Taxes: Myths And Realities

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] [1]. 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] [2]. 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] [3]. 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] [4]. 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] [5].

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] [6]. 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] [7]. This redistribution translates to income inequality in America reaching levels not seen since the Gilded Age [Emmanuel Saez] [8].

Income inequality in the United States is so bad, we rank 77th among countries worldwide, tied with Georgia, Tunisia and Turkmenistan [United Nations] [9]. And among OECD countries, we rank close to last in terms of income equality [Organization for Economic Cooperation and Development] [10].

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 [11]]

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 [12]]
• 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 [12]] [PriceWaterhouseCoopers] [13]
• 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 [14]]
• 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 [15]]

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] [5]. Because of reduced capital gains taxes, the top 400 taxpayers cumulatively saved $10 billion between 1995 and 2005. [CBPP [16]] Warren Buffett pointed out that it is unjust for him to pay taxes at a lower rate than his secretary [Raw Story [17]].

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 [18]]

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] [19]

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] [20]

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 [21]]. 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 [22]].

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 [18]].

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] [23]

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 [24]] Closing that loophole would increase government revenues by $98 billion a year. [Institute for Policy Studies] [25]

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] [25]

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 [26]] 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 [27]].

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] [28]. 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.