Debunking The Barack Obama "Rich Don't Pay Taxes" Myth

We hear it over and over from the President and from the Democratic party, the well off do not pay their fair share of taxes and during the eight years of the Bush administration, their burden was eased even further.

Like most things coming out of the Obama White House that claim is bogus. The Non-Partisan Congressional Budget office issued a report that showed that the top 20% of income earners pay over 86% of all taxes, which is 6% more than what they paid at the beginning of the Bush administration. At the same time much of the bottom 40% not only did not pay taxes, but they got cash back. 

In 2006, the latest available year from CBO, the top 20 percent of income earners paid 86.3 percent of all federal income taxes, an all-time high.[1] This is an increase of over 6 percent from 2000, when the top 20 percent paid 81.2 percent. During the same period, the bottom four quintiles all saw their share of the federal income tax burden fall sharply:
The bottom 20 percent of income earners' share of federal income taxes fell from –1.6 percent in 2000 to –2.8 percent in 2006;


The next 20 percent's share declined from 1.1 percent to –0.8 percent;


The middle quintile's share dropped from 5.7 percent to 4.4 percent; and


The fourth quintile's share decreased from 13.5 percent to 12.9 percent.


Each of these four quintiles' shares was an all-time low.





2001 and 2003 Tax Cuts Removed Low-Income Earners from Roles


The 2001 and 2003 tax cuts removed millions of taxpayers from the federal income tax roles, leaving only those at the top to pay the bill. They lowered every federal income tax rate and created a new 10 percent bracket to further reduce taxes for low-income earners.


While these tax rate cuts lowered taxes for all taxpayers, low-income earners got the biggest cut. In addition to these rate cuts, the 2001 and 2003 tax cuts expanded the refundable Child Tax Credit from $500 per child to $1,000 per child. The combination of lower tax rates and an expanded Child Tax Credit meant many low-income taxpayers no longer paid any federal income taxes.


Was Greater Income the Cause?


Critics counter that the increase in tax shares for high-earners was due to income increases at the top of the income spectrum. But a closer look at the data shows this just is not the case.


The top 20 percent of earners saw their share of pre-tax income rise from 54.8 percent to 55.7 percent, from 2000 to 2006. During that same period, their share of federal income taxes increased from 81.2 percent to 86.3 percent.


The modest increase in incomes is not large enough to explain the large increase in the share of income taxes paid by the top 20 percent. Rather, the removal of substantial numbers of low-income taxpayers from the federal income tax roles is the real culprit.


Refundable Credits Redistribute Income


The bottom 40 percent of income earners actually paid a negative share of federal income taxes in 2006. In other words, these taxpayers are actually paid money through the tax code. This happens through refundable credits like the Child Tax Credit and the Earned Income Tax Credit, which result in "refunds" when they are greater than the taxpayer’s total income tax liability.


For instance, if a family with one child has an income tax liability of $300, it can claim the Child Tax Credit, which wipes out their tax liability, and still receive $700 from the IRS for the remainder of the $1,000 credit. On April 15, not only do the bottom 40 percent of all taxpayers pay ``no taxes, but they actually receive additional income from the IRS. 

But there is even more, click here to read the rest of the story

The Rich Pay More Taxes: Top 20 Percent Pay Record Share of Income Taxes

[1]Unless otherwise noted, all data come from Congressional Budget Office, "Historical Effective Federal Tax Rates: 1979 to 2006" April 2009, at http://www.cbo.gov/publications/collections/tax/2009/all_tables.pdf (April 23, 2009).




[2]Curtis S. Dubay, "‘Making Work Pay Credit’ Will Not Stimulate the Economy," Heritage Foundation WebMemo No. 2240, January 26, 2009, at http://www.heritage.org/Research/Taxes/wm2240.cfm.


[3]Curtis S. Dubay, "Obama's Stimulus Has "Spread the Wealth Around’: Are Tax Hikes Next" Heritage Foundation WebMemo No. 2354, March 23, 2009, at http://www.heritage.org/Research/Economy/wm2354.cfm.


[4]U.S. Office of Management and Budget, A New Era of Responsibility: Renewing America's Promise (Washington, D.C.: U.S. Government Printing Office, 2009), p. 123, Table S-6, at http://www.whitehouse.gov/omb/assets
/fy2010_new_era/A_New_Era_of_Responsibility2.pdf (April 23, 2009)