The Truth about Taxes, the Rich, and the Poor

Townhall.com ^ | August 26, 2011 | Craig Steiner

[Kaslin]

For as long as I can remember, allegations and accusations about taxes and the rich and the poor have been a part of every election--well, except the current 2006 election which has not substantively addressed any issue other than Republicans prodding voters to "stay the course" and Democrats prodding voters to vote against Bush.

But in a normal election, Democrats inevitably accuse Republicans of promoting tax cuts that benefit primarily the rich, and the slogan "The rich got richer while the poor got poorer" is something that no election can go without. The same arguments are made election after election, so when someone recently made that accusation on a message board, I decided to investigate whether it is really true or if it's just been repeated so much that it's accepted as truth with no supporting evidence.

Do Tax Cuts Benefit Primarily The Rich?

In a word, yes. Now before anyone rushes to conclusions, it must fairly be pointed out that the reason the rich benefit most from tax cuts is because the rich are the ones that pay taxes. If I don't buy milk very often, I'm not going to see much benefit if there's a decrease in the price of milk. Likewise, if I don't pay much in taxes, I'm not going to see much benefit if there's a decrease in taxes. That doesn't mean a decrease in the price of milk or a tax cut is a bad thing, it simply means it will only effect those people that buy milk or pay taxes.

IRS data shows  that in 2004, the richest 50% of the taxpayers paid 96.7% of all income taxes. From 1986 to 2004, the share paid by the richest half increased from 93.5% to 96.7%, and the share paid by the richest 1% increased from 25.75% to 36.89%. At the same time, the amount paid by the poorer half decreased from 6.5% in 1986 to 3.3% in 2004. While the poor's contribution was cut in half, the richest Americans saw their contribution increase by nearly 50%. When you get past the propaganda, for the last two decades the rich have been paying more and more while the poor have been paying less and less.

To put it simply, of the $832 billion in personal income taxes collected in 2004, the richest half of the country paid $804 billion while the poorest half only paid $27.4 billion.

Those that make the claim "the tax cuts help the rich" will claim that the reason why the rich paid so much more in taxes is because they made so much more money. There is truth to that, though the progressive nature of the tax code also insures that the rich pay more than they should, proportionally speaking. However, the reason for the rich paying so much more is irrelevant to this discussion: If the "rich" are paying 96.7% of the income taxes and the poor are only paying 3.3%, then it's simply common sense that most of any income tax cut will benefit those that arepaying it. You can't reduce taxes on someone who isn't paying any.

Are the poor paying taxes? In 2005, a family of four was considered to be at the poverty level if they earned less than $19,350 . If you complete a 2005 1040  considering an income of $19,350 and four family members, you will find that the standard deduction for the couple is $10,000, and an additional $3200 deduction is given for each of the four family members for an additional $12,800. So, in all, the family earning $19,350 has $22,800 in income deductions which means they pay no federal tax. In fact, a family of four will not pay a single dollar in federal tax until the family earns at least $22,800. Since these people pay no taxes whatsoever, a tax cut will obviously not be of any direct benefit to them since they aren't paying taxes to start with. This doesn't make the tax cut a bad idea, but it stands to reason that it won't directly benefit anyone that isn't paying taxes any more than a price reduction in milk won't help anyone that isn't buying milk.

The Washington Post reached a similar conclusion:



Based on these numbers, it would be hard to argue that the country doesn't already have a significantly progressive tax system. Taxes aren't just for suckers, with cashiers paying more of their income than corporate chief executives...

But there is a limit to how much the tippy top should bear. President Obama has promised that taxes will not be increased for families making under $250,000. That is a promise that will probably have to be dropped down the road. There just isn't enough revenue to be found above that figure unless we create a system so lopsided that voters would always want more government spending because it would come at such a low price. 


In other words, we can't just keep extracting more and more money from the rich as if there were an endless supply of money. Everyone is going to have to pay for all of this spending eventually, not just the rich.

CNN reached a similar conclusion:



The top fifth of households made 56% of pre-tax income in 2006 but paid 86% of all individual income tax revenue collected, according to the most recent data available from the Congressional Budget Office... 

The Tax Policy Center estimates that for 2009, 43% of tax units (most of which are lower income households that may or may not file a return) will have no income tax liability or will have a negative income tax liability, meaning the government will actually pay them. 

A tax cut cannot be given to someone who is not paying taxes. The poor do not pay taxes so, by definition, a tax cut won't help them. 

Saying that "a tax cut favors the rich" is either based on ignorance (given that you can only give a tax cut to someone that pays taxes, and that the "rich" are really the only ones that pay taxes in any substantial manner) or is disingenous (because the person knows this to be true, but makes the accusation anyway). The statement "a tax cut favors the rich" should be reworded "a tax cut favors those that pay taxes." It would be just as accurate but obviously without the class warfare undertones. Unfortunately, those that state "tax cuts favor the rich" are usually hoping for those class warefare undertones, so hoping for them to use the more accurate and less divisive words is probably utopian.

