Wednesday, March 11, 2009

Income Tax Share: Top 1% vs. Bottom 50%

From an IBD editorial yesterday:

A study for the National Center for Policy Analysis shows that from 1986 to 2004, the total share of the income tax burden paid by the top 1% of income earners grew by nearly half, from 25.8% to 36.9%. Over that same time, wrote study author Michael Stroup, an economist and associate dean of the Nelson Rusche College of Business at Stephen F. Austin State University in Texas, the burden of the bottom 50% of earners was almost halved from 6.5% to 3.3%.


MP: The federal income tax share data are actually available from the IRS (
link here, see Table 5) through 2006, see chart above.


39 Comments:

At 3/11/2009 9:33 AM, Blogger craig said...

From the CBO for the years 1979-2005:

"The average after-tax income of the top 1 percent of the population more than tripled, rising from $326,000 to over $1.07 million — for a total increase of $745,000, or 228 percent. (Figures throughout this paper were adjusted by CBO for inflation and are presented in 2005 dollars.)"

Also:

"The top 1 percent of households received 70 times as much in average after-tax income as the bottom one-fifth of households in 2005 — the widest such income gap on record, with data available back to 1979."

I won't be shedding any tears for the wealthiest 1% any time soon.

 
At 3/11/2009 9:39 AM, Blogger Walt G. said...

The top 1% went from having about every $1 out of $10 (11.3% of the AGI) to almost every $2 out of every $10 (19% of the AGI) during the same time frame. That is a 68% change. They have more money now, and they pay more money now.

 
At 3/11/2009 9:51 AM, Anonymous Anonymous said...

To the first two commenters. Sounds like you are advocating a flat income tax - the more you earn, the more you pay. I think lots of people would support such a thing.

 
At 3/11/2009 10:21 AM, Anonymous Anonymous said...

2006 was a long time ago.

I could have sworn I heard Warren Buffet say he and the top 400 in the US have a 17% tax, which is less than your average person. That doesn't seem like a great system to me.

 
At 3/11/2009 11:04 AM, Blogger QT said...

Anon. 10:21,

Isn't capital gains taxed at a lower rate than salaried income? Wouldn't one expect Warren Buffett's income to come largely from capital gains and therefore, be taxed at a lower rate?

We also have to consider the risk involved in investment vs. a paid salary. Recent results from Berkshire Hathaway offer some perspective on the element of risk.
Berkshire Hathaway reported today that its net worth fell in 2008 by $11.5 billion, a decline reducing its per-share book value by 9.6%. That was Berkshire's worst result in the 44 years that Chairman Warren Buffett has run the company and, in fact, only the second decline in that period. The other drop was 6.2% in 2001, a year hurt by 9/11 and other problems in Berkshire's insurance operations.

Wouldn't we expect investment income in top 1% to decline significantly given the present turmoil on the stock market? Doesn't tax revenue usually drop during a recession?

There is a certain disquiet when one considers that the multiplier being used by the Obama administration to calculate the effect of the stimulus on GDP is higher than that of the CBO. Revenue forecasts and growth projections seem to be very optimistic.

Given the level of spending which is on an unprecedented scale, one wonders what future taxes will be required to pay for these measures. One also wonders at the nebulousness of the plan to stabilize the financial system.

There are many more questions than answers. As the ancient Romans might ask "Quo vadis?"

 
At 3/11/2009 11:33 AM, Blogger Walt G. said...

QT,

If we are going to assess risk, how do we assess my risk of going to work this morning and almost getting hit by a truck because my employer turned off lights to save money as opposed to someone sleeping at home while their money earns/loses in the stock market? I also broke asbestos off pipes with a sledge hammer back in the 1970s. That’s risky, too

 
At 3/11/2009 12:03 PM, Blogger Dave Narby said...

Income tax is a relatively small portion of taxes.

Payroll, FICA, Medicare/Medicaid, SS (not to mention all the other ways they take your money that isn't called a 'tax', e.g. licenses, surcharges, fees, fines etc.) make up a much bigger chunk.

Everybody knows this, I wonder why it keeps being brought up?

The real issue is what we get for our tax dollars.

So instead of bringing up the 'income tax' canard, wouldn't it be much more constructive to focus on improving government efficiency via competing with private industry (e.g. post office vs. UPS/FedEx/DHL)?

 
At 3/11/2009 12:30 PM, Anonymous Anonymous said...

Sorry, I really don't know where the taxes were stemming from when Buffet said that, but he also said "I think we (wealthiest 400) have had it too easy (re: taxes)."

So even he admits that the top 400 richest should be taxed more heavily.

 
At 3/11/2009 1:09 PM, Blogger ExtremeHobo said...

