Tuesday, September 20, 2011

Taxes, Billionaires and the Actual Data

The President's recent tax and budget cuts proposal inspired me to go looking for some data, particularly given the assertion by some that "the rich just don't pay their fair share of taxes."

Well, fairness is in the eye of the beholder, I suppose (while I think it would be only fair if the Dodgers went to the World Series, since it's been so long for them, I'm sure my friends in San Francisco would disagree), but let's take a look at the data as to who actually pays what:

As of 2008 (the most recent numbers I found), the top 10% of taxpayers (by adjusted gross income) paid 69.94% of federal income taxes and the top 1% paid 38.02%.  

Now in large measure this is a function of the fact that the top 10% of taxpayers make a large share of the income; 45.6%, and the top 1% makes 17.7% of the total income, each according to the Paris School of Economics. (http://g-mond.parisschoolofeconomics.eu/topincomes/)  But the fact remains that high income earners pay a greater share of the personal income tax burden that their share of income itself would account for.

On the other hand, the bottom 50% (based on adjusted gross income) of taxpayers pays only about 2.7% of taxes paid. (Sources: www.taxfoundation.org/news/show/250.html#table6 and http://ntu.org/tax-basics/who-pays-income-taxes.html, both from IRS data)  

As to the federal tax burden on various income classes as a share of income (how deep does the tax dog bite?), as of 2007, the top 1% paid at an average rate of 29.5%, and the top 10% paid at an average rate of 26.7%.  

For comparison, the middle 20% (a reasonably good marker for “middle class”) paid at an average rate of 14.4%.  (Source: Congressional Budget Office - www.cbo.gov/publications/collections/collections.cfm?collect=13)

So, while I'll not attempt a definition of tax fairness here, the data seems to indicate that the rich pay a disproportionately high share of taxes and lose a significant portion of their income, as compared to other income classes.

Interestingly enough, a recent Washington Post Fact-Checker article (www.washingtonpost.com/blogs/fact-checker/post/obama-taxes-and-the-buffett-rule/2011/09/20/gIQAXdd0iK_blog.html#pagebreak) came to the same conclusion:

"When you add up all of the various taxes, and look at the effective tax rates, it is clear the tax system is already pretty progressive. 

Everyone pays some tax, even those who pay no federal income taxes, and the wealthiest pay a larger percentage share of taxes. 

Here’s the effective tax rate for all of the groups, according to 
the CBO:

Lowest quintile (23.4 million taxpayers), zero to $18,900: 4.3 percent
Second lowest quintile (22.4 million), $18,900-$32,100: 10.2 percent
Middle quintile (22.9 million), $32,100-$47,400: 14.2 percent
Fourth quintile (23 million), $47,400-$71,200: 17.6 percent
Highest quintile (23.6 million), above $71,200: 25.8 percent
Top 10 percent (12 million), minimum income of $98,100: 27.5 percent
Top 5 percent (5.9 million), minimum income of $134,400: 29 percent
Top 1 percent (1.1 million), minimum income of $332,300: 31.2 percent"
Finally, let's look at a chart comparing various 10-year tax revenue proposals, including the president's.  Compared to a world in which we did nothing (allowing the Bush tax cuts to expire, as current law allows), here's the chart comparing various proposals.

As you can see, the President's most recent proposal is for less of a tax increase than he proposed in April (in that sense, moving in the direction of the Republicans), as well as being less than half that of the President's Commission on the debt.

Draw what conclusions you wish, political, moral or otherwise, but the data set out above is clearly worth looking at and thinking about.


  1. The problem with a progressive tax is twofold. One it's far too easy to manipulate it for power (see: last 100 years of U.S. tax code & politics), the other is: it punishes progress, ironically. That is, hard work and smart investing.

    Coupled with a fiat currency and fractional reserve banking, a progressive tax structure will always fail - it just takes time comparable to the economic size.

    The U.S. has been someone isolated and long-lived due to the whole "international currency of trade" (thank you WWII). Should the US Dollar come off the currency of trade (i.e. Oil, goods, etc) for the rest of the world, we'll QUICKLY see how much damage a progressive and manipulated tax code does when the true value of the fiat currency is out-pacing taxation.

    I don't think we'd like a Weimar economy.

  2. What I was hoping to convey (and do not think I did) was: we're looking at the bandaid, and not the wound.

    Stabilization of the currency is paramount, or all this is for not. Think 5- or 20-years down the line! China and Russia are making some serious maneuvers that have potential to massively damage the USD and we're just arguing how to confiscate and redistribute wealth.

  3. rOy

    Thanks for your comments!

    Yes, we've not tried to analyze the effect of any current economic conditions, future trends or specific proposals on the position of the dollar as the general reserve currency for international trade or the domestic or other effects of any serious inflation, as took place in Weimar Germany.

    I personally would agree that much of the current discussion is focused on band-aids, such as how much, if anything, additional should be taxed of well-off folks.

    The more serious issue is achieving financial stability and we're a very long way from achieving that!.