myheritage.org: Myth Busters

Amnesty solves nothing 

• Amnesty only encourages further illegal entry by those who want to take advantage of the program. This makes the immigration problem worse, not better.
• Previous amnesty programs have been unable to process applicants quickly and weed out illegal aliens, especially potential terrorists. Three known terrorists, for example, exploited the 1986 amnesty.

Almost no shift in burden 

• In 2003, the latest year for which complete data is available, the top one percent of taxpayers paid just over 34 percent of all income taxes, compared to over 37 percent in 2000 and 33 percent in 1997
• The top 10 percent of taxpayers paid almost 66 percent of income taxes in 2003, compared to 67 percent in 2000 and 63 percent in 1997
• Middle 50 percent of taxpayers paid a roughly even share of the taxes in 2003, 2000 and 1997: 12.6 percent, 12 percent and 14 percent, respectively
• The bottom 50 percent of taxpayers bore less of the burden in 2003 compared to 2000, paying almost 3.5 percent of taxes compared to over 4 percent three years earlier. The bottom half of taxpayers has paid a decreasing share of taxes since 1980.

A misguided critique 

• It assumes that the economy is a fixed pie and that one group's wealth causes another group's poverty. In reality, the economy is expanding, and all income classes are getting wealthier. Some incomes will grow faster than others, yet the vast majority of Americans enjoy rising incomes throughout their lifetimes. Even America's "poor" would be considered middle-class in Europe and upper-class almost anywhere else. By contrast, socialist countries (e.g., North Korea, Cuba, and the former Soviet Union) have achieved relative income equality--everyone is equally poor.
• People often move across income ranges. Much of the bottom half consists of younger, unmarried workers who move into the top quarter as they marry and enter their peak earning years before dropping back down after retirement. Accordingly, lifetime incomes (and taxes paid) are much more equal than one-time "income distribution" snapshots would show.
• The term "income distribution" implies that the nation's wealth simply falls from the sky and that Washington has a duty to distribute this bounty fairly. But wealth and income are not "distributed," they are created. When Microsoft turns sand into computer chips, it is creating wealth where none existed. A farmer who grows a field of corn is creating wealth. These workers and businesses should have the right to keep much of the wealth they create.

Small businesses benefit 

• Most of those who benefited from the 2001 and 2003 tax cuts are actually small business owners, who are assuming more of the tax burden every year. Since they are not corporations, small businesses do not pay taxes-but their owners do.
• Small businesses, with fewer than 100 employees, represent 98 percent of all businesses and create a third of all jobs. So raising taxes on the top one percent really raises taxes on small businesses. They are the engines of new job creation, and taxing them out of business only eliminates jobs.
• In 2000, small business owners earned 21 percent of the gross national income and paid 37 percent of all individual income taxes. Businesses also bear nearly all the cost of the 15.3 percent payroll tax, including the half that is removed from their employees' paychecks.

Related Heritage research 

• Brian Riedl, "Ten Common Myths About Taxes, Spending, and Budget Deficits," June 13, 2003

Other Resources 

• Gerald Prante and William Ahern, "Summary of Federal Individual Income Tax Data," The Tax Foundation, October 11, 2005

High federal spending is the real problem 

• Federal spending has grown twice as fast under President Bush as under President Clinton
• Federal spending has increased by 45 percent since 2001, from $1,863 billion to $2,708 billion-that's almost eight percent a year!
• Federal spending neared $22,000 per household in 2005, the highest level since World War II (inflation-adjusted)
• Between 2001 and 2006, education spending surged 137 percent, international affairs spending jumped 111 percent, and health research and regulation spending rose 78 percent.

• The total cost of those three programs is projected to leap from 8.4% of GDP today to 18.9% of GDP by 2050.
• Unless those three programs are reformed, lawmakers face three options:
  
  
  
  
  1. Raise taxes every year until taxes are 60 percent ($11,000 per household) higher than today;
  
  
  2. Eliminate every federal program except Social Security, Medicare, and Medicaid by 2045; or
  
  
  3. Do nothing and watch the federal debt expand so much that even a minor interest rate response would induce a spiral of rising debt and interest rates, threatening the entire economy.
  
  
• Combined with spending by states and local municipalities, America's economy would be more government-run than any European country. (See chart)
• Since the private sector spends money more wisely than government, reductions in government spending would lead to greater prosperity

Deficits are a symptom, spending is the disease 

• Deficits enable politicians to disguise the price of government from taxpayers
• Absent spending reform, future deficits will be much larger, with unknown economic consequences

Spending cuts are the solution 

• Even a modicum of fiscal discipline-holding spending increases to 4 percent annually-would cut the federal deficit by more than 50 percent in just five years.
• The budget reconciliation bill enacted in February 2006 cuts the projected growth in entitlement spending to 38 percent over five years, instead of 39 percent over five years. This is not nearly enough.

Raising taxes is not the solution 

• Raising taxes would be disastrous for the economy- meaning less income to tax, potentially resulting in even less government revenue and thus higher deficits
• Raising taxes to balance the budget only works if lawmakers are trusted not to increase spending after the tax increase-which is implausible at best
• If politicians believe that excess spending can be "erased" by raising taxes (as if a smaller deficit means the government is spending more wisely) there is no incentive for any spending restraint at all

Spending hikes, not tax cuts, caused 1980s deficits 

• President Reagan signed major tax cuts into law in 1981 and 1986
• Inflation-adjusted tax revenue increased by 28 percent-an even larger jump than the 27 percent revenue increase during the high-tax 1970s. (See charts)
• Inflation-adjusted federal spending increased by 36 percent. These budgets resulted from deals in which the Democratic Congresses agreed to pass tax relief and increase defense spending and President Reagan agreed to sign into law new domestic social spending.

• As much as 40 cents on the dollar is caught up in bureaucracy and never reaches classrooms
• Parents have no choice but to send their children to failing schools

Related Heritage research 

• Daniel J. Mitchell, "The President's Tax Agenda: Pro-Growth Measures Jeopardized by Excessive Spending and Misguided Focus on Deficit," February 7, 2006
• Brian Riedl, "Federal Spending-By The Numbers" (PDF), February 6, 2006
• Brian Riedl, "Entitlement-Driven Long-Term Budget Substantially Worse Than Previously Projected," November 30, 2005
• Brian Riedl, "Ten Common Myths About Taxes, Spending, and Budget Deficits," June 13, 2003

Footnotes 

1. U.S. Office of Management and Budget, Budget of the United States Government, Fiscal Year 2004: Historical Tables (Washington, D.C.: U.S. Government Printing Office, 2003), Table 1.3.