Taxes and the Rich
January 31st, 2008 by Peter SudermanWhenever the issue of tax cuts gets brought up, a common complaint is that many tax cuts “only benefit the rich,” and that the rich don’t pay their fair share. Typically, of course, there are no statistics to back this up. If there were, I think it would be a tougher argument to sell. Why? Because the rich pay a disproportionate share of federal taxes in the U.S.
Let’s look at the tax distribution by income percentile.
Here’s the distribution, provided by NTU, of which income groups paid what share of the income tax in 2005:
|
Percentiles Ranked by AGI |
Percentage of Federal Personal Income Tax Paid |
|
Top 1% |
39.38 |
|
Top 5% |
59.67 |
|
Top 10% |
70.30 |
|
Top 25% |
85.99 |
|
Top 50% |
96.93 |
|
Bottom 50% |
3.07 |
When the top 10% of earners are paying 70% of the total income tax, I think it’s tough to complain that they’re undertaxed. Meanwhile, the poor — the bottom half of earners — aren’t exactly being unfairly squeezed at 3%.
Ah, you say, but what about payroll taxes? An article in The American summarizes the tax data put together by The Tax Policy Center, a joint effort between two left of center think tanks (and no low-tax ideologues), Brookings and the Urban Institute:
The Tax Policy Center, run by the Urban Institute and the Brookings Institution, recently studied payroll and income taxes paid by each income group. The richest 1 percent pay 27.5 percent of the combined burden, the top 20 percent pay 72 percent, and the bottom 20 percent pay just 0.4 percent.
Again, this hardly looks like a wildly uneven or unfair distribution. Meanwhile, the same article points out that, since the beginning of the Reagan era, which saw top tax rates come steadily down from their previous astronomically high levels, most Americans are better off:
Median family income in America between 1980 and 2004 grew by 17 percent. The middle class (defined as those between the 40th and the 60th percentiles of income) isn’t falling behind or “disappearing.” It is getting richer. The lower income bound for the middle class has risen by about $12,000 (after inflation) since 1967. The upper income bound for the middle class is now roughly $68,000—some $23,000 higher than in 1967. Thus, a family in the 60th percentile has 50 percent more buying power than 30 years ago
(For more info on the Reagan tax cuts, check out this Cato paper and this report by the Joint Economic Committee.)
UPDATE: In the comments section, Sickle argues that:
Of COURSE the poor are not going to contribute as much tax revenue. They don’t make as much money! The real chart you need to post is the percentage of income the bottom rung pays vs. the percentage of income the top rung pays.
You request, I provide. Here’s a look at the CBO’s chart of effective tax rates by income quintiles in 2003 and 2004. (Taken from the report “Historical Effective Tax Rates 1979-2004″, page 5 [PDF]).
The chart measures what’s known as the “Effective Tax Rate,” the total tax burden when you add up all federal taxes. (Click the chart to see a full sized version.)
And lo and behold, in both years, the bottom quintile paid significantly less in federal taxes as a percentage of income–4.6% and 4.5% respectively–than the top quintile, which paid 25% and 25.1%. This is hardly surprising, really, considering our progressive income tax code, but it makes the point all the same: the income tax burden falls heavily on the rich. They pay significantly more in actual dollars. They pay significantly more as a percentage of total tax revenues. And they pay significantly more as a percentage of income. So the arguments about how the rich aren’t paying their fair share just don’t hold up.
*Post corrected to say that the chart came from NTU, not the Tax Foundation.
January 31st, 2008 at 1:51 pm
Meaningless chart, Peter. Of COURSE the poor are not going to contribute as much tax revenue. They don’t make as much money!
The real chart you need to post is the percentage of income the bottom rung pays vs. the percentage of income the top rung pays. To be even more accurate about it, you’d include the tax paid as a percentage of the individual’s living expenses. If you did that, you’d come to the opposite conclusion you reached before.