"Admits" and "believes" are two completely different words. Buffet "believes" the rich should carry more of the burden. Easy to say when you have billions of dollars. Ask your average "wealthy" small business owner what he admits about his tax burden.

 
At 3/11/2009 1:38 PM, Anonymous Anonymous said...

That is why we are conversing about the 400 most wealthy Americans. NOT the "rich" small business owners... I doubt the "rich" small business owners are in the top 1% as the original post states.

 
At 3/11/2009 1:52 PM, Blogger ExtremeHobo said...

Top 1% begin at $388,806

That includes quite a few small business owners.

keep in mind that 1% is 1/100. Thats not as few people as you might think (over 3 million in the US).

 
At 3/11/2009 1:52 PM, Blogger ExtremeHobo said...

This comment has been removed by the author.

 
At 3/11/2009 2:01 PM, Anonymous Anonymous said...

Even still, my comment was in regards to the top 400 wealthy Americans. Not small business owners. I never once mentioned small business owners, neither did Warren Buffet. I don't know even begin to know why that was brought up.

 
At 3/11/2009 2:54 PM, Anonymous Ralph Short said...

Why do we worry about what the top 1% percent earn. It is my opinion those who worry, or perhaps more accurately whine about it, are simply envious of anyone who achieves more than themselves. Their friends are Unions and our own government where mediocrity is the ideal.

Unions and government are the classic organized example of this envy and class warfare. Unions only want to share in the Profits and never the losses, while our government extorts from the achievers and gives the largess to the indolent.

And it is all for votes and the resulting power.

 
At 3/11/2009 2:59 PM, Anonymous Anonymous said...

How about a graph that shows how many jobs the top 1% have created vs. the bottom 50% over the same period of time.

Walt G.,

You're worried about the risk at your job, create your own job. Go ahead, start a business, hire some whiners, shoulder the risk - show us all how it's done. Put it all on the line and find out what it's like to have the government as your 50+ percent partner on the upside and forget who you are when things turn to shit.

Until you've actually created a job, maybe you should STFU about the jobs others have created for you.

 
At 3/11/2009 3:03 PM, Anonymous Anonymous said...

Oh, and one more thing, if you've got a government job, that's has been created by "rich" people too.

Stop freeloading, man-up, the country needs jobs and geniuses like you need to stop whining and create them.

 
At 3/11/2009 3:12 PM, Anonymous Anonymous said...

"To take from one, because it is thought his own industry and that of his fathers has acquired too much, in order to spare to others, who, or whose fathers, have not exercised equal industry and skill, is to violate arbitrarily the first principle of association, the guarantee to everyone the free exercise of his industry and the fruits acquired by it."

— Thomas Jefferson, letter to Joseph Milligan, April 6, 1816

 
At 3/11/2009 3:41 PM, Blogger 1 said...

Wow! What a collection of whores and thieves...

Why should the top 1% pay even one more penny than the poorest of the poor?

Its not the job of the top 1% to have to carry the parasites of this country...

Do you all enjoy being government dependents?

 
At 3/11/2009 4:10 PM, Blogger NoWhining said...

"Until you've actually created a job, maybe you should STFU about the jobs others have created for you."

That was freakin' beautiful, man....right on the money. I actually think I teared up while reading that!

 
At 3/11/2009 4:14 PM, Blogger NoWhining said...

"— Thomas Jefferson, letter to Joseph Milligan, April 6, 1816"

Thanks for sharing that...it's a great quote. Unfortunately, liberals only care about citing Jefferson's private correspondance (or that of any other founding father) when it supports their cause (e.g. separation of church and state).

 
At 3/11/2009 5:07 PM, Anonymous Anonymous said...

That includes quite a few small business owners

Bullshit.

 
At 3/11/2009 5:18 PM, Anonymous Anonymous said...

Oops, busted link.

 
At 3/11/2009 5:21 PM, Blogger Patrick said...

I think we're kind of missing the point here. It's not that the top 1% is paying too much or too little. It's that sooner or later politicians will realize that political power rests not with the people footing the bill, but with the people who carry more of the vote. This is a dangerous balance. It is not an issue of what people can afford to contribute, it's an issue of what someone should be expected to contribute as a citizen of this country. We shouldn't raise taxes because we think the wealthy aren't paying enough. We should focus on putting more people into the higher tax brackets, not extracting more from those who are already there.

 
At 3/11/2009 5:23 PM, Blogger 1 said...

Ahhh anon @ 3:12 PM, you did indeed touch a nerve with that Jefferson quote...

Beautiful timing also...

John Petrie’s Collection of Thomas Jefferson Quotes

The site has the quote you laid on us and some more...

