Are We Better off Now? A Look at How Tax Cut Made Rich Richer and Poor Poorer

Yesterday, I read this interesting article on NY Times about how our personal income in 2004 (the year that the latest IRA data is available) compared to what we earned four years earlier in 2000. The title of the article, ’04 Income in U.S. Was Below 2000 Level, already decleared the conclusion of the comparison. However, the statistics compiled from IRS data offered more insights on how the tax cut favored the rich over the poor than the headline did.

I remember more than four years ago when the tax cut was a hot topic, politicians supporting the cut from every corner argued how on average a family could save $1000 on taxes if the initiative went through. While it is true on average, the distribution is by no means even. If for one rich household there is a poor family, the rich could save $1900 on taxes with the poor getting the short end of the stick of $100, and that still made the average tax savings per household at $1000. However, the cold fact is for one rich family, there are probably ten families earning minimum wages or less to offset, and that will make the difference even more significant than the face number suggested.

The following is what I summarized from the article.

Overall income & taxes in 2004 and 2000

• Total income reported on all tax returns is $7.044 trillion in 2004, down from more than $7.143 trillion in 2000.
• The average reported income is $53,974 in 2004, falling $1,641, or 3 percent, compared to 2000.
• Individual taxpayers paid $831.8 billion income taxes in 2004, down from $980.4 billion in 2000.

The pain of the poor

• The poorest 60 million Americans (48 million adults and 12 million dependent children) reported average incomes of less than $7 a day each. The official poverty line in 2004 was $27 a day for a single adult below retirement age and $42 a day for a household with one child.
• The bottom fifth taxpayers (about 26 million) made less than $11,166 each in 2004 and had an average income of $5,743, up $135 or 2.4 percent, from the year 2000. 

The gain of the rich

• The top one-tenth of 1 percent, about 130,500 taxpayers, reported average income of just under $4.9 million each in 2004.
• About 300,000 Americans in the very top households made significantly more combined pretax income than the poorest 120 million Americans earned in 2004.

How the tax cut made rich richer and poor poorer: From 1979 to 2004

• Overall, average incomes rose 27% from 1979 to 2004. But the gains were narrowly concentrated at the top and offset by losses for the bottom 60 percent of Americans, those making less than $38,761 in 2004.
• On average, the bottom 60 percent of Americans made less than 95 cents in 2004 for each dollar they reported in 1979.
• The fifth of Americans on the 60th to 80th rungs of the income ladder, averaged 2 cents more income in 2004 for each dollar they earned in 1979.
• The average income of the top 5 percent (those on the 95th to 99th rungs of the income ladder) rose by 53%, almost twice the average rate.
• The top 1 percent contributed to a third of the entire national increase in reported income and more than half of that went to the top tenth of 1 percent, whose one dollar in 1979 became $3.48 in 2004 after inflation adjustment.
• For those top tenth of 1 percent, each inflation-adjusted dollar they had after tax in 1979 they had $3.94 left after taxes in 2004.
• For the bottom 60 percent, while their pretax average incomes fell by a nickel on the dollar from 1979 to 2004, their after-tax incomes fell by a fraction of a penny less.

If you enjoyed reading this post, subscribe to the RSS feed.