Tuesday, July 04, 2006

Slicing Up the Tax Pie

Over at the RBC, James Wimberley posts the following graph, based on data from the Tax Policy Center:

Tax Cuts

Wow, that looks pretty bad. The richest quintile got the biggest slice of the tax reduction, and the poorest quintile got the smallest. Wimberley (implicitly) invites us to draw the obvious conclusion: the rich got a great deal and poor got screwed.

But hold on a minute. On the Tax Policy Center’s website, you can also find data on the percentage of taxes paid by the quintiles back in 2000, before the Bush tax cuts. Here’s a graph:

Taxes Paid

Now things look a bit different. The richest quintile paid 66.7% of the taxes, but got only 64.7% of the rebate. The poorest quintile paid only 1.1% of the taxes, but they got 1.3% of the rebate. More generally: The top two quintiles both got a smaller slice of the rebate than the slice of taxes they paid. The bottom three quintiles all got a larger slice of the tax rebate than the slice of taxes they paid in 2000. Seems to me that the tax code became more progressive.

Here’s a simple example to make my point clear, if it’s not already. Suppose I earn $100,000, you earn $20,000, and each of us faces a tax rate of 20%. Then I pay $20,000 and you pay $4000 in taxes. Now, suppose the tax rate is reduced to 19% for both of us. Then I’ll get a tax rebate of $1000, and you’ll get a tax rebate of $200. Good god, look at that: I got a whopping 83% of the tax rebate, and you got only 17% of the tax rebate! What a gyp! The government must love the rich and hate the poor! But wait a second. I also paid 83% of the taxes to begin with, and you paid 17%. We both got the same percentage back as the percentage we paid in.

The point: if the rich pay a bigger share of the taxes to begin with, then the rich will get a bigger share of tax reductions, too (unless the reductions are aimed specifically at the poor).

There are plenty of reasons to dislike the Bush administration’s fiscal policies, but this isn’t one of them.


Anonymous said...

I love the colorful pie charts!
But by your own numbers, the rich got the bulk of the benefits. So why are you trying to defending that? So what if they pay the bulk of the tax revenue, or if the reductions are proportional to what's paid in.

Like you remark parenthetically, "unless the reductions are aimed specifically at the poor." Well, you know that wasn't Bush's goal. He wanted to give billions back to his rich supporters (as promised). You want me not to hate him for that? You've made me hate him even more, if that's possible.

Tom W. Bell said...

You write: "Suppose I earn $100,000, you earn $20,000, and each of us faces a tax rate of 20%. Then you pay $20,000 and I pay $4000 in taxes." Did you get your pronouns switched in that second sentence?

A third pie chart, one showing the change in marginal rates, would prove the clincher, I think.

Anonymous said...

I don't know what marginal means, but thank you for proving that President Bush cares equally about the poor as he does about the rich. I always knew he was a fair man. I voted for him twice. Aren't rich folks the ones who create all the good, high-paying jobs out in the economy anyway. By all means, they deserve a big tax break. Liberals just don't get it. The guys and gals at Taco Bell don't create any jobs at all as far as I can tell. Economics is a very difficult subject, so thank you for disproving all that propaganda about Bush hating the poor at the expense of the rich. Why isn't your common sense universal?

Glen Whitman said...

Tom -- thanks, I've fixed the typo. I'll look into the marginal tax rates suggestion.

Anon -- "You've made me hate him even more, if that's possible." I think that says a lot more about you than it does about the tax cuts. Are tax cuts aimed at the poor the only tax cuts you'd ever support? Across-the-board tax cuts are unacceptable?

RR -- I see you behind the mustache, Trumpit. (And I think you might be Anon, too.)