My favorite right now: "I predict future happiness for Americans if they can prevent the government from wasting the labors of the people under the pretense of taking care of them"...

The mantra of the left courtesy of Thomas Jefferson: "The democracy will cease to exist when you take away from those who are willing to work and give to those who would not'...

 
At 3/11/2009 7:14 PM, Blogger Craig said...

"So instead of bringing up the 'income tax' canard, wouldn't it be much more constructive to focus on improving government efficiency via competing with private industry (e.g. post office vs. UPS/FedEx/DHL)?"

If income tax is nothing but a "canard", let's do away with it altogether.

 
At 3/11/2009 10:11 PM, Anonymous Brandy Night Rocks said...

"It's that sooner or later politicians will realize that political power rests not with the people footing the bill, but with the people who carry more of the vote."

Sooner or later? Dude, what do you think the New Deal was all about?

 
At 3/11/2009 10:41 PM, Blogger QT said...

Walt,

You & I have a different perspective on the subject of "risk". The definition that I am invoking is "risk of loss".

A farmer, for example, has substantial risk and his income may swing widely from one year to the next depending on factors beyond his control like crop futures, and weather.

I can appreciate that you are in a tough spot with GM at present. GM has, however, provided a very good living for you for the last 30 years. It is highly unlikely over that period of time that your salary had wide swings from one year to the next like a farmer or a small businessman.

We have very different perspectives. You work for a large corporation and I work for a small business that does not get loan guarantees or taxpayer funding in a downturn. Unlike UAW workers, small businessmen usually do not have any pension. I sincerely doubt you will still be working full-time at the age of 75 like my husband. Just a wild guess.

 
At 3/11/2009 11:11 PM, Anonymous Anonymous said...

The obvious solution is for high earners to retire or work less, and starve the government beast. Paying high taxes rewards bad behavior on the part of the US government. If you do not want a large nanny state move your assets to gold, municipal bonds or other assets that minimize taxes.

The government will take half of what you earn each year. When you die they will take half of what is left. This means you are now working 9 months a year for the government. Wise up and quit while you are ahead.

Don't get mad. Exercise your economic freedom.

 
At 3/12/2009 6:15 AM, Blogger Walt G. said...

QT,

Capital and labor needs each other equally. If you don't agree with that, you're right, we don't agree. I made a decision yesterday that saved my company $7000--that's labor at work.

My working for your husband (labor) or for someone else and buying stuff from your husband who invested capital is a synergetic relationship. Eliminate the worker or customer and see where you are at.

When assessing risk, I don't think you can narrow the financial relationship down risk-wise and leave out relevant variables like you are doing. I believe not properly assessing risk by looking at everything and charging accordingly is why we have the current economic mess.

 
At 3/12/2009 9:33 AM, Blogger ExtremeHobo said...

Anonymous said...
Oops, busted link.


I dont understand what I am looking at

 
At 3/12/2009 9:47 AM, Blogger Patrick said...

Brandy,
I don't consider the New Deal to be a good example of that. The New Deal was more of a Keynesian (sp?) experiment than an exploitation of the wealthy to benefit the poor if I remember my history correctly. The situation I'm talking about is best described by this example:

5 friends go out to eat and when the time comes to pay for the bill they take a vote to see how it should be split. Well, 4 of the friends make less money than the 5th friend and so 4 of them vote that the 5th pays 98% of the tab and the 4 of them split the remaining 2%.

To make the connection with a real country you have to assume that all 5 friends HAVE to eat together, and that all of them accept the decision of the vote. So if you aren't the 5th friend footing the bill, why wouldn't you want to go out to eat all the time? It's really easy to spend other people's money, but a little harder to spend your own.

It's a ridiculous example, I know, but it gets across the point I was trying to make. I'm not rich, or even close to the upper two tax brackets, but I'd rather have less government programs than make rich people pay more in taxes.

 
At 3/12/2009 10:08 AM, Blogger QT said...

Walt,

I admire your ability to stay motivated and seek opportunities for cost savings during what must be a very stressful and anxious time. One of GM's greatest strengths is in its people. I believe we concur that employees, entrepreneurs and customers are equally important to the success of a business and an economy.

My original post was not intended to assert the superiority of capital to labour but to point out the difference in tax treatment for different types of income. The implication seemed to be that Mr. Buffett had somehow manipulated the tax system when it appeared more likely to me that the lower tax rate reflected that his income was largely derived from capital gains. Wouldn't one expect the world's most famous investor to have investment income?

The reason for this type of tax treatment reflects the potential risk that invested capital can and often does incur material losses which is something that does not happen with salaried earnings or interest income on T-Bills. My Nortel stock purchased at $68.00 per share is now worth about 25 cents a share.

