Saturday, July 05, 2008

Top 50% Pays 97% of All Federal Income Taxes

The U.S. income tax system is highly progressive. The top 1% of income earners, by household, paid more than 39% of all federal income taxes in 2005, the top 10% paid more than 70%, and the top 50% paid almost 97%, whereas the bottom 50% paid a little over 3%. Further, 32% of all tax returns filed in 2005 were from people who paid no federal income tax at all.

The chart below (click to enlarge) shows graphically the levels of household income earners, and their proportion of the federal income tax in 2005:



Link.

32 Comments:

At 7/05/2008 8:11 AM, Blogger Unknown said...

It seems like an unfair system. I propose the following income tax system:

The more you make in relation to how many people you employ the less you pay. For example, the formula could be like that:

(R)ate of federal tax = F/(1+E),

where F is a flat tax rate function and E a function of number of employees.

As E increases in value, R goes asympotically to zero.

This function motivates people to start business and hire as many as they can. The current system has a "motivation saturation" point, like a socialist system just at a more elevated point.

The justification for my formula is that the more people you employ, the more taxes are paid by them and the higher the injection into social security system. You actually pay idirectly what you save in tax payments and maybe more.

 
At 7/05/2008 8:44 AM, Anonymous Anonymous said...

The Democrats want to make it 100%. Once that happens, they will be in power permanently, because there will be no limit to their ability to buy votes from the lower 50%.

Amusingly, this is in spite of the fact that, contrary to their desired image, the Democratic Party is really a party of upper-middle and upper-class people.

 
At 7/05/2008 9:15 AM, Blogger Thomas Coolberth said...

Just out of curiosity, what is the 50% level? $60,000 a year income?

 
At 7/05/2008 10:02 AM, Blogger opacity said...

That seems like an extremely unfair system, and one, if Obama wins, is only likely to get more unfair. If the richest half of the country pays for 97% of the state, then they should get a weighted voting share to their contributions. It makes no sense that someone contributing 10x (usually higher) more in taxes should have the same voting power as someone who is a net gainer from the government. If this system can perpetuate itself, it makes me more skeptical to those championing democracy as the most enlightened system of government.

 
At 7/05/2008 10:18 AM, Blogger Matt Young said...

Taxes and wealth match pretty closely, and the numbers get jiggered on this quite a bit, depending on the presenters point of view.

The question is, why do the wealthy insist on purchasing so much government? One would think wealthy people are smart, but they double the number of lobbyists they send to the capital almost every three years.

Wealthy people must be socialists, that is all I can figure.

 
At 7/05/2008 11:24 AM, Anonymous Anonymous said...

I don't think it is a realistic assessment of taxation to pick one tax, such as the federal income tax, and analyze it on its own and then come to the conclusion that those in the upper income levels are paying too much money for taxes. Total taxation is more relevant and much more complicated than that.

For a total taxation analysis, state, and local income taxes along with sales taxes and property taxes would have to be included, too. In addition, licensing fees and other governmental fees are essentially taxes. On top of that, Social Security is a regressive tax that hits the bottom 50% of the taxpayers disproportionately hard due to only being withheld for the first $102,000 in earned income in 2008 (also, there is zero Social Security withholding for dividends and capital gains that more higher income people receive than lower income people). Obviously, and quite relevant for the times, a poor person who purchases gasoline pays the same amount in sales tax per gallon as a person who is rich—and probably does not get to write it off as a business expense. Since there are so many taxes and mandated governmental fees nowadays, I am sure I have missed quite a few.

In the final analysis it might be true that those who make more money pay more in total taxes; however, isolating the federal income tax and analyzing that by itself does not tell the whole story about who pays their “fair share.”

Professor, not to be picky here, but your title of this post is misleading and incorrect using the word “all taxes” instead of federal income taxes.

 
At 7/05/2008 11:46 AM, Blogger Mark J. Perry said...

See my new post on tax burden.

 
At 7/05/2008 11:55 AM, Blogger Mark J. Perry said...

See new title.

 
At 7/05/2008 12:53 PM, Blogger juandos said...

Nice bit of socialist nonsense there sophist attempting to use the government and its extortion system to do what you think is good social engineering....

The federal government tries to rationalize it also...

How about the people needing/wanting the social services the federal government is pushing, pay for it?

Do you believe like Sen. Reid says: Paying income tax in America is Voluntary

 
At 7/05/2008 1:45 PM, Blogger Andy said...

