Ending Tax Cuts for Wealthy Would Make Major Contribution to Deficit Reduction

May 9, 2011 at 6:00 pm

A recent Jennifer Rubin column in the Washington Post cites an OECD report and some CBO data to make her case that:  “We can’t solve the debt problem by grabbing more money from the rich.”

Of course no one source of deficit reduction will “solve” our debt problem.  A closer look at these same sources, however, underscores that reversing President Bush’s tax cuts for the highest income people would make an important contribution to deficit reduction.

Take that OECD report.  It looked at the effect of government policies on the disparities of income in 24 OECD countries.  The study concluded that U.S. tax and spending policy (i.e., the whole budget) does less to diminish this inequality than the policies in any other of the studied countries except South Korea:

US Does Least Among OECD Countries to Reduce Inequality

One consequence of this is that inequality of disposable income (i.e., after considering taxes and public transfers) is higher in the U.S. than in any other of these 24 OECD countries.  (Among all countries in the OECD, the U.S. had the fourth-highest level of income inequality as of the mid-2000s, after Mexico, Turkey, and Portugal.)

Among OECD Countries US Has Greatest Income Inequality After Taxes and Public Transfers

The same CBO tables that Rubin mentioned highlight just how dramatically taxes have been cut at the top end of the income scale.  In 1979, the top one percent paid an average federal tax rate of 37.0 percent.  After three decades of the supply-side experiment, that rate had fallen to 29.5 percent even as incomes were surging at the top and stagnating for working and middle class Americans. By 2007, the average household income in the top 1 percent was $1.3 million — or 74.6 times higher than those at the bottom — more than triple the rich-poor gap in 1979.

Federal Tax Burden on the Wealthiest Americans Is Lower than It was Three Decades Ago

Consider if this policy of cutting taxes for the richest people were reversed and the average federal tax rate had returned to 37.0 percent, instead of the actual 29.5 percent, for 2007.  How much money would we be talking about?    Using CBO data, we estimate that additional revenue of roughly $180 billion in 2007 alone.  That would not “solve” anything, but that’s real money.

That’s why returning the tax burden on this top group to what it was in 1979 belongs at the center of the negotiating table.

May 12 Update: This post has been corrected to reflect the fact that the referenced 2008 study did not include all members of the OECD.  The data are from Figure 4.5 in the 2008 OECD report, and show all countries in the OECD-24 (www.oecd.org/els/social/inequality/GU).

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More About Chuck Marr

Chuck Marr

Chuck Marr is the Director of Federal Tax Policy at the Center on Budget and Policy Priorities.

Full bio | Blog Archive | Research archive at CBPP.org

13 Comments Add Yours ↓

Comments are listed in reverse chronological order.

  1. PJR #
    1

    Good analysis. Your final bar graph understates the decline in “tax burden” because the amount of money going to the top 1 percent has more than doubled (as a percent of GDP). If you double my income, I can improve my lifestyle unless you more than double my effective tax rate. Doubling my income AND reducing my effective tax rate is quite a nice gift indeed.

  2. Kenneth Thomas #
    2

    Three suggestions:

    1) Please include all OECD members’ data when you claim the U.S. has a certain position in OECD rankings. Mexico and Chile have worse inequality than the U.S.; Turkey may also still be worse. A lot recent OECD data does not yet include Estonia, but you should list all 33 other members in your charts.

    2) Label the x-axis and give it a scale.

    3) Give the entire web address of OECD sources; that is one gigantic website.

    Kenneth P. Thomas
    University of Missouri-St. Louis

    • CBPP #
      3

      1. “The charts in this post show all 24 countries included in the 2008 OECD report to which Jennifer Rubin’s column referred. The data are from Figure 4.5 in the report and are available in full here: http://dx.doi.org/10.1787/421751173340. We’ve updated the chart title to clarify that fact.”

      2. “Given the technical nature of the Gini coefficient, we labeled both charts that rely on this measure through a technical footnote that provides the complete range of shown values.”