You what’s even more interesting? The author of the article doesn’t actually link to the actual study, and neither do you. The author, Stephen Moore, writes for the WSJ (sorta undercuts your “left of center” argument) and is the founder of the anti-tax Club for Growth. Unsurprisingly, he cherry-picks his stats and doesn’t actually present the truth about the middle class. Real wages and incomes for the middle class have declined since 1970, period, while the incomes of the wealthiest 1% have increased an average of 175%, with come corporate executives making 400% more, all while wages have declined or been stagnant.
Curiously, I went to the Tax Policy Center website but could not find the study you or Moore referenced. Maybe it’s there, maybe it’s not, but it’s pretty telling that there’s no link to it.
Nice try, though.
January 31st, 2008 at 6:16 pm
No, once again you’re missing it, but that’s largely my fault. The point I was trying to make is that the impact of tax rates on the top earners is not nearly as much as the impact on the poor. You are right (of course) that the chart I requested doesn’t really say much different than the chart you originally posted.
A thousand bucks to someone making 15 grand a year is a LOT of money. Despite the relatively low tax rate, the impact of that money on a typical family can’t be overstated. That’s a year of auto insurance, six months of health insurance, etc. etc. Imagine how much a flat tax would impact a poor person. For the very wealthy, $250 grand from $1 million seems like a lot, but have three-quarters of a million dollars to play with after taxes is still a great deal, and certainly won’t prevent them buying insurance, paying bills, or any of the other things someone living on $15 grand is struggling to do.
The chart you posted makes that point. It shows a typical progressive tax system in apparently good health. Unfortunately, the chart is just all number theory and doesn’t really reflect reality. The very rich, in fact, don’t end up paying that tax rate because of a variety of laws, loopholes, and exceptions enabling them to escape a lot of their tax burden.
Again, I’m curious about your choice of sources. There’s nothing on the NTU website that explains the methodology behind their calculations or links to their raw data. That’s pretty suspect. I would think that you would be even more suspect of them, since NTU supports the Fair Tax.
Could you please perhaps point to some figures from a non-partisan source? You know, someone who isn’t a FairTax advocate or who didn’t found the Club for Growth?
January 31st, 2008 at 6:29 pm
As long as I’m on that subject of the stats, I’d like to point out that two of your sources appear to be at odds with one another. The TPC apparently said that the top 1% pays 27.5% of the tax burden, while the FairTax supporting NTU says that figure is almost 40%. That’s a significant difference. The NTU figures are from 2005, and the Cato guy doesn’t say exactly where or when the TPC’s numbers were collected, but even so, we’re talking about a difference of more than 12% between the two, which is billions and billions of dollars difference.
As long as you’re updating, you mind figuring out what’s up with that very large discrepancy?
January 31st, 2008 at 8:31 pm
You guys on this website simply don’t believe that taxes should be based on ones ability to pay…just admit that and be done with it.
Payroll taxes are regressive taxes, period. Everyone knows that incomes are flat for most people and have been for many decades now. Keep repeating the same lies guys…they still won’t work.
Both the Reagan and Bush tax cuts ballooned the federal deficits and debt, period. “Supply-side” is a dead argument IMO.
I’m pleased to see you guys try and respond to some of the comments that are made on this website. Doing that will make you guys just a tad more credible IMO.
February 1st, 2008 at 1:23 am
There is a problem with the data you posted Mr Suderman. It does not match the same data that is available from the IRS and that includes the year 2005. I am not sure if I am allowed to post links, but the IRS chart clearly shows that the biggest burden falls in the 1 million to 2.0 million brackets with an effective tax rate of 24.6%. I must say that I am in that bracket in particular and I don’t consider myself rich. Compare that with the 10 million and up rate which is 20.8%, so much for our progressive tax system. The very rich manage to pay actually less taxes than me.
From the same source the number of individual returns making 10 million or more are around 14000, so only 14000 people get to enjoy a substantial tax break even though they don’t need it. Compare that to the 1 million to 2 million brackets that include 185000 returns.
So all this tax talk basically will benefit just a few of us (less than 200 thousand tax payers) in detriment of many millions more that are in the lower brackets.
