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A version of this article appeared in the September 15, 2008, issue of National Review.

September 2008

Opponents of President Bush's tax policy often argue that the 2001 tax cuts have unfairly benefited the wealthiest Americans. Yet recent data released by the U.S. Treasury Department demonstrate that this is not the case. Since the tax cuts were enacted in 2001, the tax share of the wealthiest 10 percent of Americans has grown by more than their income share, demonstrating that lower tax rates may improve the progressivity of the system by encouraging work and discouraging avoidance activity.

According to the critics, George W. Bush's tax cuts have dramatically changed the fairness of the U.S. federal income tax. On his campaign website, Democratic presidential nominee Barack Obama says that "[t]he Bush tax cuts give those who earn over $1 million a tax cut nearly 160 times greater than that received by middle-income Americans." Such rhetoric suggests that a big share of the tax burden has been passed on to the little guy.

Proponents of the cuts support them not because they are a giveaway to the rich, but because lower marginal tax rates improve the overall working of the economy, enhancing the welfare of people at the top and the bottom. And there is a bonus for a revenue-hungry government: when tax rates are lower, individuals have more incentive to work and less incentive to avoid taxes. That explains why the revenue cost of reduced marginal rates is much smaller than the static scorers in Washington let on.

According to the negative view, when Bush's tax cuts took effect, the share of income taxes paid by the wealthiest Americans should have declined. The rich, in this scenario, benefited from the senseless giveaway, putting a greater and greater proportion of the tax burden on the poor. Under the positive view, by contrast, the share of income taxes paid by the wealthiest Americans might increase even when you cut their tax rates, since they will work harder and reduce their efforts to avoid taxes.

Figure 1 suggests that recent movements in the tax data are inconsistent with Obama's perspective. The top line indicates the share of income taxes paid by the top 10 percent of taxpayers. The bottom line indicates the share of income taxes paid by the bottom 90 percent. In 2006, the top 10 percent of earners paid fully 70.8 percent of taxes. That is significantly above the 2000 peak of 67.3 percent--before the Bush tax cut.

Obama might agree that this is true, but only because the income share of the top earners has climbed so much. But Treasury Department data contradict this argument: the top 10 percent received about 46 percent of the income in 2000 and about 47.3 percent in 2006. The number may well have declined again after that. So the tax share of the rich has gone up a lot more since 2000 than their income share has.

Suppose there were a candidate for president who advocated a tax policy that dramatically reduced the share of income taxes paid by top earners. What would the progressives say about such a candidate? The truth is that anyone who suggests the repeal of the Bush tax cuts is just that fellow.

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Kevin A. Hassett is a senior fellow and director of economic policy studies at AEI.