      • Sebastian Karcher #
        4

        I looked up the 2008 OECD report. Figure 1.1 on page 25 includes the OECD-30, including Portugal, Turkey, and Mexico, all of which have (according to the same disposable income numbers you use) a higher gini than the US. While your graph is correct, the statement that the US has the highest Gini in the OECD is false, was false in 2008 and is false with respect to the report you cite.

      • Kenneth Thomas #
        5

        Thank you for the clarifications and data source.

        Kenneth P. Thomas
        University of Missouri-St. Louis

  3. Chaz #
    6

    According to the OECD, the OECD member with the highest Gini coefficient is Chile. Why are Chile, Mexico, and Turkey not on your graphs?

    Source:
    http://dx.doi.org/10.1787/888932381874

  4. Bill Towne #
    7

    By extension, the millions of unemployed Americans don’t have a revenue problem, they just have to spend less than they make.

  5. billy lentz #
    8

    Wait, I’m totally on board with having a problem with our income inequality, but where are Turkey, Chile, and Mexico?

  6. J Webb #
    9

    We don’t have a revenue problem; we have a spending problem. Any suggestion that higher taxes will help our economy is not even rational.

    • Tom Baxter #
      10

      Our spending problem is spending as much as the rest of the world with the merchants of death as the rest of the world put together and investing the best minds into making the highest of high tech tools of death.

    • donbsea #
      11

      Hey J.W.,

      Don’t think of it as a tax increase, think of it as canceling the foolish tax cuts for the wealthy that started with Ronald Reagan in the 80’s, increased a bit under Bush I,lessened somewhat under Clinton, then really was pushed down our throats with Bush II.

      It was a foolish move from the get-go, but the Republican mantra of getting rid of taxes, removing any controls/restraints on businesses is just wrong on a number of levels.

      Corporations “for the most part,” (especially multinationals), lack any sort of moral responsibilities to the people of any country they exist within. At this moment in time I’m thinking of the financial/banking industry, pharmaceuticals, oil/petroleum, who spend a HUGE amount of money via lobbyists and campaign contributions to keep things just the way they are.

      Why are you buying into this horse poo?

      Whether you realize this and pretend otherwise for what I’d suspect is a financial interests on your behalf, or if you just don’t get what is going on would be a question for another time.

    • Someguy #
      12

      Why is that not rational? Our nation’s economy was healthier when taxes on the wealthy were higher. We’ve had three decades of tax cuts for the rich with the promise being that “since they make the jobs,” the status of the lower classes would rise due to the need for their employment. It hasn’t happened. Real wages for the working classes haven’t gone up since the 70’s.

      And before you start bringing up stuff like “small business,” keep in mind that the SBA’s definition of small business is quite different from the mom & pop stores that politicians like to cite; There are businesses that qualify as “small” because they only have a handful of employees but rake in millions.

      Finally, the idea that tax cuts for corporations and business = more jobs is ludicrous. I own an actual small business, and I can tell you what would make me hire someone: More people buying my stuff. A tax cut just lets large companies and the wealthy buy another car, buy up stock, or pay down debt.

  7. 13

    This report says: the U.S. has the greatest income inequality and does less any nation by way of transfer or tax policy to reduce it. In France they have about the same childhood poverty rate before social transfer, about 27%. After social transfer France reduces it to 7%, the U.S. reduces it to 20%. The economy produces over $46,000 per person, yet the median income is $29,755 according to the US Census, 2009. The “ratio of the wealthiest 1% to median wealth in the United States” in 1962 was 1 to 125, in 1983 1 to 131, in 2009 1 to 225. This from Sylvia Allegretto, State of Working America, Wealth, Economic Policy Institute, March 2011. According to Citizens for Tax Justice, the overall effective tax rate (total taxes as percentage of income paid to all governments, municipal, local, state, and federal) for the top 1% equaled 30.0%, for the bottom 80% of households, 22.6%. Oy Vey!



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