Depression showed, an increase in taxes in a time of economic problems only prevents any sort of recovery. In short, if the trend
continues we are headed for exactly the type of failure predicted by Alexander Fraser Tytler’s quote at the beginning of this chapter,
with the result that a democracy always collapses over loose fiscal policy followed by a dictatorship.30
The Problem With Theory
Now this, of course, is based on the assumption that the trend continues. As was pointed out earlier, in theory, in a democracy, if the tax burden becomes too high, the people can always demand that their taxes be reduced. But herein lie two additional problematic trends. While over the last century the tax burden was steadily increasing, on the one hand the tax code was also becoming more complex and difficult to understand, and on the other it was becoming increasingly more progressive.
A tax code that is complex and difficult to understand is a problem, for how can we know if our taxes are too high if we do not know what we are actually paying in taxes? This problem is further compounded by withholding, as many people do not really look at their gross pay or how much the government is taking in taxes. They simply focus on how much they get to take home, particularly if they have direct deposit; out of sight out of mind. Probably the quickest way to start a tax revolt would be to stop withholding, and make people write a check to the government each pay period, for this would remind people how much they pay every time they get a paycheck.
| Percentiles Ranked by AGI* | Adjusted Gross Income Threshold on Percentiles | Adjusted Gross Income Share Percentiles | Percentage of Federal Personal Income Tax Paid |
| Top 1% | $313,469 | 20.81% | 37.42% |
| Top 5 % | $128,336 | 35.30% | 56.47% |
| Top 10% | $92,144 | 46.01% | 67.33% |
| Top 25% | $55,225 | 67.15% | 84.01% |
| Top 50% | $27,682 | 87.01% | 96.09% |
| Bottom 50% | <$27,682 | 12.99% | 3.91% |
*Adjusted Gross Income
Percent of Income and taxes for 2000 by Income.
Table 2.1
The problem with the second trend, that taxes have become more progressive, can be seen in Table 2.1, which is from IRS data provided by the Joint Economic Committee and it shows the distribution of taxes for the year 2000.31 As can be seen in this table, the bottom 50 percent of people filing returns during that year paid only 3.91 percent of the taxes. This is down from 6.46 percent in 1986, or a 39 percent reduction. The top 25 percent increased their share from 76.02 percent to 84.01 percent in the same period. Thus the overall tax burden was not only increasing, but it was increasingly being shifted onto an ever smaller percentage of the population.
Now at first glance this may seem like it is a good thing. Those who have the most money carry the greatest burden while those who can least afford it, pay the least. While in general this is not a bad concept, the problem is that it creates a dangerous imbalance and threatens one of the main checks in the system.
This imbalance can be seen in Figure 2.3, Income and Taxes which shows the share of income earned in relation to the share of income taxes paid. As this figure shows the first 90 percent of those filing income tax returns pay a smaller share of income taxes than their share of income, while the top 5 percent paid a higher share of income taxes than their share of income.
This imbalance can be seen more clearly by looking at the share of taxes paid minus the share of income earned, as is done in Figure 2.4. As is clearly shown in the figure the first 90 percent of income earners pay less of a share of income taxes than the share of income they earn while those above 95 percent pay more.
As we said earlier, if taxes get too high, people can always vote to lower them. But what does this mean when the majority of people are paying only 3.91 percent of all income taxes? And this is only personal income taxes. This does not take into account the monies paid by corporate income taxes or other forms of taxes that individuals do not have to pay, or at least pay directly. Thus the real percentage is even lower.
Since the average income tax rate for the lowest 50 percent is only 4.6 percent,32 they are very likely to have a vastly different view on whether taxes are too high than those in the top 25 percent whose average rate is 19.09 percent or those in the top 1 percent whose average rate is 27.45 percent.33 And again this is only federal income tax.
Thus why shouldn’t the majority of people continue to demand and vote for more and more government services and programs, when they pay only 3.9 percent of the bill? There is little incentive against such demands, and in fact, great incentive in favor of them doing so. If these three trends, i.e., a difficult and confusing tax code, steadily increasing tax burden, and a tax burden that is increasingly progressive continue, then disaster is inevitable.
On the positive side there are periodic calls for tax cuts, some of which are actually passed. But as we have seen, these only slow the growth in taxes somewhat and temporarily. Once the burden of taxes is reduced, the economy begins to grow strongly, and in a growing economy the burden of taxes becomes a less important issue. In addition, as the economy grows revenues to the government increase, monies which politicians of both parties are all too eager to spend.
Tax Cuts For The Rich?
As a result, even with periodic tax cuts, the overall trend of the tax burden is to increase. To make matters worse, to get these cuts passed in the first place, those proposing the cuts have to try and mitigate the charge that inevitably comes from opponents: that the tax cuts are “for the rich.” In order to avoid these charges, the tax cuts normally result in an even more progressive tax system.
Thus it was with Bush’s recent tax cuts, “the highest percentage tax cuts go to the lowest income Americans.”34 While such cuts do improve the short term situation by temporarily easing the tax burden, they do so at the cost of further unbalancing the system by shifting taxes onto an ever smaller percentage of taxpayers making further cuts even harder. After all, how can you have meaningful tax cuts that are not “for the rich” when the rich are paying the vast majority of the taxes?
This shifting of the burden is at times disputed, but was clearly seen in a 2004 CBO study on the effects of the Bush tax cuts. The CBO projected that if the Bush tax cuts had not occurred; the top 20 percent of those filing income tax returns would have paid 78.4 percent of the total income tax burden in 2004. Yet, as a result of the Bush tax cuts, this increased nearly 4 percentage points to an even higher 82.1 percent. On the other hand, those in the lowest 40 percent saw their share of income taxes drop from -0.1 to -2.8 percent.35 Yes those last numbers were negative.
How can you have a negative percentage of taxes paid? Easy; it means that because of the various credits that are given to low income earners, on average more money was paid out to the people in this group than was received in taxes. Thus on average, for the lowest 40 percent of those filing returns, the income tax was actually a source of additional income rather than something they had to pay.n So while cutting overall taxes,