CBO's Taxing Report

The Congressional Budget Office (CBO) recently rolled out a suspiciously timed analysis that, its Democratic sponsors say, shows the tax burden is shifting to the middle class under President Bush’s tax cuts.

But, in fact, the CBO study shows and flatly states that everyone, especially the middle class, has benefited from the Bush tax cuts, whose heaviest tax reductions go to lower- to middle-income people, 6 million of whom were removed from the tax rolls or helped by the Earned Income Tax Credit; working couples who got marriage penalty relief; and families with children whose per child tax credit was doubled to $1,000.

In a paper titled “Effective Federal Tax Rates Under Current Law, 2001 to 2014,” the CBO clearly states that Bush’s tax cuts “lowered individual income taxes for all taxpayers.”

But this is a presidential election year and congressional Democrats hoped to make some political hay — and help John Kerry’s presidential bid — by asking the CBO to come up with a distributional tax burden study designed to promote their class warfare notion that Bush’s economic recovery plan cut taxes for the rich and raised taxes for everybody else.

When the study was completed a week or so ago, Democratic leaders leaked it to their pals in the news media and spun its findings to promote their “rich get richer” obsession.

But tax analysts who saw the study said it shows nothing of the kind.

“A lot of ink is being spilled about modest shifts in relative tax burdens,” former CBO Director Robert Reischauer told me. “Virtually all taxpayers benefit to some degree from the tax cuts.”

Many of the news reports on the study focused on data or projections showing that the total share of taxes paid by the wealthy has gone down and that revenue from the middle-income earners has risen. No one asked why this could be, buying into the Democrats’ notion that Bush’s tax cuts favored the wealthy over the middle class.

The stock market’s long slide over the past four years that have cut into the portfolio incomes of upper-income people is one explanation. Another is that middle-class incomes have risen as a result of Bush’s pro-growth tax cuts and the economic recovery that followed them, so it follows that tax revenues from this group have risen as well. (Something the CBO’s no-growth, static analysis ignores.)

But there is another, more mischievous reason for the CBO paper’s differences in total taxes paid by varying income groups. In requesting the study, the Democrats asked that all incomes be included in its distributional analysis, even those that are not usually included in federal tax returns to derive the adjusted gross incomes upon which income taxes are levied.

“The CBO report measures ‘income’ in a way that makes everyone appear wealthier,” complains Scott Hodge, who runs the nonpartisan Tax Foundation.

Instead of adjusted gross income standards, “The unit of measurement in the CBO report is ‘comprehensive household income,’ a concept that is very unfamiliar to typical taxpayers, reporters and lawmakers,” Hodge said.

This distorted and enlarged definition of income includes: cash income, taxes paid by businesses (corporate income taxes and employees’ share of Social Security, Medicare and federal unemployment insurance taxes), worker contributions to 401(k) plans, and in-kind benefits from Medicare, Medicaid, health insurance, food stamps, school lunches and housing assistance.

The analysis also measures households (about 109 million), which can contain many individuals who are not related, instead of taxpayers or tax filers (about 135 million). This tends to suggest that there are more high-income families than tax data actually shows.

“By relying on household data rather than income tax data, the CBO report includes roughly 14 million households that do not earn enough to file a tax return,” so they could not benefit from a Bush tax cut, Hodge says.

But the Democrats asked that all of this be included in the study to make it appear that the middle class are paying more and the rich are not paying “their fair share.”

In fact, the Bush tax cuts reduced middle-income taxes this year “as a share of income from 5.2 percent to 3.5 percent, a decline of 1.7 percentage points relative to the share that would be paid under 2000 tax law,” said Rep. Jim Saxton of New Jersey, the Republican vice chairman of the Joint Economic Committee.

As for those in the top income brackets, the IRS says that upper-income people are still paying the lion’s share of all federal income taxes paid.

According to the latest data: the wealthiest 1 percent of all taxpayers pay 33.89 percent of all federal income taxes paid; the top 5 percent pay 53.25 percent; the top 10 percent pay 64.89 percent; the top 25 percent pay 82.90 percent; and the top 50 percent of income earners pay 96.03 percent.

Everyone else in the bottom half, people making $28,528 a year or less in adjusted gross income, pay 3.97 percent of all individual federal income taxes paid.

If this isn’t an extremely progressive income tax system, where upper income people are paying more than their “fair share,” I don’t know what is.