut ($400 for individuals, $800 for couples) and changes in the child tax credit and the earned income tax credit that made more people eligible to take those deductions.

Families in the bottom 20 percent of income (up to $19,792 in 2009) received an average tax cut of $604 under the 2009 tax cuts [Citizens for Tax Justice]. The 2001 and 2006 tax cuts under President Bush resulted in an average tax cut for the bottom 20 percent of income earners of just $22 [Tax Policy Center]. The next 20 percent of earners (making up to $38,000 in 2009) got an average tax cut of $628 under the 2009 tax cut. The same group only got an average reduction of $360 under the Bush tax cuts.

Conservative tax policies helped the rich the most, and left everyone else poorer.

Under conservative government, wealth was redistributed—upward. Under the Bush administration, the incomes of middle-range households stagnated. Workers with earnings in the lower range lost more ground and, taking inflation into consideration, on average earned less than they did in 2000 [U.S. Census Bureau]. From the end of 2001 to the end of 2007), two-thirds of the nation’s total income gain flowed to the highest-income 1 percent of Americans. Between 1992 and 2007, the average income of the top 400 households, after federal income taxes, increased by 475 percent [Center for Budget and Policy Priorities].

In the long run, conservative policies have made a serious income inequality problem even worse. Adjusted pre-tax household income grew just 13.2% between 1992 and 2007 for the median family of four, but surged 409% for the top 400 households. [Economic Policy Institute]. Now the combined net worth of the Forbes 400 wealthiest Americans is almost as much as the combined net worth of the lower 50 percent of all American households ($1.5 trillion v. $1.6 trillion) [Extreme Inequality]. This redistribution translates to income inequality in America reaching levels not seen since the Gilded Age [Emmanuel Saez].

Income inequality in the United States is so bad, we rank 77th among countries worldwide, tied with Georgia, Tunisia and Turkmenistan [United Nations]. And among OECD countries, we rank close to last in terms of income equality [Organization for Economic Cooperation and Development].

It’s the wealthy and corporations, not working Americans, who avoid taxes.

Conservatives claim that nearly half of Americans pay no income taxes right now, as if it’s low-income workers who are skipping out on their tax responsibility. Yet the wealthy enjoy most of the income generated by capital investments that are taxed at a lower rate than the income middle-class workers earn. Corporations, too, skip their tax bill. 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]

Here’s the truth about corporate taxes:

  • The problem is not that corporations are overtaxed. In fact, 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 61st of over 100 countries. [World Bank]
  • 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 (23rd highest tax rate), India (21st), and Mexico (45th). [World Bank] [PriceWaterhouseCoopers]
  • 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]
  • 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]

People who earn their fortunes from the stock market shouldn’t be taxed at a lower rate than the average worker.

Billionaires and hedge-fund CEOs pay lower tax rates than their secretaries. That’s because the capital gains tax is currently at 15 percent, while the taxes on earned income—what millions of Americans get for doing their jobs—is taxed at rates as high as 35 percent. It’s conservatives who have championed cutting capital gains taxes in the name of promoting investment. The effect, though, is that the 400 U.S. taxpayers with the very highest incomes pay income taxes worth only 15 percent of their income on average, less than half the top tax rate on wages and salaries for the typical American. The top 400 taxpayers derived two-thirds of their income from capital gains and qualified dividends in 2007 [CBPP]. Because of reduced capital gains taxes, the top 400 taxpayers cumulatively saved $10 billion between 1995 and 2005. [CBPP] Warren Buffett pointed out that it is unjust for him to pay taxes at a lower rate than his secretary [Raw Story].

The Obama Administration’s fiscal year 2011 budget proposes to raise the capital gains tax rate to 20 percent for high-income households, still well below the 28 percent capital gains tax rate enacted under the Reagan administration and in effect for most of the 1990s. For dividends, at 20 percent the top rate would be roughly half of what it was during the prosperous 1990s. Under the Obama proposal, therefore, the very highest-income filers would continue to pay income tax at very low effective rates.

Conservative rhetoric about the "death tax" is just that: rhetoric. The facts don’t match the right-wing hype.

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. [Public Citizen]

The federal estate tax doesn’t affect the middle class—it applies only to the very wealthiest taxpayers. The IRS data show that only 0.7 percent— less than one percent — of deaths in 2007 resulted in estate tax liability in 2008. [Citizens for Tax Justice]

In 2009, any estate worth less than $3.5 million (or $7 million per couple) was passed on to heirs and heiresses estate-tax free. In fact, fewer than one of every 3,000 estates is subject to the tax. And this year (2010) the estate tax is repealed, before returning to pre-Bush tax rates in 2011. [CBPP]

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]. In fact, the American Farm Bureau Federation has never cited a single example of a farm having to be sold to pay estate taxes [The New York Times].

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].

Those who have prospered the most should contribute their fair share toward a more prosperous, and less debt-laden, future.

Allowing the Bush tax cuts to expire for married filers with incomes above $250,000 and single filers with incomes above $200,000—the top 2 percent of U.S. households—would reduce the federal deficit by $826 billion over the next 10 years. More than half of that amount ($443 billion) would result from allowing the top two marginal tax rates to expire for those high-income households. [CBPP]

There is no good reason for wealth to be taxed at a lower rate than work. The current capital gains tax rate of 15 percent is the lowest it’s been in years and is two-and-a-third times the top tax rate for wage income, 35 percent. That’s simply unfair. [Citizens for Tax Justice] Closing that loophole would increase government revenues by $98 billion a year. [Institute for Policy Studies]

Let’s stop the estate tax hysteria. A graduated estate tax rate that was limited to estates valued at more than $2 million, or $4 million for a couple, would apply to only one of every 200 estates. But that would mean $40 billion a year that could be used to help reduce the deficit or for important spending priorities. [IPS]

Other reasonable steps we could take to restore fairness to the tax code include closing offshore tax-haven loopholes that corporations use to hide profits and evade at least $100 billion in taxes each year.

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. [The Washington Post] 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].

Today conservatives decry President Obama’s plan to let the Bush tax cuts expire for the wealthiest Americans, saying it is an attempt to "soak the rich." The truth is that under Obama, the top 5% of households will still enjoy slightly lower tax rates than seen during the Clinton years [CBPP]. And, more importantly, the nation can’t afford more tax give-aways to the rich that contribute nothing to revitalizing our economy or to the investments we need for our future prosperity. Progressive tax policies will allow us to reduce our federal deficit while enabling the investments in people and infrastructure for a sustainable, shared prosperity.

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] 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] 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]

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]

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] 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]

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] 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]

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]

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] 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] 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]

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] Billionaire Warren Buffet famously criticized our tax system for taxing him at a substantially lower rate than his secretary. [Raw Story]

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]

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] 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] 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]

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]

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]

“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] 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] In fact, only one of every 300 estates is subject to the tax. [Center for Economic and Policy Research]

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] 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]

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] That’s more than twice as much as we pay for everyone’s Social Security benefits. [Social Security Administration]

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]

Adapted from “Making Sense 2008″ issue alerts, Campaign for America’s Future. October 2008.