Do the Rich get Richer and the Poor Poorer?

First, we should agree that there's nothing wrong with the rich getting richer. It would require a selfish, ignorant, and hateful person to want anyone to get poorer. I might not be rich, but I have no vindictive anger that desires that those who've had better fortune do poorly just because I've not done as well myself. That kind of trite material jealousy is best left in grade school.

Second, we should agree that even if the rich are getting richer and the poor are getting poorer, the good fortune of the rich is only objectionable if it came at the expense of the poor. It is not honest or useful to complain about some people doing well simply because other people aren't doing as well unless it can be shown that one's success came at the expense of other people's failure.

So what do the numbers say? As usual, the numbers can pretty much say whatever you want them to say. If you check the U.S. Census Bureau , we can see that in 1967 the lowest fifth of wage earners earned 4.0% of the total national income and in 1998 they earned 3.6%--a decrease of 0.4% over 20 years. In the same time, the highest fifth of wage earners went from 17.5% to to 21.4%. Using these numbers, you might make the argument that the rich did indeed get richer while the poor got poorer.

However, this is--in and of itself--a shallow argument. It's entirely possible that everyone got richer, but the rich got a larger portion of the new wealth. For example, perhaps the poor earned $100 and the rich earned $1000 while a few years later the poor earned $150 and the rich earned $2000. In this case, even though the poor person is earning 50% more, his share of total income will have dropped from 9.1% to 7.0%. The fact that their share of total income dropped doesn't mean they got poorer.

In fact, that's exactly what appears to have happened. Referring to the chart on page 5 of the same link, we see that the top of the lowest fifth bracket went from $13,471 in 1967 to $16,116 in 1998, a growth of 19.6% in real terms. During the same time, the top fifth of wage earners went from a minimum of $53,170 in 1967 to $75,000 in 1998, a growth of 41.1%. Similar increases can be observed in each of the income brackets.

Everyone got richer, but the rich got richer faster.

This is hardly surprising. Someone that is rich is going to have more extra money that they can invest which, in turn, creates more money. Money generates money and no-one disputes that being rich is, by definition, a financial advantage in a capitalistic society. Short of draconian wealth redistribution, this will always be the case. However, the macro-economic data from 1967 to 1998 does not support the assertion that the rich got richer and the poor got poorer. The data supports the position that everyone got richer. While there may be year to year variations in a negative direction, the long-term trend is that all Americans are getting richer.

Conclusion

As has been shown above, the claim that "tax cuts benefit the rich" is true inasmuch as the rich are the ones that pay taxes in the first place. The statement is true but could be more accurately (and less divisively) stated as "tax cuts benefit those who pay taxes." The assertion that the rich have gotten richer while the poor have gotten poorer is patently false and is simply not supported by the evidence.

I hope readers will keep this in mind as they evaluate the current and future assertions made by politicians.

[Signalman]

I like the flat tax.

[festusbanjo]

The rich get richer because they continue to do the things that made them rich in the first place (education, hardwork, responsible shoices, investing). The poor get poorer because the continue to make the same mistakes that likely caused them to be poor in the first place(lack of education, drug use, bad choices, not recognizing the connection between hard work and achievement). If you are poor and want to be rich, try emulating a rich person’s actions rather a poor person’s.

[Repeal The 17th]

I like the “Fair Tax” minus the prebates.

[StopSpending]

I like the idea of cutting taxes all Americans. But the tax cuts SHOULD benefit the rich because they pay the most.

[Vintage Freeper]

Actually, the article addresses only the issue of tracing the tax dollars, but it is completely devoid of economic understanding. Taxing the rich to give the money to the poor is economic insanity; here's why:

"Government is not the solution; goverment is the problem!" President Ronald Reagan, First Inaugural, 1981.

    The first step toward solving the problem of government requires challenging, and then changing the simplistic thinking of voters who accept the flawed premise put forward by most politicians, "Government should tax the rich so that it can help the poor and the less fortunate," when in fact, nothing can be farther from the truth.

    Economist, Dr. George Reisman, introduces the last chapter of his epic book, CAPITALISM: A Treatise on Economics, with this statement, "The principles and theories presented in this book call for a society of laissez-faire capitalism.... If such a society is to be achieved, a political movement pursuing a long-range program will be necessary,"¹ but it is in Chapter 9 where Dr. Reisman shares the vital message needed to defeat the socialists. As is so often the case, in order to get the correct answer, it is necessary to ask the correct question. In this case, who actually gets or enjoys the benefit of the wealth owned by the rich?

The following has been excerpted with Dr. Reisman's copyright permission from CAPTIALISM: A Treatise on Economics², pages 296-299.