The same chart also illustrates nicely the total fraud that your flat tax proposal is. By using a 17% flat rate on ordinary income, it can be shown that the tax liability for the 10 million and up bracket will go down from 20.8% to 8.5% (because from the chart you can see that half of their income comes from capital gains that under your proposal are not taxed).
In my case it will help me a lot because my tax liability will go down from 24.6% to 12.75% (because in my bracket capital gains are around 25% of total income).
But the real problem is that the middle class now pays an effective rate of 13.2% and with you proposal they will endup paying almost the whole 17%.
Do you really think that something like that is really fair?
February 1st, 2008 at 3:00 am
Post all the links you want Leo. Of course it isn’t “fair”…that’s just 1984 talk.
February 1st, 2008 at 11:18 am
Sickle, so you think it’s fair that one person pays $250k and another pays $1k? As the federal budget mostly consists of entitlements which benefit the “poor” much more than the “rich” it seems this is a pretty good deal for the $1k guy, as in retirement he will probably receive much more from social security/medicare than he ever paid in (assuming he stays in this low income bracket his entire life). Also, the $1k guy can improve his income bracket through work. I know you’ll give me grief over not citing a source but Americans are very successful at improving their income over time, especially starting from lower incomes. I’m sure there are many conflicting statistics on this, but I haven’t seen any that says people are actually getting poorer. The few I’ve seen show varying degrees of improvement.
Leonardo mentioned the upper middle class argument. I am probably in the upper middle (though I don’t consider that to be $1 mil, but anyway this is subjective). The middle and upper middle class do seem to pay the highest rates. I have a different take on this however. I don’t feel the “rich” are not paying their share. In many cases they’re taking the risk and investing, that drives our economy and are contributing quite alot. Do we really want to kill this? What I see is that as we create higher tax burdens, the middle/upper middle gets crushed. These people make relatively high incomes but must work throughout their life to maintain this.
But really what we need is to control the tax burden and the spending.
There will never be agreement on what’s “fair” in this tax system (how about a flat or fair tax?). Everybody thinks they’re paying too much, and the others don’t pay enough, and all have a valid argument from their perspective. In the meantime we argue and continue to increase the burden. One day this will come crashing down. If you think the answer is taxing the “rich” (yeah, let’s tax that other guy) this will badly hurt the middle and ultimately the poor as well. This is no solution, and just passing the buc. And what is the moral grounds for punishing success anyway?
If we all think we pay too much, then why don’t we instead solve the problem of why the tax burden is as high as it is. Politicians love to divide us along class. This tax system is a great tool for achieving that. We should all ask them how they got us here, and what is their plan to improve this, and unite us.
February 1st, 2008 at 12:13 pm
Here is the link to the IRS information:
http://www.irs.gov/pub/irs-soi/07infallbulreturns.pdf
With regard to fairness and 1984 concepts, I might agree about how relative or outdate they can be. But beyond the philosophical issues, there is an objective one. Any change that benefits a small percentage of tax payers in detriment of a huge number of them is plainly wrong and misguided.
For whatever reason, be it hard work, or just being lucky at birth, some of us are in the upper middle class or higher brackets and even with our tax burden we have it way too easy compared with a vast majority of americans, let alone with the rest of the world. This discussion about lowering taxes, at least in my personal view, comes down to a matter of pure greed. I think that an effective tax rate around 25% is manageable for people like me. Of course I would take a nice tax cut anytime you want, but not at the expense of others that have a harder time than me, call me stupid or idealistic, but that is the way I was raised.
February 1st, 2008 at 12:45 pm
I forgot to address an interesting point Rich is trying to make about the very rich (no pun intended seriously). It seems that be a meme, or some sort of cultural thing in the US to consider capital owners as a different breed of humans, which they are not. There is no innate difference between a capital owner and a hard worker such an auto mechanic for instance.
In fact I would argue that professionals (like Doctors, Lawyers, Architecs, Engineers) contribute more to society as a whole than rich capital owners. However those professionals are the ones that are carrying the tax burden right now in comparison to other high income earners (like hedge fund managers).
