Saturday, October 1, 2011


After I posted US Economy 101, there was an interesting question raised which had me digging for some more information; and what I found is not only interesting but also somewhat contrary to public opinion/perception. After reviewing the deficit that the nation is burdened with, one question that cropped up several times was: how much of this is related to the tax-cuts implemented by President Bush and how much of this is related to the cost of wars waged in Afghanistan and Iraq?

This is a very valid question and one that has probably been raised a few times before in the past decade.  I was surprised, if not shocked, to find that while the question is fairly obvious, the data related to the answer was not readily available.  One note of particular interest was that the Joint Committee on Taxation (JCT) - a congressional non-partisan body who scored the original tax-cut proposal under certain assumptions about future tax laws - has not taken a hindsight look on what the tax-cuts have cost so far.  This would lead me to believe that Congress is not willing to take an impartial look at the decisions it took a decade ago.  This reeks of complicity more than anything else.

After digging around a little bit, I was able to find some data regarding the annual costs of the tax-cuts published by from a research organization called Institute on Taxation and Economic Policy (  Here is what I found:  (click to enlarge)

Looking at the last decade, there is a clear correlation between the annual deficit and the impact of the tax-cuts as well as the cost of the wars.  For clarity, the cost of wars shown above represents the appropriations (government spending) requested by the Department of Defense from the Congress each year.  Over the 10-year period, the Bush tax-cuts have cost about $2.1 trillion in lost receipts.  The wars have cost about another $1 trillion.  But the key spike in the deficit came in 2008, as a result of the economic crisis caused by the housing market meltdown.  So while the Bush tax-cuts did not deliver the economic stimulus they were intended to, we would still have found ourselves in a serious problem on account of the economic crisis.

The economic crisis is a whole other issue but if you can spare a couple of hours, Inside Job does a fine job of explaining the origins, cause and culprits of the financial meltdown.  (Spoiler alert: there's nobody innocent here.)  For the time being, let's just focus on the tax-cuts alone and see how they break down between the different groups of tax payers. (click to enlarge)
The chart above shows the estimated taxes that would have been paid by the different tax payer groups.  On average, the government would have collected over $200 billion in additional taxes if the Bush tax-cuts would not have been implemented.  About half of that comes from the top 5% of tax payers.  This is not really a surprise.  Those who pay higher taxes benefit the most under the Bush tax-cuts.  Keep in mind that these numbers are estimates and one cannot predict the changes in earning and spending patterns over the years.  Also, the spike in the early years indicates that income tax collections went up.  This, in turn, means that income went up.  One may attribute that to the tax cuts which may have led to increased spending and hence increased earnings by small business owners and perhaps even salary increases. 

The distribution is not at all unexpected.  This is completely in line with share of total income tax paid. The chart below shows the share of income tax paid by top tax payers in the US: (click to enlarge)

You will note that prior to this century, the top tax group was limited to the top 1%.  Since 2001, the tax collection was broken out by the top 0.1% and the rest of the top 1%.   About 10% of the total tax collected comes from the top 0.1% of the tax payers.  The top 10% of the tax payers provide the government with over half of the total tax collected.  (This data refers to the tax payers, not the entire population which includes non-payers.)  After all, this is the mark of a true capitalist society.  A small select segment of the society will earn most of the rewards and therefore will pay most of the taxes.  This is what drives the American dream chaser: one keeps striving to get into that small top bracket, either by labor, luck or lawlessness.

So the bottom line is that yes, the top earners or ultra-rich certainly got a huge benefit out of the tax cuts.  But that is mainly because they are the ones who pay most of the taxes anyway.  Like it or not, that is the American way.  The biggest culprit for the current predicament is the one that nobody is mentioning: the 2008 financial crisis.  The global impact of this crisis was around $20 trillion and to this date, there has been nobody held accountable for this.  The catastrophic crisis was undoubtedly a result of neglect and irresponsibility by several governments and other government and non-government bodies.  But I don't think I can do a better job of explaining this than Inside Job.