on the cover / By David Cay Johnston

Wealth Care

How America’s tax system makes the super-rich richer while costing the rest of us

(April 14, 2011)  For three decades we have conducted a massive economic experiment, testing a theory known as supply-side economics. The theory goes like this: Lower tax rates will encourage more investment, which in turn will mean more jobs and greater prosperity — so much so that tax revenues will go up, despite lower rates. The late Milton Friedman, the libertarian economist who wanted to shut down public parks because he considered them socialism, promoted this strategy. Ronald Reagan embraced Friedman’s ideas and made them into policy when he was elected president in 1980.

For the past decade, we have doubled down on this theory of supply-side economics with the tax cuts sponsored by President George W. Bush in 2001 and 2003, which President Obama has agreed to continue for two years.

Corporate profits rise, taxes fall NORTH COAST JOURNAL GRAPHIC

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You’d think that whether this grand experiment worked would be settled after three decades. You’d think the practitioners of the dismal science of economics would look at their demand curves and the data on incomes and taxes and pronounce a verdict, the way Galileo and Copernicus did when they showed that Earth revolves around the sun. But economics is not like that.

Tax policy is something the Framers left to politics. And in politics, the facts often matter less than who has the biggest bullhorn. The Mad Men who once ran campaigns featuring doctors extolling the health benefits of smoking are now busy marketing the dogma that tax cuts mean broad prosperity, no matter what the facts show.

As millions of Americans prepare to file their annual taxes, they do so in an environment of media-perpetuated tax myths. Here are a few points about taxes and the economy that you may not know, to consider as you prepare to file your taxes. (All figures are inflation adjusted.)

1. Poor Americans do pay taxes.

Gretchen Carlson, the Fox News host, said last year that “47 percent of Americans don’t pay any taxes.” Ari Fleischer, the former Bush White House spokesman, once said, “50 percent of the country gets benefits without paying for them.” John McCain and Sarah Palin said similar things during the 2008 campaign about the bottom half of Americans.

Actually, they pay lots of taxes — just not lots of federal income taxes. Data from the Tax Foundation shows that in 2008, the average income for the bottom half of taxpayers was $15,300. This year the first $9,350 of income is exempt from taxes for singles ($18,700 for married couples), just slightly more than in 2008. That means millions of the poor do not make enough to owe income taxes.

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