"1.  The General Benefit from Private Ownership of the Means of Production

    "The influence of the division of labor on the institution of private ownership of the means of production is almost universally ignored. Typically, people think of privately owned means of production in terms that would be appropriate only in a non-division-of-labor society. That is, they think of them in the same way that they think of privately owned consumers’ goods—namely, as being of benefit only to their owners. They believe that before the nonowners can benefit from the means of production, they must first become owners.¹
    "This belief underlies the popularity of all forms of 'redistributionism' and socialism.² People believe that so long as wealth remains concentrated in the hands of a relatively small number of capitalists, the capitalists alone benefit from it. For the great mass of noncapitalists to benefit, it is believed, the wealth of the capitalists must first be taken away and given to the noncapitalists, or be held by the government and used for the collective good of all....

"The Benefit of Capital to the Buyers of Products

     "The first thing that must be realized is that in a division-of-labor society, all private property that is in the form of means of production—i.e., of capital—serves everyone, nonowners as well as owners. In a division-of-labor society, the means of production are not used in producing for their owners’ personal consumption, but for the market. They are used in producing goods that are sold. The physical beneficiaries of this private property—and it is the far greater part of the capitalists’ wealth—are all those who buy the products it helps to produce. In other words, it is the general buying public who are the physical beneficiaries of the capitalists’ capital.
    "Consider, for example, the question of who are the physical beneficiaries of the auto plants of General Motors.... Almost 100 percent of General Motors’ auto output goes to people who do not own a single share of its stock or a single one of its bonds. The same is true of every other business enterprise....

    "Thus, the overwhelmingly greater part of the physical benefit derived from the privately owned means of production in a capitalist economic system goes to nonowners of the means of production—to wage and salary earners.
    "It cannot be stressed too strongly: the simple fact is that in a division-of-labor society, one does not have to own the means of production in order to get their benefit. One has only to be able to buy the products. In a division- of-labor society, one gets the benefit of means of production owned by others—every time one appears in the market as a customer. Indeed, it is of the very essence of a division-of-labor society that one obtains the benefit of others’ means of production, just as one obtains the benefit of others’ labor and knowledge, and that this occurs by means of the purchase of products in the market. It is only in a non-division-of-labor society, in which there is little or no production for the market, in which the producer and the consumer are almost always one and the same person, that privately owned means of production benefit only their owners, or virtually only their owners.
    "Implicitly, it is such a society that the enemies of capitalism have in mind. They have not yet woken up to the fact that capitalism is a division-of-labor society. They are unaware that in a division-of-labor society, the means of production serve everyone who buys products, and that thus, under capitalism, there is a general benefit from the capital owned by the capitalists—a benefit which everyone shares in his capacity as a buyer of products, even if he himself does not own any means of production or capital.
    "This general benefit, it should be realized, applies to all of the means of production, not merely to those which are employed in the direct production of consumers’ goods. The benefit of the steel mills that produce the steel that enters into GM’s cars goes to the buyers of the cars, along with the benefit of the auto plants, as does the benefit of the iron mines that contribute to the production of that steel, and the benefit of the factories that produce iron-mining equipment. The benefit of the land that grows wheat goes to the buyers of bread, as does the benefit of the tractors used in the growing of wheat, and the benefit of the factories which produce those tractors, along with the benefit of the flour mills that make the wheat into flour, and of the bakeries that finally turn out the bread.

    "Furthermore, if we are to acknowledge the truth, we must recognize that the general buying public, composed overwhelmingly of wage and salary earners, not only obtains the benefit of all of the means of production owned by the capitalists, but exercises real and decisive power over the ways in which those means of production are employed.... The buying public thus places the capitalists in a position in which, to make profits and avoid losses, they must produce what it wants to buy, and abstain from producing what it does not want to buy.⁴ In a division-of-labor, capitalist society, it is ultimately the consumers—composed, it cannot be stated too often, overwhelmingly of wage and salary earners—who determine not only the pattern of production, including the relative size of the various industries, but even the specific methods of production used in every industry. For the demand of the consumers determines the relative prices of the factors of production, such as the wages of skilled versus unskilled labor, or the price of copper versus the price of aluminum, and thus which methods of production are more economical in any given case.⁵

