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A Taxing Debate
Subject Tax cuts
Topic Fiscal Policy
Key Words Fiscal Policy, Economic Growth, Budget Deficits, Tax Revenues
News Story

President Bush has yet to reveal his proposals for promised tax cuts in 2003. His statements, however, have renewed a debate over how much in taxes the rich should pay. The President is expected to propose lowering the tax on dividends, accelerating tax reductions for the upper half of the income distribution and permanently repealing the estate tax: measures which would clearly benefit the wealthy. Many, especially in the Democratic Party, argue that too much of the Bush tax cuts have gone to the wealthy and prudent economic policy should focus on putting more money into lower- and middle-class families. In addition to the issue of equity, arguments over the appropriate distribution of taxes consider its impact on economic growth.

There has always been considerable debate over the distribution of income taxes throughout the twentieth century. Initially, the debate focused on issues of equity. Redistribution was considered to be an ethical issue and one of the functions of the tax system was to take money from the rich and give it to the poor. Those who argued for lower taxes for the rich were typically defenders of private-property rights. In recent years the impact of taxes on economic growth has been interjected into the debate. The current view is that there is a tradeoff between equity and efficiency. As the tax system becomes more progressive, income net of taxes becomes more equal; however, those taxed have less incentive to work, save and invest, with obvious consequences to the economy.

The President's position is that the wealthy pay most of the taxes and any income-tax cuts should benefit them disproportionately. The top one-half of all taxpayers pay 96 percent of individual income taxes. Furthermore, the richest 1 percent paid 37.4 percent of all federal income taxes in 2000, an increase from 16.7 percent in 1970. Opponents of this view argue that the wealthy have had a greater share of all income today than they have in the last 50 years. Furthermore, the middle class has not benefited significantly from recent federal income tax reductions. According to the Congressional Budget Office, the middle 20 percent of families were paying 18.7 percent of their incomes in all federal taxes including Social Security and Medicare in 1980, and about 17 percent twenty years later, after the Regan tax cuts.


(Updated April 3, 2003)

Questions
1.

What is a progressive tax? What is a regressive tax?

2. What is the Earned Income tax Credit? How does it redistribute income?
3. Suppose that a per-unit tax is imposed on each hour of work. What happens to the labor supply curve? What happens to the number of hours worked and the hourly wage rate net of this tax?
4. The Congressional Budget office estimates that those families earning over $200,000 a year earn about 25 percent of total income and pay 46 percent of the federal income tax. Is this too much? Too little? What would you base your analysis on?
Source David Wessel, "Behind Tax Debate, Issues of Ethics And Economics," The Wall Street Journal, January 2, 2003.

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