In September of 2003, the IRS released statistics on income drawn from tax returns through 2001. In October, Rush Limbaugh posted an update to an article on his website titled "Only The Rich Pay Taxes - Top 50% of Wage Earners Pay 96.03% of Income Taxes". A link to the article can be found at http://www.rushlimbaugh.com and the updated IRS numbers that Rush references can be found at http://www.house.gov/jec/tax/09-26-03.pdf.
Rush begins the article as follows:
There is new data for 2001. The share of total income taxes paid by the top 1% fell to 33.89% from 37.42% in 2000. This is mainly because their income share (not just wages) fell from 20.81% to 17.53%. However, their average tax rate actually rose slightly from 27.45% to 27.50%.
This proves that it was not the tax cut that caused revenues from the rich to fall, but the recession and the stock market crash.
In fact, no reasonable person would argue that the fall in the share of taxes paid by the rich in 2001 was caused chiefly by the tax cut. The first tax cut bill was signed in June of 2001 and only a small portion of it was made retroactive to that year. This included the creation of the 10 percent bracket (creating a $300 rebate for all taxpayers), a half-percent cut in the tax brackets, and a rise in the child tax credit from $500 to $600. Hence, the top rate was cut only one-half percent of the planned total cut of 4.6 percent. In any case, Rush continues:
In other words, you live by the sword, you die by the sword. If you are going to benefit from the rich paying more taxes, due to progressivity, on the upside, you are going to lose more revenue from these people on the downside. This is a good argument for reducing progressivity.
Progressivity likely had little to do with the drop in revenues from the rich (actually, high-income workers). Only if a large number of these workers had their salaries cut, dropping them into lower tax brackets, would progressivity be a factor. The most likely factor was the drop in capital gains. The fact that these are claimed chiefly by high-income workers was the likely cause of the drop in the share of taxes paid by the top 1 percent. The fact that capital gains are taxed at a lower rate than ordinary income would likewise explain why their average tax rate rose. A larger percentage of their taxes were now on income, taxed at a higher rate.
Rush continues:
Think of it this way: less than four dollars out of every $100 paid in income taxes in the United States is paid by someone in the bottom 50% of wage earners. Are the top half millionaires? Noooo, more like "thousandaires." The top 50% were those individuals or couples filing jointly who earned $26,000 and up in 1999. (The top 1% earned $293,000-plus.) Americans who want to are continuing to improve their lives - and those who don't want to, aren't.
The above statistics could well have the effect of angering anyone who makes more than $26,000 since it implies that they are helping to pay for the lower 50 percent of wage-earners. In fact, this is an example of the misleading use of averages. Following is a summary of the IRS data being cited by Rush:
PERCENT OF INCOME EARNED AND TAXES PAID BY SELECTED CUMULATIVE PERCENTILES
Top 50 Top 25 Top 10 Top 5 Top 1
Percent share of... Total Percent Percent Percent Percent Percent
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Adjusted gross income 100.00 86.19 65.23 43.11 31.99 17.53
Total income tax..... 100.00 96.03 82.90 64.89 53.25 33.89
Population........... 100.00 50.00 25.00 10.00 5.00 1.00
AGI floor ($thousand) N/A 28.53 56.09 92.75 127.90 292.91
As can be seen, the upper 50 percent of wage earners, who earn $28.5 thousand and above, did pay 96.03% of all income taxes. Now, following are the same numbers, divided up into distinct percentile groups:
PERCENT OF INCOME EARNED AND TAXES PAID OF SELECTED DISTINCT PERCENTILES
0-50 50-75 75-90 90-95 95-99 Top 1
Percent share of... Percent Percent Percent Percent Percent Percent
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Adjusted gross income 13.81 20.96 22.12 11.12 14.46 17.53
Total income tax..... 3.97 13.13 18.01 11.64 19.36 33.89
Population........... 50.00 25.00 15.00 5.00 4.00 1.00
AGI floor ($thousand) N/A 28.53 56.09 92.75 127.90 292.91
As can be seen, the lower half of this "oppressed group", the 50 to 75 percentile, actually pays only 13.13 percent of all income taxes despite the fact that they make up 25 percent of the population. The next group, the 75 to 90 percentile, pays 18 percent of all income taxes, slightly more than their 15 percent share of the population. However, the 18 percent is still less than their 22.12 share of income and is therefore less than they would pay under a flat tax. The next group, the 90 to 95 percentile, pays 11.64 percent of all income taxes, slightly more than their 11.12 percent share of income. Hence, it is primarily the top five percent of taxpayers, those making over $127.9 thousand, who pay more than they would under a flat tax, making up for the lower 90 percent, who pay less. This is a far cry from the upper half of taxpayers, those making over $28.5 thousand, referred to by Rush.
