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May 3, 2011

Myths of Tax Cuts for Rich, Spending Cuts for Poor

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Conventional wisdom becomes dangerous when it contradicts analysis and evidence. On the federal budget, for example, we’re told that the rich are evading their fair share of the tax burden while the poor are seeing their spending slashed.

These assumptions have consequences. The president’s deficit commission — which maintains that everything is on the table — left the $638 billion federal anti-poverty budget virtually untouched. Others assert that finally soaking the rich will close the budget deficit.

Basic government data reveal this conventional wisdom to be flat wrong: Anti-poverty spending is at record levels. The rich are shouldering more of the tax burden than ever. The federal budget is more redistributive than ever.

First, let’s examine taxes. The nonpartisan Congressional Budget Office reports that the richest 20 percent of taxpayers now shoulder a record 86 percent of the federal income tax burden. This is substantially higher than when Ronald Reagan took office (64 percent) and even higher than when George W. Bush took office (81 percent).

How could the tax code become even more progressive after President Bush's tax cuts? Imagine an income tax cut that reduces Montgomery Burns’ tax from $95,000 to $85,000 and Homer Simpson’s tax from $5,000 to $0. Mr. Burns saves more dollars, but the Simpsons see a larger percentage reduction in their taxes. As a result, Mr. Burns goes from paying 95 percent of the combined tax burden up to 100 percent.

This happened with the 2001 and 2003 tax cuts. Although Mr. Bush reduced taxes for wealthy individuals, he also cut the lowest income tax bracket by one-third and doubled the refundable child tax credit — taking 10 million low-income families off the income tax rolls. In fact, the poorest 40 percent of households now pay zero income taxes, and many actually receive checks from Washington on April 15.

Examining all federal taxes — including corporate, payroll and excise taxes — doesn’t significantly change the story. In 1980, the richest 20 percent financed 55 percent of all federal revenue. Today, they finance a record 69 percent. In that time, the portion of all taxes paid by the top 1 percent has doubled. The portion paid by the bottom 40 percent has dropped nearly in half.

The data are clear. Nearly every year, the federal tax burden tilts even further toward upper-income taxpayers. Seekers of a more progressive tax policy should answer two questions: If 86 percent of the income tax burden is not enough, how much should the top 20 percent of taxpayers pay? And if the bottom 40 percent paying no income taxes is not sufficient, what is?

The flip side of the “tax cuts for the rich” mantra has been “spending cuts for the poor.” Again, the official government data flatly contradict the conventional wisdom.

According to the White House’s Office of Management and Budget, federal anti-poverty spending has soared from $190 billion in 1990 to $348 billion in 2000, and to a staggering $638 billion this year (all adjusted for inflation). The growth since 2000 has been particularly remarkable in the Children’s Health Insurance Program (470 percent), food stamps (229 percent), energy assistance (163 percent), child care assistance (89 percent) and Medicaid (80 percent).

These expansions have been bipartisan: Mr. Bush — unfairly derided as bad for poor people — became the first president to spend more than 3 percent of the nation’s income on anti-poverty programs. President Obama then pushed it above 4 percent. In fact, since 1990, anti-poverty spending as a share of national income has expanded as fast as Social Security, Medicare, defense and education — combined.

So why the perceived “spending cuts for the poor”? Because anti-poverty spending increases (as large as $60 billion annually) occur automatically, and therefore go largely unnoticed. Yet any lawmaker proposing to shave even $1 billion off that growth is loudly attacked for “declaring war” on the safety net.

Missing is any broader context. Also missing is serious engagement with Robert Rector’s research displaying the ineffectiveness of much of this spending.

Washington faces enormous budgetary problems, including trillion-dollar deficits and the exploding costs of Social Security and Medicare. A lack of redistribution of wealth from the rich to the poor is not one of those problems.

Brian Riedl is the Grover M. Hermann fellow in federal budgetary affairs at the Heritage Foundation

First appeared in The Washington Times

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