    "The power of the consumers under capitalism is such that businessmen and capitalists are constantly on the lookout for ways in which they might supply the consumers better. For example, a businessman or capitalist who has invested in a clothing store or clothing factory, in a restaurant, or in the manufacture of breakfast foods, or who is contemplating such an investment, is vitally interested in improving the clothing or the food he sells. He is interested not because he values the satisfaction of others’ needs for its own sake, but because he values his own wealth. The only way to increase his wealth, or prevent the competitive improvements introduced by others from decreasing it, is for him to serve his customers better and more efficiently. This, of course, applies to all branches of production that are privately owned and subject to the freedom of competition. It dictates the behavior not only of producers of consumers' goods, but also of suppliers at all stages of production, such as those who sell cloth to the clothing factories, and raw material to the factories which make the cloth. For the businessmen who sell to consumers seek to buy means of production that will enable them to produce products of the kind the consumers most want, and to do so at the lowest possible costs of production. The suppliers of these businessmen in turn are obliged to purchase means of production that produce products that best satisfy these criteria. The same principle guides the suppliers of these suppliers, and so on through all stages of production. In other words, the whole system operates so as to produce the best possible products for the final buyers, the consumers, and to do so at the lowest possible costs.
    "....Let there be any need or desire whatever for whose satisfaction a sufficient number of consumers are willing to pay profitable prices, and, as soon as they become aware of it, as soon as they have discovered it by a process of actively searching out its existence, businessmen and capitalists race to meet that need or desire. This, of course, is in sharpest contrast to conditions under socialism, where, in the nature of the case, no incentives exist for the rulers to serve the general public⁶....

"The Benefit of Capital to the Sellers of Labor

     "....The second [benefit] is in connection with the fact that capital constantly appears in the market as a demand—expenditure—by the capitalists for means of production, including labor. The capitalists begin their productive activities with outlays of money for labor, materials, and equipment. The revenues they subsequently take in from the sale of the products they produce are then almost entirely reexpended in the form of fresh outlays for labor, materials, and equipment. These outlays of the capitalists for labor are what make possible the purchase of products by noncapitalists. They are the incomes of the wage and salary earners....
    "It should be obvious that the more economically capitalistic the economic system is, in the sense of the capitalists expending a larger proportion of their sales revenues for means of production and a smaller proportion on their own consumption, the higher will be the income and consumption of wage and salary earners in comparison with the consumption of the capitalists. In other words, the more the capitalists abstain from consumption, in order to accumulate or maintain their capitals, the larger the share of the economic system’s output of consumers’ goods that goes to wage and salary earners, and the smaller the share that goes to capitalists.⁷

"The Direct Relationship Between the General Benefit from Capital and Respect for the Property Rights of Capitalists

    "There is a conclusion that follows from all this which will appear highly paradoxical to many people, because it totally contradicts all they have been mistakenly led to believe—by the educational system, by the media, and by our culture in general—but which is nonetheless perfectly logical and correct. That is, the more the private property rights of capitalists are respected, the greater are the benefits to noncapitalists. Because to the extent that their rights are respected, the capitalists are encouraged to save and accumulate capital; their own consumption is small in relation to their capital and grows only as their capital grows. In each year the demand for labor and for capital goods is correspondingly larger—because of the capitalists’ greater saving—and the share of consumers’ goods purchased by wage earners is likewise correspondingly larger....

    "But what is most important of all in the long run, and subsumes all the other benefits, is that if the capitalists’ property rights are sufficiently respected, then from year to year the total production of consumers’ goods available to everyone tends to grow and thus the purchasing power of everyone’s income tends to rise. In other words, there is not only a general benefit from private ownership of the means of production, but a progressively increasing general benefit....
    "The conclusion should already be obvious that an individual is far better off as a nonowner of the means of production under capitalism than he is as an equal owner under socialism. For in his capacity both as a wage earner and as a consumer he obtains the benefit of the means of production owned by others. In a division-of-labor, capitalist society, others’ means of production are the source both of the demand for his labor and of the supply of the goods he buys. And his benefit in both capacities is the greater, indeed, becomes progressively greater, the more the property rights of those others are respected.

"Notes

1. "Cf. Ludwig von Mises, Socialism (New Haven: Yale University Press, 1951), pp 40-42; reprint (Indianapolis: Liberty Classics, 1981). Page references are the Yale University Press edition; pagination from this edition is retained in the reprint edition.

2. "For a discussion of its influence on the mentality of destructionism, see above, pp. 230-231.

3. [Cf. von Mises, Socialism, pp 500-504.]

4. "See above, p. 174. This, of course, is a leading theme of von Mises.

5. "See above, pp. 201-212.

6. "See above, pp 275-278 and 288-290.

7. "For elaboration of the significance of this fact, see below, pp. 477-480. See also below, pp. 632-634."

References

1. George Reisman, Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996) p. 969. Copyright © 1996, by George Reisman. The quotations above from Capitalism appear with the permission of the author, Dr. George Reisman, who has graciously consented to the use of this copyrighted material.

2. Ibid., pp. 296-299.

[RWB Patriot]

One thing I’ve learned about taxes is that they tend to be based on hate and jealousy. I’ve yet to hear a single push for raising them on the “rich” that didn’t include some version of “why should so and so who makes more than you have the same taxes as you when he/she can afford to give more”?

[r-q-tek86]

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