The current financial problems arose from many different factors and certainly, inadequate risk evaluation and risk pricing played a significant role in creating excessive leveraging and instruments that were complex enough that once the foreclosures started, the market for an entire asset class disappeared overnight. Interest rates held for an extended period of time at a 50 year low and a resulting housing bubble were also significant factors. Exempting mortgages held in the form of securities from banking capital requirements was also a very short-sighted aspect of the Basel II international banking rules. The problem is a complex one which might well be described as the "perfect storm".

When one considers sub-prime & mortgage backed securities, it seems that there is still a hard asset, a house & property, that eventually ends up in the hands of the bank. Has the value of this asset been impaired by 100%? This doesn't seem to be highly likely. I can see that the stream of payments may be gone and the home may no longer be worth what it was a the peak of the market but it is still worth something even if it is 50 cents on the dollar. A value of zero on mortgage backed securities reflects lack of a customer (yeah, you are right...we know where we are at there) not the actual value of the asset adjusted for impairment.

So I believe we are in a very strange place in the financial world and there aren't easy answers to solve this problem. In this sense, I can see why there are comparisons to the Great Depression. It would seem taht there has been a significant loss of confidence.

 
At 3/12/2009 12:28 PM, Blogger Walt G. said...

QT,

Thanks for your reply. I believe most of us on this blog are more alike than we think we are. The small differences we dwell on are magnified because of the rapid changes we are experiencing in the economy, which are jerking us out of our comfort zones—and our different perspectives. In the long run, everything always works out for the best, and if it doesn’t, we have to deal with it anyway :)

 
At 3/12/2009 4:44 PM, Blogger randian said...

I could have sworn I heard Warren Buffet say he and the top 400 in the US have a 17% tax, which is less than your average person.

Buffet may have said that, but in doing so he was either lying or so ignorant of our tax system he should stop talking about it.

He may very well be paying that low rate on his capital gains, but don't forget that capital gains on Berkshire Hathaway stock are realized only after the 35% federal corporate tax has been paid on its net profits. Since Buffet has frequently talked about the value of deferred taxes in the context of insurance company float, he cannot be ignorant of the corporate tax burden on BH's profits.

Hence my conclusion he was lying when he said that. That doesn't surprise me, socialists frequently lie to advance their cause.

 
At 3/12/2009 10:36 PM, Anonymous Anonymous said...

" but don't forget that capital gains on Berkshire Hathaway stock are realized only after the 35% federal corporate tax has been paid on its net profits. "
I think capital gains are paid on sales of stock by investors and the 35% coporate tax rate is paid on the earnings of the corporation. This does not seem to be the double taxation that you seem to imply it is.

 
At 3/13/2009 2:07 AM, Blogger randian said...

I think capital gains are paid on sales of stock by investors and the 35% coporate tax rate is paid on the earnings of the corporation. This does not seem to be the double taxation that you seem to imply it is.

And how is it that the stock price has increased so there will be a capital gain to harvest? The company has increased its profits, making its shares more valuable, and paid a 35% tax on said profits, that's how.

 
At 4/17/2009 7:34 AM, Anonymous Anonymous said...

Well, I am a month late to the party ( and an alum of U MICH Flint)
But this last BH comment about double taxation, anon is correct. While the share price may rise because of earnings, the double taxation thing is not quite correct.

However, if dividends are paid, then they are double, triple or more taxed.
How? Well, ABC earns profit, pays tax and then pays a (non-deductible for ABC) dividend. If that dividend goes to XYZ Co, it is investment income for XYZ and is taxed. If XyZ then pays a div, part of that dividend is from its ABC income and is taxed again when paid out. Now, if XYZ is paying to, say LMN then we see another layer. Of course, these effects are diluted as more layers come in, but the tax is still there.

Of course, sales tax can be the same way... esp for cars:
New car $25,000 taxed at 6% (1500), then sold as used for 15,000 (900 tax) then sold again as used for 5000 (300). In this scenario, our sales tax on the new vehicle price of 25,000 is 2900 (or 11.6%)

 
At 5/07/2009 10:47 AM, Anonymous TOM PAINE said...

My children all live better than I do. I live better than my father did. He lived better than his father, who had a government job in the old country. That is the American dream, nothing more, nothing less. We did not feel entitled to any government handouts, other than borrowing money for education, all paid back!

 
At 8/26/2009 11:25 AM, Anonymous GEODF said...

LICK "EM or JOIN "EM?

Let's spread the wealth around. In other words,let's lick 'em (the rich). Karl Marx and Barack Obama

Let's join 'em! The American Dream

 

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