Taxes: Lies, Damn Lies, and Statistics

Under Republican pressure, President Obama recently announced his plan to extend the Bush Tax cuts for another two years. That pressure comes from politicians who keep insisting that tax cuts, especially for the rich, are good for growth. That belief persists despite the economic wisdom that shows that they increase GDP by very little.

And if you need more evidence than data from economists all you need to do is take a look at the real income growth (in 2009 dollars) in the US over the past 37 years. What GDP growth we have seen has gone disproportionately to the wealthy.

From 1972-2009, for non Hispanic Whites:

  • The top 5% have seen their incomes rise at a rate 3.6 times that of the middle 20%
  • This works out to an increase in income of $3,701 versus $208 per year
  • Further, the lowest 20% only saw an annual increase in wages of $63.

Income Inequality 1972 – 2009

Source: US Census Bureau H-1, H-2, H-3

This trend towards increasing income inequality over time only gets more dramatic as you look at a smaller slice of the top. The fact is that for decades most of the populace has seen meager growth in real income while the wealthy reach Gilded Age heights. This uneven growth rate explains graphs like this, by the Heritage Foundation, which cite the growing income tax burden on the American family.

They also claim that tax increases will increase government revenue but better numbers don’t back up that claim. More accurate measures such as Government revenue as a percentage of GDP (even better per capita) are much better measures of how much revenue the government is generating from tax payers adjusted for economic and population growth.

Income as a Percentage of GDP

Income as a Percentage of GDP

Spending as a Percentage of GDP

Spending as a Percentage of GDP

Source: Time Magazine, December 13th Issue

I really wish the President and Democrats would do what this country needs: fight the Bush tax cuts and give us a stimulus without all the garbage the first one had. Unfortunately, the reality of Republican opposition makes me thing we’re in for a long road to recovery, especially if the government refuses to invest in new job creation and focus on the deficit.

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