International Herald Tribune Editorial - Tax cuts and consequences

International Herald Tribune Editorial - Tax cuts and consequences
Copyright by The International Herald Tribune
Published: January 12, 2007


The tax system in the United States is supposed to mitigate inequality. But a recent report by the U.S. Congress's budget agency provides fresh evidence that Bush-era tax cuts have done more to reinforce inequality than to redress it.

The agency found that in 2004, the latest year for which comprehensive data were available, the top 1 percent of households pocketed 14 percent of total after-tax income in the United States, up from 12.2 percent in 2003. That increase, the third largest in one year since the agency started keeping track in 1979, works out to an extra $128 billion. And yet despite that hefty gain, the effective federal tax rate of the top 1 percent decreased slightly.

In contrast, the share of after-tax income going to households in the middle of the income distribution fell to 15 percent in 2004, down from 15.4 percent in 2003 — the equivalent of a $29 billion loss. In that time, the share of their income going to federal taxes stayed about the same.

One of the reasons the rich are getting so much richer than everyone else is that investment income is highly concentrated among the richest Americans and has grown robustly through much of the Bush years, unlike wages and salaries. But the rise in investment income hasn't caused rich Americans' income taxes to rise substantially because, thanks to the tax cuts of 2003, investments are now taxed at about the lowest rates in the code.

Another reason for the after-tax advance of upper-income Americans is that an ever larger share of their salaries escapes the payroll tax that pays for Social Security benefits. The annual amount of income subject to the tax — now $97,500 — has been adjusted upward each year since 1982, in line with the increase in average wages. But as pay raises at the top of the income scale have increasingly exceeded the average wage gain, incremental adjustments in the wage cap have been inadequate.

Unfortunately, with the administration having abandoned fiscal prudence for the past six years, it's practically inevitable that inequality will worsen. The bill for the deficit- financed tax cuts of the Bush era will arrive in the years to come. It's likely that the costs will be borne by all, even though most of the benefits have accrued to the few.