This election season, you are hearing all sorts of seemingly reasonable claims about economics being put forth by all three parties. While these claims are being made and parroted by otherwise intelligent people, most of them are completely ignorant and misleading. Although informed voters have absolutely no impact on the outcome of an election, you might like the feeling you get by having superior understanding.
Read this recent research from the IRS, and then try these questions to test your understanding.
Q. The tax cuts are having a larger overall positive impact on which group of people?
A. People making less than $100,000
B. People making between $100,000 and $1,000,000
C. People making more than $1,000,000
A. The tax cuts have a greater positive impact on the net worth of people making less that $100,000. First, the maximum tax rebate was the same for people making $70,000 as for people making $700,000, so the rabate was a larger percentage of a lower income. Second, the people in higher net worth categories were already paying a much lower percentage of their net worth as taxes (e.g. if you realize income of $100,000 and have net worth of $1,500,000; you are only paying 2% of your net worth in taxes — as opposed to someone with realized income of 50,000 and a net worth of 50,000, who pays 25% of his net worth in taxes). So the impact of a marginal change in taxes is far less overall for ?the wealthy?.Even a massivetaxcutof 50% would only have the effect of increasing the first person’s potential net worth by 1%, while allowing the second more average person to double his net worth in short order (and a 50% increase in taxes would also not phase the first guy, but it would obliterate the average guy). Finally, the impact of taxes to the wealthy is further blunted by factors such as investments placed in tax shelters, municipal funds, and so on; as well as the fact that many of these wealthy individuals posted losses in the bubble crash which can be used to offset capital gains taxes.
Q. True or false; the rich have done very well under Bush.
A. False. Under Bush, the incomes of the wealthiest Americans have declined for the first time since WWII, and at a much larger rate than the general population. Since Clinton left office, the number of people making $10,000,000 per year declined by more than half. The wealthiest Americans have experienced financial carnage under Bush of a scale not seen for generations.
Q. Which factor is most directly to blame for the current deficit?
A. The Bush tax cuts
B.Increased government spending
C. The Internet bubble
A. The answer is quite clearly ‘C’, the Internet bubble, and for the forseeable future, ‘B’ government spending. During the nineties, the politicians never admitted that most of the IRS revenue projections depended more than anything else on an unending supply of ?bubble juice?. The tax revenues collected shrank at an alarming rate for the first two years under Bush, and primarily because of the previously mentioned stock marketcarnage. The IRS data shows that ?At the same time many of those whose incomes fell the most – those reporting $200,000 to $10 million in income – paid at the highest rates, which meant that the drain on revenues was even greater when their incomes shrank.? In fact, the evidence shows that the Bush tax cuts have actually had the net effect of increasing tax revenues. Tax revenue is far more a matter of income level than it is a matter of taxation rate, and tax rate can often inversely impact tax revenue.Unless we have another Internet bubble, it is unlikely that tax revenues will go up drastically. Therefore, increases in government spending will be the primary driver of deficits for the forseeable future. Note that neither party has a monopoly on increased spending, as federal spending for even non-military purposes (e.g. ?education?, since we all know books are so expensive) has increased at record levels under Bush.
In other words, the Bush Deficit and Clinton recession have about as much to do with Bush and Clinton as the weather does. Don’t blame tax cuts, defense lapses, or military spending. Instead, blame the hoardes of gullible lemmings who bought into the mass hypnosis of the bubble. And blame the budgeting officials who based projections on the assumption that the ?bubble juice? would never end, and who don’t have the discipline to spend less than they take in.