August 24, 2007 10:09AM

Soak the Rich with Lower Tax Rates

By Daniel J. Mitchell

Ever since the supply‐​side tax rate reductions of 2003, the economy has prospered and this has generated a windfall of tax revenue for the Treasury. The Wall Street Journal notes [$] that the lion’s share of this new revenue is from upper‐​income taxpayers.


There are many factors that influence the economy’s performance, so this does not necessarily prove that the 2003 tax cuts “paid for themselves.” But the windfall certainly bolsters the argument that the right types of tax cuts (lower marginal tax rates) have a positive impact on growth and that this means at least some revenue feedback.


Writes the WSJ:

Since the Bush tax cuts of 2003, the budget deficit has fallen by $217 billion mostly because of a continuing torrid pace of revenue growth. …For the Bush tax cuts to have been a give‐​away to the rich, people paying the higher marginal tax rates would have to be carrying a smaller share of the income tax load. But the IRS data indicate that they are not paying less. Instead, they are paying more — lots more. More surprisingly, the richest 1%, 5% and 10% of the taxpayers are shouldering a larger percentage of the income tax burden at the federal level than the tax estimators said they would had the Bush tax cuts never materialized. …The amount of tax paid by those earning more than $1 million a year increased to $236 billion in 2005, up from $132 billion in 2003, the year of the tax cut. This was a 78% increase in taxes paid by millionaire households.


…[L]ower tax rates on capital gains and dividends also caused a huge jump in reported income. The National Bureau of Economic Research found an “unprecedented surge in regular dividend payments after the 2003” Bush tax cut. Likewise, the lowering of the capital gains tax was followed by a 150% increase in the amount of capital gains unlocked by the 15% tax rate. Lower tax rates expanded the tax base.


…The supply‐​side revenue effects on the rich are remarkable: Tax rates on higher incomes have been halved, but the federal tax share of the top 1% has nearly doubled.