My counterpoint to Rich’s is that in the US economy, small companies (like mine) employ more than 90% of the workers in the US, and without hard data, we are the ones that are actually moving this economy as oppose to mega corporations, or speculative hedge funds.
The whole super rich thing is just a myth, the US economy is driven by 70% internal consuptiom (done by normal people, mostly middle class). And we, the small business owners, provide jobs for 90% of them.
Also it is a fallacy that goverments must reward risk takers, there is nothing worthy about taking risks, in fact any idiot can do it (just look at the subprime market mess). The rewards or punishments of risk taking should be left to market forces. The important thing is to tax income from any source the same way, be it manual labor, intelectual one, or just dividends or capital gains. All at the end is the same money, and should be taxed in a consistent manner.
My grief with the 10 million and up bracket is that they are having a field day with taxes because their capital gains are taxed at 15% flat. I fail to see any reason why, unless we buy into the whole “capital gains are for especial people and they deserve rewards” philosophy, which is clearly false.
February 1st, 2008 at 3:07 pm
Go to Brendan Steinhauser’s MySpace page (just search for his name) and you’ll see his favorite books are heavy on Ayn Rand. I read “Atlas Shrugs” and “Fountainhead” in High School like everyone else and of course believed I was one of Rand’s chosen, special people, just like everybody else who reads her. Of course, I got older and realized how silly that all was (again, like most folks), but others like the folks here have bought all that stuff hook, line, and sinker.
In short, they really do believe that capital owners are a different breed of humans and that it is their (divine?) right to do whatever is good for them at the expense of other, lesser people.
What strikes me is how these guys have duped their “grassroots” into voting against their interest, using the very people they scapegoat and despise to pass their agenda. I doubt their “activists” know that their contributions are going to paying Dick Armey’s half-a-million dollar annual salary from Freedomworks (for well under 40-hours of work, check out their latest 990s).
February 2nd, 2008 at 4:52 am
“As the federal budget mostly consists of entitlements which benefit the ‘poor’ much more than the ‘rich’”
This is a load of bunk, and it’s a shame that you don’t know it. Ever hear of corporate welfare, tax give-aways to Big Oil and the like, etc., etc.?
“how about a flat or fair tax?”
Do the math on it…it’s a great deal for the rich and a crappy deal for the poor, period. They even have a calculator for their tax scheme on this website…check it out and run some numbers.
“And what is the moral grounds for punishing success anyway?”
Sounds like you don’t believe either in basing taxes on one’s ability to pay…that’s fine…some of us just disagree is all.
I meant 1984…the book by Orwell. Sounds like you were raised right to me Leo.
“in the US economy, small companies (like mine) employ more than 90% of the workers in the US, and without hard data, we are the ones that are actually moving this economy as oppose to mega corporations, or speculative hedge funds.”
I agree completely.
February 2nd, 2008 at 4:17 pm
I’d also like to point out that not a single contrarian commenter here has argued that “the rich doesn’t pay its fair share.” For some reason, guys like Rich and Peter seem to think that’s what we’re saying, when we’re not. We’re actually arguing about the policy, not the talking points surrounding that policy.
I say this only because it’s a little unsettling to see us responded to as straw men, instead of as normal people making very real policy points.
February 4th, 2008 at 3:19 pm
Nice to see people talking about a progressive tax system.
A thing that has always bothered me about these discussions is the percentage of taxes paid by high income people, as in the NTU chart above.
First, why do these charts never have Gross Income instead of Adjusted Gross Income? I don’t know many $30,000 a year workers maxing out their IRAs, do you? Or maxing out their HSA’s?
February 5th, 2008 at 4:12 pm
“basing taxes on one’s ability to pay” is exactly what we have with the existing progressive system. It is simply amplified when tax credits are given to a large portion of the population including many who earn no income whatsoever. I notice that no one here points to the government’s ability to generate federal tax revenues in the first 140 or so years of our country’s existence. ANY income tax at all is unfair. ANY tax system that charges a higher rate based entirely upon success is unfair.
