Thursday, August 23, 2012

Fiscal myths and reality

In left-wing lore, the rich are forever screwing the rest of us by refusing to pay their fair share (a term that is almost never precisely defined) of federal income taxes. Based on the rhetoric, one would be forgiven for thinking that the rich, and the top 1 percent in particular, are busy reaping vast sums while offering only a relative pittance to the US treasury. 

As can be seen by the following charts, however, this is far from reality:

Be it the top 1 percent, 5 percent or 10 percent, each group pays a far larger share in federal income tax than the share of income they collect. Is this the picture of greed? Of unfairness?

Another argument advanced by the left is that tax cuts enacted by Presidents Bush and Reagan served as giveaways to the rich, both blowing a hole in the budget while also unfairly reducing the tax burden of the wealthiest among us. The latter argument, however, is difficult to square with this reality:

Now let's look at how that compares internationally:

With regard to the former argument, meanwhile, despite the tax cuts the federal government has not been starved of revenue:

  • With the exceptions of the immediate aftermath of the 2001 and 2008-09 recessions, federal revenue has been on a steady upwards trajectory.
  • Despite the Reagan tax cuts, revenue growth during the 1980s appears to roughly continue its trend from the 1970s. Similarly, despite the Bush tax cuts, revenue growth by about 2007 appears to have reverted to the trend of the late 1990s boom. 
  • There is no notable spike in revenue following the Clinton tax increase of 1993. Rather the jump in revenue tends to better correspond with the improved fortunes of the economy.
  • In addition to the jump in revenue produced by a booming economy, the real story of the 1990s is one of relative spending restraint. Interestingly, Democrats -- who love to brag about the Clinton fiscal record of the 1990s -- never seem to focus on this aspect.
  • President Bush, aided and abetted by a Republican Congress, spent with abandon during the 2000s. Amazingly, President Obama -- despite a promised net spending cut -- and a Democratic Congress managed to increase spending at an even faster pace.
  • That the massive spike in spending over the past 4 years has failed to generate a particularly impressive economic recovery would seem another blow to Keynesian theory.
  • The fiscal problem facing the US continues to be one of too much spending rather than insufficient revenue. With the last 35 years as a guide, revenue will recover as the economy gains steam. The real mission should be not to increase tax rates (although closing loopholes and deduction would be welcome), but to reduce spending while pushing pro-growth measures (such as free trade agreements, tax simplification and deregulation) to juice the economy. 

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