Middle class feeling pinch from tax cuts, government study says

By Jonathan Weisman
The Washington Post

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The CBO study, to be released today, likely will stoke an already burning debate about the fairness and efficacy of Bush's $1.7 trillion in tax cuts and is likely to roil the presidential election campaign.

The study found that the wealthiest 20 percent, whose incomes averaged $182,700 in 2001, saw their share of federal taxes drop from 64.4 percent of total tax payments in 2001 to 63.5 percent this year. The top 1 percent, earning $1.1 million, saw their share fall to 20.1 percent of the total, from 22.2 percent.

Taxpayers with incomes from around $51,500 to around $75,600 saw their share of federal tax payments increase. Households earning around $75,600 saw their tax burden jump the most, from 18.7 percent of all taxes to 19.5 percent.

The analysis, requested in May by congressional Democrats, echoes similar studies by think tanks and Democratic activist groups. But the conclusions have heightened significance because of their source, a nonpartisan agency headed by Douglas Holtz-Eakin, former chief economist of Bush's Council of Economic Advisers.

"CBO is nonpartisan, it's independent, and right now it works for a Republican Congress with a former Bush economist at its head," said Jason Furman, economic director of the presidential campaign of Sen. John Kerry. "There's no higher authority on the subject."

Girding for the study's release, Bush campaign officials have begun dismissing it as "the Democrat-requested report."

The question posed was a standard request for analysis of the type members of both sides of the aisle routinely make of the CBO. In this case, ranking Democrats on the House Ways and Means Committee, the Senate Finance Committee, the House and Senate budget committees and the Joint Economic Committee asked Holtz-Eakin to estimate the distribution of tax cuts among income levels, and compare that to tax levels if none of the cuts were passed.

The conclusions are stark. The effective federal tax rate of the top 1 percent of taxpayers has fallen from 33.4 percent to 26.7 percent, a 20 percent drop. In contrast, the middle 20 percent of taxpayers — whose income averaged $51,500 in 2001 — saw their tax rates drop 9.3 percent. The poorest taxpayers saw their taxes fall 16 percent.

Republican aides on Capitol Hill said the tax cuts actually made federal income taxes — as opposed to total taxes — more equitable. Once Social Security, Medicare and other federal levies are excluded, the rich actually are paying a higher share of income taxes this year than they would have paid with no tax changes, the CBO also found.

If none of the tax cuts had passed, the top 20 percent would be paying 78.4 percent of income taxes this year. Instead, they will be paying 82.1 percent. In contrast, the middle-class share of income taxes dropped to 5.4 percent, from 6.4 percent if no tax cuts had passed.
 
"Are the rich paying their fair share?" one GOP aide asked. "Yeah. They're paying more."

But to Democrats, the conclusion was clear. For the bottom 20 percent of households, the combined tax cuts averaged $250. The middle 20 percent received $1,090, while the top 1 percent garnered $78,460, said Democrats on the Joint Economic Committee who analyzed the report.

The tax cuts this year will boost the income of millionaires by 10.1 percent, while middle-income families will see a boost of 2.3 percent, the Democrats said.

Congressional Republican aides said the analysis has limitations. For instance, it assumes that beneficiaries of business-tax cuts passed in 2002 and 2003 are taxpayers who own stocks, bonds and other stakes in businesses. But that analysis does not consider new workers hired, or higher wages that may have been granted because of the boost to the bottom line.

It also does not reflect that tax rates on lower-income households in the 1990s fell considerably because of an expansion of the earned income-tax credit and other forms of relief. In that sense, GOP aides said, tax cuts for the wealthy were overdue.

But Furman said the results are too stark to spin.

"This is the first really detailed government report that says not only did the wealthy get an enormous tax cut, but, if the conclusions are what we expect, the middle class will be left paying a larger proportion of the taxes than they were before," he said.