You May Already Be A Winner - Who really benefits from the Bush tax cuts?

Reason Online ^ | 06 October 2004 | Nick Gillespie and Mike Snell

[Lando Lincoln]

The second presidential debate—which will focus on domestic issues, including the economy and the living standards of average Americans—is slated to darken TV screens across this sweet land of liberty at the end of the week. So it's a good time to take stock of one of the major bones of contention between President George W. Bush and challenger John F. Kerry. We speak, of course, of Bush's income tax cuts, which Kerry has consistently attacked as little more than a giveaway to the rich and powerful.

"George Bush has given more to those with the most, at the expense of the middle-class working families who are struggling to get ahead," Kerry pronounced in a recent, and typical, speech. In at least one sense, this statement is incontrovertibly true: Those at the top of the income pyramid get more money back from tax cuts. However, that's mostly because they pay more in taxes. In a recent publication, the Congressional Budget Office concluded that the households comprising the top 10 percent of income earners in 2001 shouldered 67.7 percent of income tax liabilities. So any cut in rates will reduce the burden of those paying the most.

But of course that's not what Kerry, and many of his supporters, mean. They've consistently suggested that the Bush tax cuts push platefuls of cake to well-connected millionaires while reserving only a few crumbs for the vast majority of Americans whose income places them far lower on the income scale.

Is that true? Using tax amounts due in the pre-Bush tax cut year of 2000 as a baseline, we ran some numbers based on households that made between $50,000 and $75,000 a year in total income. We chose those numbers for a couple of important reasons. First, more households—18.4 percent in 2001, according to Census figures—reported an income in that range than in any other. Second, that same spread is the most typical range for income tax returns filed. Using 2001 IRS stats, 13 percent of all returns filed reported an adjusted gross income level of between $50,000 and $75,000. In fact, that range accounted for 18 percent of all returns when there was any taxable income reported. For each scenario below, we calculate cumulative savings by subtracting the amounts due under Bush's cuts from the figure that would have been due if the 2000 rates had remained in place. That is, cumulative savings = (2000 tax x 3) - (2001 tax + 2002 tax + 2003 tax). Because the lower tax rates were phased in gradually, we've also noted the difference between amounts due in 2000 and 2003.

Consider first a married couple that brings in $75,000 a year in total income. That's a lot of money—enough to put a household in the fourth-highest income quintile (go here for the upper limits on each quintile). We assumed that they own a home and that their itemized deductions, including mortgage interest, property taxes, and charitable contributions, totals $13,500 (a typical amount). We ran the numbers for them as childless and with two kids. Here's what their federal income tax came to in each of the last four years.

Year		Childless Couple		Couple with Two Kids
2000 actual tax	$9,959.00		$7,391.00
2001 actual tax	$9,674.00		$6,879.00
2002 actual tax	$8,788.00		$5,968.00
2003 actual tax	$7,614.00		$4,699.00
Cumulative savings		$3,801		$4,627
Difference between 2000 and 2003 tax		$2,345		$2,692

In both the childless and two-child scenarios, the amount of taxes saved over the three years of Bush tax cuts is substantial. So is the difference between the 2000 and 2003 tax due.

Significant, if smaller, savings can be seen at a lower level of income, especially if there are children involved. Here are our calculations for a couple making $50,000 a year and taking the same $13,500 in itemized deductions.

Year		Childless Couple		Couple with Two Kids
2000 actual tax	$4,639.00		$2,799.00
2001 actual tax	$4,609.00		$2,539.00
2002 actual tax	$3,979.00		$1,879.00
2003 actual tax	$3,864.00		$949.00
Cumulative savings		$1,465		$3,030
Difference between 2000 and 2003 tax		$775		$1,850

And here are the figures for a $50,000 a year household that lives in an apartment and takes the standard federal deduction.

Year		Childless Couple		Couple with Two Kids
2000 actual tax	$5,561.00		$3,721.00
2001 actual tax		$5,494.00		$3,424.00
2002 actual tax		$4,826.00		$2,726.00
2003 actual tax		$4,464.00		$1,549.00
Cumulative savings	$1,899		$3,464
Difference between 2000 and 2003 tax	$1,097		$2,172

These calculations suggest that, contrary to John Kerry and other critics, the Bush income tax cuts have in fact put real money in the pockets of typical American families.

