Who Benefits the Most from Tax Cuts?

Last September Forbes magazine published The Richest People in America. From the report:

“America’s super rich are getting poorer. For only the fifth time since 1982, the collective net worth of The Forbes 400, our annual tally of the nation’s richest people, has declined, falling $300 billion in the past 12 months from $1.57 trillion to $1.27 trillion.”

In a related note titled “Capitalism: A True Love Story” Steve Forbes wrote:

“–A pro-growth tax system. Taxes are a price and a burden. Low tax rates on income, profits and capital gains foster more risk- taking and higher growth, bringing about a richer economy with a higher standard of living–along with higher government revenues.”

One of the reasons, the wealthy stay wealthy and continue to multiply their wealth despite the boom and bust cycles in the economy is due to tax cuts.

During the Bush Administration, the wealthy enjoyed significant tax cuts. The 2001 tax package cost the federal government $1.3Trillion in lost revenues according to Congress’ Joint Committee on Taxation. The tax cuts had an uneven effect on different groups of taxpayers. The wealthy benefited greatly as a result of the cuts while others did not.

The following chart shows difference in income growth between the rich 400 American households and the rest between 1992 and 2007.


Source: Economic Policy Institute

The figures noted in the graph are inflation-adjusted. The pre-tax income of the 400 households grew by 409%. The equivalent after-tax income growth during the same period totaled a whopping 476%. This is because tax rates applied to their income had fallen by a third.When capital gains and dividend income taxes were reduced dramatically during the previous administration it helped the wealthy preserve and grow their wealth even more.

During the same 15-year period, the pre-tax median household income of the majority of Americans grew by just 13.2%. Despite the dot com boom, the financial crisis, housing bubble and other events the wealthy thrived while the rest of Americans lost out again.

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