This chart doesn't show what percent of total income is earned by the top 1% so it's not clear that there is even any progressiveness. Without this information this chart is meaningless. For example if the top 50% earn 97% of all the income then what's so bad about that?

 
At 7/05/2008 1:49 PM, Anonymous Anonymous said...

Thanks for the title change. Your new post does not take into account that many of the federal programs that were dropped to lower federal taxes were picked up by the states and cities and resulted in tax increases at that level. Additionally, as you know, in Michigan state support of public colleges has decreased from 2/3 to 1/3 of student costs in just the last few years because the state is paying for more programs. States cannot print money. Unlike the federal government that is $9 trillion in debt, they also must maintain a balanced budget.

Also, I don't mean to imply that I believe in soaking the rich. I have worked at least two jobs since I was fifteen-years-old, or the overtime equivalent; however, in the 70s and 80s I turned work down because I did not want to give so much of my hard-earned money away to the government. Excess taxation is definitely a disincentive to work.

I think looking at the federal income tax alone hides the true picture of how much money we actually pay in taxes. Yes, even the middle class pays taxes up-the-nose. In fact, I had a reminder just today in the form of my 2008 Summer Property tax bill. Hopefully, I will have enough after- tax-pay to pay my other taxes!

I don’t believe those in government want the taxpayers to critically examine how much they pay in taxes. On the other hand, as Juandos would attest, we are our own worst enemy by demanding programs from our governments (federal, state, city, county) that we are not willing to pay for.

Here's an idea:

Maybe everyone should keep track of how much in taxes they pay for everything, and then decide what they are willing to pay for the luxury of having someone else do for them what they could do for themselves much more cheaply. After that is done, we then need to elect people who will represent the voters’ realistic wishes. No matter what politicians say, there’s no such thing as a free lunch—don’t be duped into thinking otherwise.

 
At 7/05/2008 2:06 PM, Blogger juandos said...

"Maybe everyone should keep track of how much in taxes they pay for everything, and then decide what they are willing to pay for the luxury of having someone else do for them what they could do for themselves much more cheaply. After that is done, we then need to elect people who will represent the voters’ realistic wishes"

Common sense words of wisdom?

Seems so to me...

Well walt g, if and when you run for a national office you'll still have my vote...

 
At 7/05/2008 2:28 PM, Anonymous Anonymous said...

Sophist,

How long do you think it would be before someone tried gaming the system hiring relatives, the wife, inventing imaginary workers, etc.? How many millions would be required for auditing and enforcing this scheme?

Even if one imagines that everyone is as honest as George Washington, the idea is completely economically inefficient.
Time to go back and re-read your basic economics text. (See Ch. 18 & 19 of Mankiw's text)

A business hires workers on the basis of productivity and marginal cost. Unlike government, businesses are required to generate a return on invested capital...so make-work jobs are the perview of government not private companies.

Why does more government and more regulation seem to be your preferred solution to just about every problem? One has to wonder if you ever consider the possibility that such "solutions" often create just more problems.

Imagine a solution that involves no additional paperwork, no enforcement, no means of government delivery of funds...a solution that would be easily understood by taxpayers and easy to apply for.

Simplifying the tax code or introducing a flat tax for example.

 
At 7/05/2008 2:58 PM, Blogger Lee said...

What does the Heritage Foundation think the tax burden ought to be for the top 1% earners?

and What percentage of federal income taxes should the top 50% have to pay (now 97%)?

IF the rich and super rich don't pay the taxes (and possibly more), someone less well off has to, free money from helicopters notwithstanding.

 
At 7/06/2008 5:39 AM, Blogger OBloodyHell said...

> Social Security is a regressive tax that hits the bottom 50% of the taxpayers disproportionately hard due to only being withheld for the first $102,000 in earned income in 2008

Umm, Walt, were you under the impression that anyone making over 100k/yr really NEEDS Social Security at all?

And yes, there ARE arguments to suggest that they be DENIED whatever pittance of benefits they ARE entitled to in order to provide a temporary "fix" to the vast problems with that ridiculous Ponzi scheme.

So why in the hell should THEY be required to heavily fund a system they have no use for whatsoever? At least with income tax, etc., they typically recieve some semblance of benefit (roads, police, schools, etc.)

Explain, please, why anyone should be enslaved to fund a system which only exists because people are too stupid to set aside a percentage of their own income for the future? I'll accept the notion that you might REQUIRE people to do so, to invest in a rational pension plan somehow (and cover catastrophic issues, like serious injuries or illness when young)... but why in the hell should you or I be enslaved to pay for Joe Blow's?