None of this should be taken as a brief for George W. Bush. One of us (Nick Gillespie) is on the record (in the November issue of Reason, on newsstands now!) as declaring that he will not vote for Bush; he has also consistently decried Bush's policies on trade, drug prohibition, gay marriage, public education, and the invasion of Iraq. One of us (Mike Snell) plans a principled vote for the guy who promises not just to cut taxes, but to abolish the income tax altogether.

But the fact remains that Bush's cuts have reduced the amount of income tax we all pay. Though Kerry will certainly suggest otherwise in Friday's debate, the trouble with Bush's budget policy isn't that he cut income taxes. It's that he hasn't cut spending. Indeed, perhaps the strongest case for electing Kerry may be that he will usher in an age of divided government that will restrain federal spending and the various problems that accompany it. That's what happened the last time a Democratic president squared off against a Republican Congress. At least in fiscal terms, the results were pretty good, with discretionary spending increasing only a (relatively!) measly 3.4 percent annually under Clinton. It's a shame that we won't hear Kerry making that sort of argument in the next debate. It's just the sort of thing that might get him a few more votes from limited-government advocates who are disappointed with Bush.

Reason editor-in-chief Nick Gillespie is editor of Choice: The Best of Reason. Mike Snell is a tax consultant specializing in tax planning for small business.

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[Lando Lincoln]

I will say this again. Mr. Bush's spending is not the central issue in this campaign. The security of this nation trumps everything. In that area, there is only one choice this election - GWB. As the father of young sons, I shudder to think about "Global Test" Kerry as Commander in Chief. Thta would be tragic.

[Lando Lincoln]

Ping to an article that you may find of interest.

BTW....Thta=That in my previous comment.

Lando

[donnab]

Everyone seems to forget the repercussions of 911. I remember it well as my stocks took a nose dive. Bush put us into recovery, with the tax cut, and spent the money needed to be spent to get us back on the road to recovery. For those who spout about job loss, about increased poverty, about the lack of leadership during this time, I have to wonder where they were while our recession prone economy took a big hit with the advent of 911. We could be in a lot worse place right now had Bush not reacted the way he did. As the economy recovers, the deficit will begin to get paid off, as well as the fact that rarely gets attention....the actual figures fell below the projections. That is an accomplishment that gets lost in the fear mongering of numbers.

[Always Right]

Bush's tax cuts were distributed evenly across the board depending on how much taxes you paid. Bush needs to make this point clear. It was a tax cut for everyone who paid taxes in every bracket.

[EdReform]

BTTT

[SirChas]

bump for later

[Cicero]

Bush's tax cuts were the first real cuts for hard-pressed middle-class families since the great Reagan tax cut.

They were an extremely welcome relief last year and will be again this year.

I don't approve of all of Bush's spending plans, but his tax cuts have been fair and real, unlike the usual smoke and mirrors that congress likes to come up with.

[OldYank1]

Here is something I got in an email the other day that puts it in very simple terms -

Economic Lesson in Taxation

Let's put tax cuts in terms everyone can understand. Suppose that every day, ten men go out for dinner. The bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:

* The first four men (the poorest) would pay nothing.
* The fifth would pay $1.
* The sixth would pay $3.
* The seventh $7.
* The eighth $12.
* The ninth $18.
* The tenth man (the richest) would pay $59.

So, that's what they decided to do. The ten men ate dinner in the restaurant every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve.

"Since you are all such good customers," he said, "I'm going to reduce the cost of your daily meal by $20."

So, now dinner for the ten only cost $80. The group still wanted to pay their bill the way we pay our taxes.

So, the first four men were unaffected. They would still eat for free.

But what about the other six, the paying customers? How could they divvy up the $20 windfall so that everyone would get his 'fair share'?

The six men realized that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being 'PAID' to eat their meal.

So, the restaurant owner suggested that it would be fair to reduce each man's bill by roughly the same amount, and he proceeded to work out the amounts each should pay.

And so:

* The fifth man, like the first four, now paid nothing (100% savings).

