Curmudgeonly & Skeptical

New IRS data for 2001 have just been published, and one headline is that the rich did not get richer. But the more intriguing story in the numbers is how much liberals have come to rely on the rich to finance their government spending.

Income tax revenue in 2001 fell by $93 billion and the majority of that decline was due to the top 1% of taxpayers paying less than they did a year earlier. Specifically, the top 1% paid $301 billion in 2001, down from $367 billion the year before.

Try as some might, it is impossible to blame the Bush tax cuts for this decline. The tax cuts were only passed midyear and barely mattered in 2001. The tax take fell because income for the top 1% of Americans fell a dramatic 18% from 2000 -- to below the income earned in 1999. The adjusted gross income necessary to put a family in the very top bracket slipped to $292,913 from $313,469 in 2000. But the average tax rate for this top group actually increased slightly to 27.5% from 27.4%.

The IRS figures show that 2001 was not a great year for anybody. With the economy in recession, income for all Americans slid almost 3%. But total federal revenue fell more than 9% because taxpayers in the top brackets represent the majority of tax dollars. Simply put, the IRS data demonstrate once again that the income tax system is steeply progressive.

True, the decline in income for the top 1% reduced its share of the total tax burden (pushing it back close to the 17.4% share posted in 1997 from 20.8% in 2000). But the top half of all taxpayers continued to contribute more than 96% of total federal income tax revenue, while the bottom half accounted for a touch less than 4%. The top 10% of taxpayers continued to cough up well over half of all tax revenues -- about 65%.

It is this progressivity that makes the federal government so hugely dependent on top earners for revenue. In the period 1997-to-2000, the last years of the Clinton bubble, adjusted gross income for the top 1% went up every year and so did its share of all income taxes paid. When times are really good, in other words, tax revenue from the rich tends to increase faster than the economy. When times are bad, however, federal revenue falls faster than overall growth does. This helps to explain the wide budget swings in the past decade from deficit to surplus and back to deficit.

This also creates a problem for liberal tax-the-rich types. Call it the goose-and-golden-egg dilemma. Class warriors, some of whom are now running for President, want to raise taxes on the wealthy geese so they can spend more. But higher taxes will slow the economy and result in lower revenues. Fewer golden eggs mean either less spending, or more spending and bigger budget deficits.

The way out of this dilemma is for liberals to give up their high-tax policies and embrace the lower marginal tax rates that lift the economy and thus produce more revenue. Class warriors should be cheering on those geese in the top 1%, not demonizing them.

Updated September 30, 2003