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OPINION | THE RICH ALREADY PAY THEIR FAIR SHARE OF TAXES

Washington is setting up “the rich” for a big tax increase next year, as a way to make them “pay their fair share.” Well, the latest IRS data suggest that it’s going to be hard for the rich to pay any more than they already do.

The data show that the 2003 Bush tax cuts caused what may be the biggest increase in tax payments by the rich in American history. The top 1% of taxpayers, those who earn above $388,806, paid 40% of all income taxes in 2006, the highest share in at least 40 years. The top 10% in income, those earning more than $108,904, paid 71%.

President-elect Obama says he’s going to cut taxes for those at the bottom, but that’s also going to be a challenge, because Americans with an income below the median paid a record low 2.9% of all income taxes, while the top 50% paid 97.1%. Perhaps he thinks half the country should pay all the taxes to support the other half.

“Aha!” we are told: “The rich paid more taxes because they made a greater share of the money.” That is true. The top 1% earned 22% of all reported income. But they also paid a share of taxes that’s nearly double their share of income. In other words, the tax code is already steeply progressive.

We also know from income mobility data that a very large percentage in the top 1% are “new rich,” not inheritors of fortunes. There is rapid turnover in the ranks of the highest income earners, so much so that people who started in the top 1% of income in the 1980s and 1990s suffered the largest declines in earnings of any income group over the subsequent decade, according to Treasury Department studies of actual tax returns. It’s hard to stay king of the hill in America for long.

The most amazing part of this story is the leap in the number of Americans who declared adjusted gross income of more than $1 million from 2003 to 2006. The ranks of U.S. millionaires nearly doubled to 354,000 from 181,000 in a mere three years after
the tax cuts.

This is precisely what advocates of lower tax rates on capital gains, dividends and income predicted would happen. The economy and earnings would grow faster, which they did; investors would declare more capital gains and companies would pay out more dividends, which they did; the rich would invest less in tax shelters at lower tax rates, so their tax payments would rise, which did happen.

The idea that this has been a giveaway to the rich is a figment of the left’s imagination. Taxes paid by millionaire households more than doubled to $274 billion in 2006 from $136 billion in 2003. These payments from the rich explain the rapid reduction in the budget deficit to 1.9% of gross domestic product in 2006 from 3.5% in 2003.

This year, thanks to the credit mess and slower growth, taxes paid by the rich may fall and the deficit will rise. The new president proposes to close this deficit by raising tax rates on the rich to their highest levels since the late 1970s. If he is successful, we’d also wager that the rich share of tax payments would fall.

The way to soak the rich is with low tax rates, and the IRS data provide more powerful validation of that proposition.

This is the opinion of The Wall Street Journal Editorial Board. What is your opinion? Write to letters.classroom@wsj.com.