> analyzing that by itself does not tell the whole story about who pays their “fair share.”

"Fair share" is a crock. Unless you're going to explain how they get MORE benefit from the government than the "plebes", the notion that someone who is rich should pay more "because they can" -- and that this would be "fair" -- is a load of bat pucky.

You can't run as fast as some people -- shall we add weights to them so that they can't run as fast? This is "fair" by that reasoning.

You aren't as sick as some people. Shall we give you diseases so that your overall health is more in line with theirs? More "fairness" for you.

The world ain't "fair", and you can't legislate it so.

.

 
At 7/06/2008 10:50 AM, Anonymous Anonymous said...

obloodyhell,

Last time I checked, Social Security was not a needs-based program. Personally, I don’t approve of the legalized Ponzi scheme.

My argument conclusion is that total taxation is more important than the federal tax rate alone for any comparison analysis. I wanted to present a different viewpoint than the unstated conclusion of the post that the top 50% are “unfairly” taxed by provoking thought that perhaps everyone is heavily taxed more than they realize. Awareness of a problem is the first step to solving a problem.

As you correctly pointed out, I probably should not use a term such as “fair” because it is much too subjective for careful analysis. But whatever “fair” is, I wanted to show that the opposite “unfairness” might possibly —or might not be—spread more evenly than was suggested by the post. I believe that you must look at the whole taxation picture before drawing a general conclusion based on a specific case.

Obloodyhell: I don’t necessarily have to personally hold a viewpoint to discuss the arguments for or against it. Intelligent discussion of opposing viewpoints often strengthens both sides of an argument. It’s also good writing practice. This is a great place for me to hone my writing skills—there are a lot of intelligent people who think and write very well here. That’s why Professor Perry has reached over ¾ of a million visitors to his blog.

 
At 7/06/2008 2:47 PM, Blogger juandos said...

"IF the rich and super rich don't pay the taxes (and possibly more), someone less well off has to, free money from helicopters notwithstanding"...

Well q, can you offer a rationale why the rich or super rich should be punished via the tax system for being successful?

Why should the rich or super rich pay one more penny than you or I do? Just because the can?

I mean I know that Sen. Harry Reid says: "Paying income tax in America is Voluntary" but do you think those folks having to work for their $250k/year should be made volunteer as much of their earnings for tax as they are paying today?

 
At 7/08/2008 3:43 PM, Anonymous Anonymous said...

I think a great graphic would be people pulling a cart with others in the cart. Show the 1% pulling 40 and 50 pulling 3.

When 50% pay no taxes, then it is the wolves and a sheep deciding on what's for lunch.

 
At 7/09/2008 9:34 AM, Anonymous Anonymous said...

Don't you think that this information would be more useful if you include what percentage of total income each of these levels made? For example, in 2000, the top 50% may have paid 97% of all federal income taxes, but also made 87% percent of all income. Knowing that they made 87% of the money does make that 97% figure seem a lot more defensible, doesn't it? I googled it, but couldn't easily access the information. Presenting only 1/2 the story makes it appear that your goal to gin up outrage.

 
At 7/09/2008 5:14 PM, Blogger juandos said...

"Don't you think that this information would be more useful if you include what percentage of total income each of these levels made?"...

Only if you are playing class warfare games it is...

"For example, in 2000, the top 50% may have paid 97% of all federal income taxes, but also made 87% percent of all income. Knowing that they made 87% of the money does make that 97% figure seem a lot more defensible, doesn't it?"...

No, not even remotely...

The fact is there is NO reason someone making a hundred, a thousand, or even a million times more in a year than what you or I make ISN'T a good enough reason to extort more money from that person...

"Presenting only 1/2 the story makes it appear that your goal to gin up outrage"...

Hmmm, the fact that YOU think there is only half a story here is I believe reflective of your own personal prejudices and jealousies...

 
At 7/28/2008 6:25 PM, Anonymous Anonymous said...

The statistic that the top 1% pays 39.4% of the taxes means nothing by itself. I'd like to know what the top 1% make of the total national income? If it is greater than 39.4%, they are undertaxed. My friend made $2.8 million last year. I asked him if he would prefer to pay the current tax rate with the resulting federal deficit's damage, or pay a few percent more and not have the deficit's long term economic damage. He wisely chose a slightly higher rate and a balanced federal budget and the prospect of greater business for him as a result.

 
At 7/30/2008 12:54 AM, Blogger Brian said...

