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TUESDAY'S EDITORIAL

The Issue: Taxation

Our opinion: Tax rhetoric and tax reality not always the same

'Rich' do pay a large part of U.S. taxes

By T&D Staff

Watt E. Smith II is an Orangeburg tax professional who has earned the prestigious designation of enrolled agent with the Internal Revenue Service. A periodic business columnist for The Times and Democrat, he wrote recently addressing the issue of who pays the taxes in our country.

Specifically, Smith addressed the common perception that the richest people in the country do not pay much income tax. He cited 2001 IRS statistics showing the top 1 percent of taxpayers filed 1.3 million returns and paid 33.9 percent of all income taxes.

If that statistic alone does not serve to temper the political rhetoric in this election year, a new study by a group called the Tax Foundation should further clear up the picture.

Noting that most of the people in that top 1 percent of earners are business owners and entrepreneurs, not just high-income individuals with business income on the side, the Tax Foundation Special Report, "Wealthy Americans and Business Activity," notes that 55 percent of all income taxes in 2004 will be paid by business owners. High-income business owners ($200,000 or more) will pay most of that - 37.4 percent of all income taxes.

The report looked at the business income declared by high-income people on their individual tax returns, mostly on Schedules C, E and F of the 1040. The income reported on these schedules is business income, and the business owners who file most of these schedules also pay themselves regular salaries out of their businesses. Added all together, this business income could amount to as much as 65 percent of all the income earned by the top 1 percent of earners ($317,000 and up in 2004).

The foundation makes no secret of its admiration for President Bush's tax cuts, which reduced the top federal income tax rate from 39.6 percent to 35 percent. That action has been an easy target for Bush critics who claim he simply gave big tax breaks to the rich.

The president has countered that high-income people invested those funds in the economy, creating jobs and fueling the recovery.

The new Tax Foundation study provides a measure of support for that thesis, suggesting that cuts in business income are the most likely kind of tax cuts to lead to job creation.

Yet the Bush foes, personified now by Democratic nominee Sen. John Kerry, also recognize the need for tax breaks for businesses. Kerry himself has proposed a series of tax credits for small businesses to stimulate job creation.

Yet, the foundation points out, these small businesses are often the same people who would pay more taxes if the cut in the top income tax rate were repealed.

No matter your position on taxes and tax policy, seeing the numbers is important in making decisions this election year.