Taxes and the Media

by Russ Roberts on August 13, 2004

in The Economy

Reporters constantly confuse tax rates and tax revenue. Today we have reached a new low. The CBO has released a study that looks at the impact of recent changes in the tax law. Go to Google news and search on “CBO tax study” and you will find headlines like these:

Tax burden growing heavier for middle class (USA Today)

Tax burden shifts to the middle (MSNBC)

and dozens saying how the rich and the wealthy got the bulk of the cuts.

On one TV report a friend heard the announcer telling the viewers: Your taxes have gone up.

All of these purport to explain how the Bush tax cuts affected people in different income quintiles, the putative focus of the study.

The New York Times story did say that in fact, the study showed that everyone’s taxes had gone down. But the income effects differed radically by quintile according to the Times:

People in the very top income categories fared better by almost any measure, according to the report. The average after-tax income for people in the top 1 percent of income earners climbed 10.1 percent, while that of those in the middle 20 percent climbed 2.3 percent, and that of those in the bottom fifth only 1.6 percent.

Here is the summary from the MSNBC story:

The CBO study, due to be released today, 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.

Unfortunately, neither of those assessments are true.

These stories act as if the CBO had studied how people today have seen their tax burden change. But that is not what the CBO study did.

The CBO study is a simulation based on 2001 incomes.

It tells us nothing about what has actually happened to individuals at various income levels, nothing even about people in different quintiles. What the CBO did is take incomes in 2001, assume they grew at a constant rate and then estimated what would happen under the tax legislation that has occurred since then. The CBO did not take account of any changes in behavior. They did not take account of the recession or any actual reality that has occurred since 2001.

To say it another way, the CBO study could have been written in 2001 if we had known then which changes in the tax code would be enacted. It is a forecast. It may capture what has actually happened since 2001 or it may not.

So statements such as “the very top income categories fared better” or “the wealthiest 20 percent, whose incomes averaged $182,700 in 2001, saw their share of federal taxes drop” are fantasies unsupported by the study.

Of course the rich did get the bulk of the Bush tax cuts, if you define “bulk” as “saw the largest reduction in what their taxes would otherwise be.” The rich pay the bulk of the income taxes (a fact noted in the New York Times study but often ignored in other accounts.) But the implications for tax burdens by class or after-tax incomes cannot and will not be known for another few years.

As I argued earlier, the fiction that payroll taxes fund social secutiy hampers our ability to truly cut taxes across the board.

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