Video: How Tax Cuts Work & Why Tax Increases Achieve the Exact Opposite of the Stated Intent

Lee Doren of “How The World Works” explains how tax cuts and increases work in a progressive income tax system like we have here in the United States.

Let us examine some charts that help to illustrate this further.

Here is the tax burden by taxable income that came out at the middle of the Bush Presidency:

You see when tax rates are cut and the economy grows the upper and top parts of the PRODUCER CLASS (notice I did not say rich as many of the super rich are NOT producers) pay the lions share of federal income taxes. Those who produce actually produce more, invest more, take more risk and hire more people when the economy grows. So as they pay a lower tax rate they actually pay more in real dollars because they are punished less by moving their money and takling risk.

Now let us look at the tax burden as it is today. According to the Tax Foundation:

Incomes reported by tax returns at the high end of the income spectrum plummeted from 2007 to 2008, as did their share of the nation’s income and income taxes paid.

In 2008, the top 1 percent of tax returns paid 38.0 percent of all federal individual income taxes and earned 20.0 percent of adjusted gross income, compared to 2007 when those figures were 40.4 percent and 22.8 percent, respectively. Both of those figures—share of income and share of taxes paid—were their lowest since 2004 when the top 1 percent earned 19 percent of adjusted gross income (AGI) and paid 36.9 percent of federal individual income taxes.

Each year from 2005 to 2007, the top 1 percent’s constantly growing share of income earned and taxes paid set a record. That trend reversed in 2008. In fact, the income share for the top 1 percent of tax returns was lower in 2008 than in 2000, largely due to differences in capital gains.

Another indicator of this reversal in the income and tax shares of the top 1 percent is that during 2007, the top 1 percent had actually paid more in federal income tax than the bottom 95 percent, a comparison that was much remarked on a year ago. But the diminished income of the top 1 percent in 2008 means that the comparison no longer holds. During 2008, the bottom 95 percent (AGI under $159,619) paid 41.3 percent of the total collected, a larger share than the 38.0 percent paid by the top 1 percent (AGI over $380,354).

The top-earning 5 percent of taxpayers (AGI over $159,619), however, still paid far more than the bottom 95 percent. The top 5 percent earned 34.7 percent of the nation’s adjusted gross income, but paid approximately 58.7 percent of federal individual income taxes.

So why did the percentage of the tax burden of “the rich” during most of the Bush presidency go UP year after year till 2007, even after the so called “tax cuts to the rich”?

And why in 2008 did a huge portion of the tax burden get shifted to the working middle class and poor?

It is just as we said, if the incentive is there to produce, if the taxes are low and if the risk is measurable those wealthier Americans and producers will take more risk and be more economically active. If you remove the incentive by threatening them with taxes, cap & trade, ObamaCare, tons of regulations, bureaucrats and the corruption that always follows such policies it creates uncertainty investors and producers can no longer make a measured risk. This is when they bottle their money up or invest it in China, who is smart enough not to punish investors and producers for taking risk.

This shows that the tax rate that the producers or “the rich” pay is secondary to certainty, confidence, and economic growth as to how much tax they pay in real dollars.

It is ironic that the left, who claims to pass this stuff in the name of the middle class and “soaking the rich”, in real dollars accomplish exactly the opposite of their stated intent. It ends up that it is the producing middle class who gets soaked with more tax burden and more inflation.

The way to crush the middle class is to grind them between the millstones of taxation and inflation. – Vladimir Lenin

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