Careful whom you soak.

PRESIDENT BUSH'S tax cuts have been lambasted by the Left as a policy that "helps Joe Millionaire more than Joe Lunch Bucket." What they don't realize is that, without the Joe Millionaires in our society, Joe Lunch Bucket might be in the unemployment line.

Data collected by the Tax Foundation, a non-partisan research organization, indicate that, among Americans who are subject to the highest income-tax rate, two out of three are sole proprietors of businesses. President Bush's cuts have made it less expensive for them to raise capital for new plants and equipment and to hire new workers. The Left may ridicule "trickle down economics," but new research further supports what we already knew: Lower taxes on the rich help the entire economy, while higher taxes on the rich often trickle down onto the backs of the middle class and the poor.

The first piece of new evidence comes from economist Charles Kadlec of J. & W. Seligman & Co., a New York investment firm. Kadlec's calculations, based on Treasury Department tax data, indicate that, after income-tax rates on the rich were raised under George H. W. Bush and Bill Clinton, something very strange occurred: After-tax incomes of the rich continued to rise, but the incomes of the middle class shrank. Why did that happen?

Kadlec explains the riddle by comparing taxes to tariffs. "Income taxes are not really levied on a person any more than a tariff is levied on a company," he says. "Rather, income taxes are levied on income-producing activities.... Just as the foreign company that pays a tariff passes that levy on to consumers by raising the price, business owners in America faced with higher taxes will also attempt to pass on the cost to someone else--either the workers in the form of lower wages, or the consumers in the form of higher prices." That is to say, some portion of the taxes on business income and investment income that are aimed at the rich is actually borne by workers and consumers, who are typically not rich.

The empirical data fit Kadlec's theory like a surgeon's glove. In 1993, the year that Clinton's big tax hike took effect, the before-tax incomes of the top 5 percent of American earners rose by about 20 percent--almost precisely the amount needed to offset their increased tax burdens. Middle-class workers were left shouldering this burden, and their income fell.

A second piece of evidence comes from David Hartman, chairman of the Lone Star Foundation, a conservative public-policy group in Texas. In a recent study published by the Institute for Policy Innovation, Hartman looked at the relationship between tax rates on the rich and the income share of the middle class over three decades: the '70s, the '80s, and the '90s. He found that raising taxes on the rich is futile as an income-redistribution strategy. In the 1990s, as income taxes on the wealthy increased, the middle-class share of total income fell almost every year.

President George W. Bush's tax cut trimmed the top income-tax rate from 39 percent to 35 percent, and it also lowered taxes on capital gains and dividends. The 1980s are probably the closest historical parallel, even though Bush's cuts are smaller than Reagan's. In the 1980s, the rich did get richer. But every income group saw income gains, and the real incomes of the middle class rose between 10 percent and 15 percent. Even more stunning, roughly one in nine Americans who started the 1980s classified as "poor" ended the decade classified as "rich."

A well-designed tax system lets poor people get rich. But the perverse goal of many would-be income redistributors in Washington and, alas, most Democratic presidential candidates--most notably Howard Dean--is to create a tax system that makes rich people poorer. If they succeed in their soak-the-rich scheme, don't be surprised if the middle class gets wet.

                                 CHANGE IN AVERAGE     CHANGE IN THE
Taxes on the Rich                TAX RATE FOR THE    OTHER 90 PERCENT
Reduce Income                     TOP 10 PERCENT     OF EARNERS' SHARE
for the Rest                        OF EARNERS        OF TOTAL INCOME

1963-1967   (Kennedy Cuts)              -5%                +2.9%
1972-1981   (Nixon-Ford-Carter         +13%                -1.2%
              Stagflation)
1981-1985   (Reagan Cuts)              -15%                +0.8%
1992-1996   (Clinton Tax Hike)         +14%                -0.2%

SOURCE: INSTITUTE FOR POLICY INNOVATION