I am no expert on the fair tax but it does seem to me that a tax system, regardless of what you call it, that charges no tax at all for food and other necessities, or gives a rebate for these items, and then charges tax on other consumption, will automatically favor the poor who simply have less to spend therefore pay less tax. This system would also eliminate corporate loopholes because corporation would pay taxes regardless of where they base their offshore headquarters. It would also force travelers, tourists, and illegals or “undocumented” people to pay taxes on each purchase.
The class warfare deal is a serious problem. The truth here is that no one argues whether or not the top percentages of wealthy Americans pay their share of taxes. They do. I notice that Sickle and some of the others are quick to point out a lack of “links” or other support for charts and numbers but they offer no figures or support for their own. THERE IS NO WEBSITE that doesn’t have its own agenda. Period. We are being divided in order to be conquered. I work for a small family company that employs less than a dozen people. The taxes they pay are astronomical! They cannot expand due to tax constraints. They cannot hire more workers or purchase more equipment due to taxes. They pay more than $20,000 per month in payroll taxes and half that again to accountants and bookkeepers. The current system is broken but the powers that be pit people against each other based on their bank account and sit back and continue to operate a broken system.
I am not in the top income brackets but I would like to be some day. And when I get there, I don’t want to pay a ridiculous amount of taxes! Class warfare is a horrible tactic but apparently quite effective.
February 5th, 2008 at 7:14 pm
“‘basing taxes on one’s ability to pay’ is exactly what we have with the existing progressive system.”
Try again…the rest of your argument has been had and lost like a hundred years ago now. Consumption taxes are regressive taxes, period.
“It would also force travelers, tourists, and illegals or ‘undocumented’ people to pay taxes on each purchase.”
This already happens now…they pay sales taxes and/or payroll taxes.
“I don’t want to pay a ridiculous amount of taxes!”
Join the club, but the rich can well afford to pay their fair share of taxes.
February 11th, 2008 at 1:44 pm
Period? That’s it?
Taxes are a necessary evil but we do have some control over how they are structured and how they are implemented. The wealthy certainly need to pay their fair share. It just seems to me that the definition of “their fair share” is being written and re-written. Often by politicians who believe in class warfare. Your last sentence says it all, “…but the rich can well afford to pay their fair share of taxes.” That implies that you believe they don’t. Unfortunately no one here (including myself) seems able to produce verifiable statistics that demonstrate where the government pulls its tax revenue broken down into income categories. What percentage of total tax revenue comes from income tax? What percentage from corporate taxes? Other taxes? etc
It has been my experience that the wealthy pay considerable taxes. It seems to me that they pay the majority of total tax revenue that the government collects. I would be very interested to see actual verifiable IRS and OMB statistics that aren’t skewed for either political parties interests. What is the point of this particular website? Isn’t it that case the wealthy are paying well over 50% of total taxes? Are you arguing that this STILL isn’t “fair?”
As for MISTER GUY’s arguments that undocumented workers pay payroll taxes, I feel that a large percentage of those work for cash and pay no payroll taxes. That being said, there are pretty substantial numbers of legal Americans who work for cash so the Fair Tax would address both of those groups completely fairly and objectively.
As for consumption taxes being regressive, that implies the poor would pay more, or at least a larger percentage, than the wealthy. Have you read the Fair Tax book? It seems pretty laid out in simple black and white that this simply isn’t the case. If you have 100 years of evidence to the contrary, point me in that direction for enlightenment because I don’t see it.
My point is not to be confrontational here. I do have significant disagreements with the current tax system. I do NOT know the perfect solution. I am quite open to alternatives. For now, the Fair Tax is HANDS DOWN, the best option I’ve seen.
February 11th, 2008 at 7:35 pm
“That implies that you believe they don’t.”
Of course they don’t…just ask them and/or their accountants. There are rich people right now that are paying less in taxes to the federal govt. than their own low-level employees!
“What is the point of this particular website?”
It’s to shill for the corporate, big money interests of the Right-wing of the GOP.
“As for consumption taxes being regressive, that implies the poor would pay more, or at least a larger percentage, than the wealthy.”
Have you run the numbers for different income catagories? I have, and the rich get off scott-free, period.