* The sixth now paid $2 instead of $3 (33% savings).
* The seventh now paid $5 instead of $7 (28% savings).
* The eighth now paid $9 instead of $12 (25% savings).
* The ninth now paid $14 instead of $18 (22% savings).
* The tenth now paid $49 instead of $59 (16% savings).

Each of the six was better off than before. And the first four continued to eat for free. But once outside the restaurant, the men began to compare their savings.
"I only got a dollar out of the $20," declared the sixth man. He pointed to the tenth man "but he got $10!"

"Yeah, that's right," exclaimed the fifth man. "I only saved a dollar, too.
It's unfair that he got ten times more than me!"

"That's true!!" shouted the seventh man. "Why should he get $10 back when I got only $2? The wealthy get all the breaks!"

"Wait a minute," yelled the first four men in unison. "We didn't get anything at all.. The system exploits the poor!"

The nine men surrounded the tenth and beat him up.

The next night the tenth man didn't show up for dinner, so the nine sat down and ate without him. But when it came time to pay the bill, they discovered something important. They didn't have enough money between all of them for even half of the bill!

And that, boys and girls, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up at the table anymore. There are lots of good restaurants in Europe and the Caribbean.

David R. Kamerschen, Ph.D.
Distinguished Professor of Economics
536 Brooks Hall University of Georgia

[Tacis]

This is a complex issue and one where the good guys have allowed the crapweasels to take the high ground with sleazy language. The scumbags have always liked to drive a wedge between honest Americans by using class as a divisor and setting us all against the wealthy. They never truely define the "wealthy" but present it as a goup of insanely rich people who stole their wealth unfairly from little guys. Thus, Viet Cong John blamed the tax cuts for giveing a larger share of the pay back to the wealthy wthout pointing out that they already pay the larger share.

Kerry, because he marries wealth and must of the dems, are old world socialists who despise those who acquire wealth, not matter by what means, and assume that they don't deserve it. Most Americans believe that we all can be wealthy and have no problem with those who got there before them.

We need to stop allowing the glib talk about sleazy numbers to be the only perception out there. And, we should be hitting on Kerry humble station with his multiple palaces, extenstive household staffs, employment of alien personal servants, secret residences owned by Terry Grendel Kerry, his personal taxes and all that tax burried in her, yep!, secret records.

How does the Kerry family, wealthy beyond belief, relate to the black and union voters he pretends to relate to?

[Adder]

Bush should also respond immediately and forcefully that he did/t GIVE anyone anything...he RETURNED their money to them.

[NaughtiusMaximus]

Join the Democratic Party!! Repeal the 10th Commandment!! <-heavy sarcasm/off->

[EdReform]

Bush needs to make this point clear. It was a tax cut for everyone who paid taxes in every bracket.

I agree, he needs to hammer Kerry with the facts.

Of course, to democraps, facts don't matter. "Tax cuts only benefit the rich" is a lie the Kerry people have every intention of selling the sheeple in this country. Unfortunately, there are too many who already believe it.

[EdReform]

Thanks for posting this!

[GailA]

For the first time in 20 years of marriage we got ALL our paid in income tax back. Thank you GW.

[SZonian]

Thanks for this! I've been trying to find some easy way of explaining this to libs and have failed. (I hate math by the way) But this makes it soooooo eazzzzy!!! I "borrowed" it and passed it on as well.

Cheers!

[MeekOneGOP]

bump !

[Safetgiver]

We need Kerry to define his version of middle income and rich. Al Gore actually defined a millionaire as "anyone who makes $20,000 a year over his working lifetime." Is middle class/income anyone who works only four years of his working lifetime for $20,000?

[Always Right]

We need Kerry to define his version of middle income and rich.

Kerry has said he will repeal the tax cut for those making over $200,000. I guess that must be his definition of rich.

[eyespysomething]

The tax cuts helped me. I love to tell people that that start to rant about tax cuts for the rich.

[Fredgoblu]

Or...to state it another way:

The family of four earning $75K got a 36.4% tax break,
and the same family earning $50K got a break of between 58.4% and 66.1% (depending on whether they itemized or not).

So, as a percentage of their total income...the lower income family got a significantly larger tax break!