Blame Budget Shortfall on Tax Cuts for the Rich

About Tamara Draut:

Tamara Draut is the Vice President of Policy and Programs at Demos, a progressive research and policy center. Previously, she served as Director of the Economic Opportunity Program at Demos. She is the author of Strapped: Why America's 20- and 30-Somethings Can't Get Ahead.

Let's leave aside the question of fairness, for now. The paramount question is whether the United States is generating the revenue it needs to fund the public structures that are essential for business and individual prosperity—things like transportation networks, schools, healthcare, college, and many other important functions of government in a capitalistic society. By any indicator the answer is that the United States is falling short in providing both the revenue to fund these services as well as providing for their ongoing maintenance and modernization.

[Read the U.S. News debate on the flat tax.]

Federal tax revenue is lower than it has been in half a century. The federal government's revenues from income taxes on households make up 6.4 percent of GDP; which is 1.1 percentage points lower than half a century ago, and 3.8 percentage points lower than the peak in the boom year of 2000. Our current tax revenues are not only low relative to historical levels, but they rank low internationally as well. Our total tax revenues, including federal, state, and local taxes, comprise 27 percent of GDP, a level far lower than most of our peers in the developed world. In fact, among the 33 nations of the Organisation for Economic Co-operation and Development, only three (Korea, Turkey, and Mexico) take in proportionately less tax revenue than we do.

[Read 10 things you didn't know about the Bush tax cuts.]

And so we come to the question of whether the richest in America are paying their fair share. The reality is that the steep fall in federal tax revenue was caused largely by cuts in the tax rates for the very wealthiest households. The current marginal tax rate for the highest income bracket—in other words, the tax rate on income above a threshold for the wealthiest taxpayers—of 35 percent is among the lowest since WWII, far lower than the 80 percent rate during the high-growth 1960s and the 39.6 percent rate of much of the 1990s. Of course, most rich households do not pay the published rate—after taking into account deductions and other big tax benefits, the actual percentage of a rich household's entire income paid in taxes has also fallen precipitously, dropping from 31.3 percent for millionaires in 1993 to 22 percent today.

So, no, the rich are not paying their fair share of taxes—neither as defined by historical American norms or by international standards. And, the result of that shirking of responsibility is sluggish growth, diminished social mobility, declining educational attainment, and lost business efficiencies due to our insufficient and often outdated transportation and information networks.

• Read the U.S. News debate on the payroll tax cut.
• See a collection of political cartoons on the economy.
• Read about 7 groups with reason to protest.