Rush continues:
Here are the wage earners in each category and the percentages they pay:
Top 5% pay 53.25% of all income taxes (Down from 2000 figure: 56.47%). The top 10% pay 64.89% (Down from 2000 figure: 67.33%). The top 25% pay 82.9% (Down from 2000 figure: 84.01%). The top 50% pay 96.03% (Down from 2000 figure: 96.09%). The bottom 50%? They pay a paltry 3.97% of all income taxes. The top 1% is paying more than ten times the federal income taxes than the bottom 50%!
Rush finds this last statement important enough to highlight in red. The problem is that it is wrong. Earlier in the article, Rush states that the top 1% is paying 33.89% of taxes. This is not "more than ten times" the 3.97% paid by the bottom 50%. It's about 8.5 times.
Rush goes on to to list the share of income earned by each percentile. Regarding income distribution, I have posted several graphs and tables that compare the distribution of income and taxes at this link. The first graph and table show the distribution of income and federal taxes for quintiles of wage earners (the top quintile is split into two deciles). As can be seen, the distribution of income taxes paid is heavily skewed toward the upper quintiles. However, income can be seen to be similarly (though somewhat less) skewed.
The second table shows the relative skewing of federal taxes paid compared to income. It shows how much more or less each group pays than it would if its share of taxes were identical to its share of income. Estate and gift taxes are the most heavily skewed toward high-wage earners with the top 1% paying 334% more than would be determined by its income. Individual and corporate taxes are the next most heavily skewed with the top 1% paying about double what would be determined by its income. The top 10% pays about 50% more. The payroll tax is actually skewed toward the middle-wage earners because Social Security taxes do not apply above a certain earnings level and no payroll taxes apply to "unearned" income such as capital gains. For total federal taxes, the top 1% pays about 36% more than would be determined by its income. The top 10% pays about 24% more.
The second graph and last table show the percent of income in federal taxes paid by each group. As can be seen, the first four quintiles pay more in payroll taxes than in income taxes.
Getting back to the article, the author goes on to state: 'Remember this the next time you hear the "tax cuts for the rich" business. Understand that the so-called rich are about the only ones paying taxes anymore.' The fact is, there is a valid argument that the Bush tax cuts were somewhat tilted toward the rich. I've posted a graph and tables showing the combined percent cut in the effective tax rate provided by the 2001 and 2003 tax cuts at this link. The very largest tax cut of 33% goes to the lowest-wage workers in the newly created 10% tax bracket. However, the smallest tax cut of 8.6% goes to single-filers with a taxable income of $27,050. For couples filing jointly, the smallest tax cut is 10.3% for taxable incomes of $45,200. This compares to the tax cut in the top tax bracket of 11.6 percent. These numbers do not include the increase in the child tax credit, the reduction of the tax on dividends and capital gains, and the proposed elimination of the estate tax. Except for the increase in the child tax credit, these cuts should favor high-income workers. One can argue that it's just as valid for Republicans to target their tax cuts as it is for Democrats. However, such targeting should be accompanied by an open, persuasive argument. The Bush tax cut was not. It was sold as an equitable, across-the-board tax cut.
Toward the end of the article, the author recounts:
Misty tried the old line that all wealth is inherited. Not true. John Weicher, as a senior fellow at the Hudson Institute and a visiting scholar at the Federal Reserve Bank, wrote in his February 13, 1997 Washington Post Op-Ed, "Most of the rich have earned their wealth... Looking at the Fortune 400, quite a few even of the very richest people came from a standing start, while others inherited a small business and turned it into a giant corporation." What's happening here is not that "the rich are getting richer and the poor are getting poorer." The numbers prove it.
Which numbers prove it? The paragraph above only states that "quite a few even of the very richest people came from a standing start, while others inherited a small business and turned it into a giant corporation." If the author has numbers, he should state the numbers and/or provide a source.
On the topic of inheritance, the first graph and table mentioned above do provide evidence of a related item. There does seem to be a very strong correlation between high-income wage earners and people who pay estate and gift taxes. Over 99 percent of estate and gift taxes were paid by the top quintile of wage earners. Hence, while these numbers do not indicate how much of any group's wealth is inherited, they do indicate that the great majority of great inherited wealth (great enough to qualify for the estate tax) goes to those who already have high incomes.
The author concludes:
This story, along with a link to the IRS chart, will stay somewhere on the RushLimbaugh.com homepage so everyone can see and find these numbers at any time. It's crucial that people get this, so please, share it with a friend now!
I would likewise like to post this response on that site but I don't see anywhere that such responses are allowed. Hence, I'll just post this on forums that reprint the story. Likewise, feel free to post this response and/or share it with a friend!