This AEI Chart Shows Why It’s Hard to Give Poorer Americans a Big Tax Cut

It’s quite impossible to offer people a comparatively huge tax cut when they’re paying a comparatively tiny percentage of income taxes.

Media often publish articles explaining how tax cuts only benefit “the rich.”

From the New York Times’s article, “You Know Who the Tax Cuts Helped? Rich People,” and a Newsweek piece entitled “Trump’s Tax Cuts Didn’t Benefit US Workers, Made Rich Companies Richer, Analysis Finds,” to similarly headlined articles in Vice, the Washington Post, and Vanity Fair, it’s a common narrative.

Often, critics of tax cuts tell readers that the policy is not for “them,” the working class. A July Vox article depicts this stance very clearly:

...the Institute on Taxation and Economic and Policy, a liberal-leaning think tank, found that from 2001 through 2018, changes to the federal tax code have reduced revenue by $5.1 trillion. Sixty-five percent of the savings have gone to the richest fifth of Americans, with 22 percent of them going exclusively to the top 1 percent.

According to the institute’s estimates, by 2025 the tax cuts will grow to $10.6 trillion. Of that amount, almost $2 trillion will be received by the wealthiest 1 percent of Americans.

“If you look at the richest 1 percent, they’re getting more than the bottom 60 percent of Americans,” Steve Wamhoff, director of federal tax policy at the institute and co-author of the report, told Vox.

Facts Left Out

But crucial facts are often missing in these articles. As a recent Bloomberg piece explained, two key points tend to be overlooked in articles written by media outlets and progressive tax proponents:

  1. The top 1 percent paid a greater share of individual income taxes (37.3 percent) than the bottom 90 percent combined (30.5 percent).
  2. The top 50 percent of all taxpayers paid 97 percent of total individual income taxes.

These numbers date back to 2016 but remain applicable in 2018.

These data show that the bottom 50 percent of US taxpayers paid just 3 percent of total income taxes in 2016, while the top 50 percent accounted for 97 percent.

Here is a wonderful visual representation of this dynamic, courtesy of Mark Perry of the American Enterprise Institute:

There is a clear correlation between economic freedom and prosperity, and tax climate is a key component of economic freedom.

Economist Dan Mitchell explains it best: Heavy taxation destroys entrepreneurship. The more money is taxed out of the private sector, the less is available for investment, development, and worker compensation (recall that after Trump’s tax bill was enacted, many businesses raised workers’ wages and offered bonuses).

It’s quite impossible to offer people a comparatively huge tax cut when they’re paying a comparatively tiny percentage of income taxes.

Efforts to improve America’s tax climate are consistently and predictably derided as tax cuts for “the rich.” But, as the above diagram shows, it’s quite impossible to offer people a comparatively huge tax cut when they’re paying a comparatively tiny percentage of income taxes.

Tax data show that the richest 1,409 American taxpayers paid more than the bottom 70 million. (So if you're looking for a utilitarian reason to not eat the rich, in addition to the moral one, there you go.)

The lesson? Next time someone complains that wealthier Americans got a bigger tax cut than poorer Americans, just point out that wealthier Americans (those in the top half) pay 97 percent of income taxes in America. Of course their tax cut will be bigger.

Further Reading

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