The failed experiment - Page 3

How misplaced faith in tax cuts and other economic myths are destroying the country

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When it comes to state and local taxes, the poor bear a heavier burden than the rich in every state but Vermont
ILLUSTRATION BY JUSTIN ROSE

In Wisconsin, Terrence Wall, who unsuccessfully sought the Republican nomination for U.S. Senate in 2010, paid no income taxes on as much as $14 million of recent income, his disclosure forms showed. Asked about his living tax-free while working people pay taxes, he had a simple response: everyone should pay less.

5. And (surprise!) since Reagan , only the wealthy have gained significant income.

The Heritage Foundation, the Cato Institute, and similar conservative marketing organizations tell us relentlessly that lower tax rates will make us all better off.

"When tax rates are reduced, the economy's growth rate improves and living standards increase," according to Daniel J. Mitchell, an economist at Heritage until he joined Cato. He says that supply-side economics is "the simple notion that lower tax rates will boost work, saving, investment, and entrepreneurship."

When Reagan was elected president, the marginal tax rate for income was 70 percent. He cut it to 50 percent and then 28 percent starting in 1987. It was raised by George H.W. Bush and Clinton and then cut by George W. Bush. The top rate is now 35 percent.

Since 1980, when President Reagan won election promising prosperity through tax cuts, the average income of the vast majority — the bottom 90 percent of Americans — has increased a meager $303, or 1 percent. Put another way, for each dollar people in the vast majority made in 1980, in 2008 their income was up to $1.01.

Those at the top did better. The top 1 percent's average income more than doubled to $1.1 million, according to an analysis of tax data by economists Thomas Piketty and Emmanuel Saez. The really rich, the top 10th of 1 percent, each enjoyed almost $4 in 2008 for each dollar in 1980.

The top 300,000 Americans now enjoy almost as much income as the bottom 150 million, the data show.

6. When it comes to corporations, the story is much the same — less taxes.

Corporate profits in 2008, the latest year for which data is available, were $1.8 billion, up almost 12 percent from $1.6 billion in 2000. Yet even though corporate tax rates have not been cut, corporate income-tax revenues fell to $230 billion from $249 billion — an 8 percent decline, thanks to a number of loopholes. The official 2010 profit numbers are not added up and released by the government, but the amount paid in corporate taxes is: in 2010 they fell further, to $191 billion — a decline of more than 23 percent compared with 2000.

7. Some corporate tax breaks destroy jobs.

Despite all the noise that America has the world's second highest corporate tax rate, the actual taxes paid by corporations are falling because of the growing number of loopholes and companies shifting profits to tax havens like the Cayman Islands.

And right now America's corporations are sitting on close to $2 trillion in cash that is not being used to build factories, create jobs or anything else, but act as an insurance policy for managers unwilling to take the risk of actually building the businesses they are paid so well to run. That cash hoard, by the way, works out to nearly $13,000 per taxpaying household.

A corporate tax rate that is too low actually destroys jobs. That's because a higher tax rate encourages businesses (who don't want to pay taxes) to keep the profits in the business and reinvest, rather than pull them out as profits and have to pay high taxes.

The 2004 American Jobs Creation Act, which passed with bipartisan support, allowed more than 800 companies to bring profits that were untaxed but overseas back to the United States. Instead of paying the usual 35 percent tax, the companies paid just 5.25 percent.

The companies said bringing the money home — "repatriating" it, they called it — would mean lots of jobs. Sen. John Ensign, the Nevada Republican, put the figure at 660,000 new jobs.