This fails to show the total taxation rate, on a percentage basis, including ALL taxes (state, county, city, sales, social security, etc.)

If you stop and look at the TOTAL tax burden, on a percentage basis, you will find that the top 1% pay an astonishingly lower percentage than the bottom half.

All you neo-cons that think that lowering taxes on the wealthy is such a good thing - explain why Clinton's tax increase in the early 90s helped to bring people out of poverty, and lead to good times for the wealthy at the same time as lowering the deficit (as cited by the Wall Street Journal on more than one occasion in the 90s).

 
At 8/08/2008 4:09 PM, Anonymous Anonymous said...

I just wanted to respond to the question brought up by a few - as far as what percentage of income the top 1% makes. The Wall Street Journel reported that the top 1% earns 22% of the income. Here's a link to the actual article:
http://www.wsj.com/public/article_print/SB121659695380368965.html

 
At 8/08/2008 4:10 PM, Anonymous Anonymous said...

Sorry, the link cuts off. Just Google "2008 Wall Street Journal Fair Share" and it comes up.

 
At 8/23/2008 2:34 AM, Anonymous Anonymous said...

That is unfair? If we divide the wealth of the US into thirds, we find that the top one percent own a third, the next nine percent own another third, and the bottom ninety percent claim the rest. Therefore the top 10 percent has 66% of the income and it ligitimately owes at least 66 percent even if it were a flat percentage of tax.

You say ownership isn't income, but in this economy it is, because ownership by that top one percent is going up like mad.

There are 946 billionaires in the US with combined net worth of $3.5 trillion dollars. Those figures come from 2007. The 2006 figures were 793 billionaires in the US with combined net worth of $2.6 trillion. That is an increase of almost a trillion dollars. I see that as income for these 946 people.

Meanwhile the median income is about $45,000. That means that half the population makes less. 28% of all american households have a combined income of less than $25,000 dollars. Now how much of that do you suppose isn't spent on absolute necessities? I honestly don't have a clue of how you'd raise a family on less than $40,000 a year, do you? You could barely do it 10 years ago, and that was before $4.00 a gallon gas, and $5.00 a gallon milk.

I think people who make less than $25,000 dollars a year aren't getting anything from their government but the shaft, so they shouldn't have to pay a cent. The government isn't protecting their jobs, most of them have been disenfranchised, as their jobs are being deported, and their homes foreclosed on. The government is by the rich, for the rich, and the rich should foot the bill for all this nonsense.

When the government starts to do one thing for the average citizen that does him more good than harm, then maybe we can talk about taxing them, but as it is? NO ONE is benefiting from this except the top thousand people, so send them the whole bill. Except for the war costs which should be totally funded by Haliburtan, and the Bush family. Bush should be sued for the entire cost of the war. I think that would help...

But we are talking about what would be fair, and fair is not part of the picture when it comes to government. Sensible would be for people who shoulder most of the tax burden to thank God every day that you weren't born under a bridge, and sent to foster care at age four, after getting brain damage from starvation. Be thankful you make enough to pay taxes. The other choice would be to donate everything you make over 40,000 dollars to a tax deductable charity. Then you can see how much taxes you have to pay, and how much that 3% really matters.

Mercy

 
At 8/23/2008 2:53 PM, Anonymous Anonymous said...

I just don't think anyone can easily visualize what we are talking about in term of amounts. I'd like to propose a word picture. A couple with two kids, making $25,000 a year. They used to make $40,000 a year before the husband lost his industrial job, because no laws prevented his employer from opening factories in other countries. Now he's working for minimum wage, and his wife is also working. Their combined income is $68.50 a day, with which they buy food, clothing, utilities, and try to make their house payment. Their house payment is 1000 a month. The payments were based on his former job. That is about 33 dollars a day. Almost half their income...

But imagine this $68.50 is a cake which they need to eat in order to survive. It is bare sustenence. Food clothing and shelter. It is a plain cake, without icing, which represents, the tightest budget. It is a tiny cake, and honestly these people aren't getting enough to eat.

Now imagine the cake of one of those billionares taking in 100,000,000 a year. Sure he spends more than $68.50 a day. His wife buys dresses for $12,000 each. His house costs ten times as much as the 25,000 dollar couple. Lets say there are four of them also. They make enough to buy 4000 of those little plain cakes every day. Instead though they buy fancier cakes with icing that cost a lot more, but not so much more that they eat all 4000 cakes worth. They save over half of that, and still have everything they want.

Now the people who make 40,000 are just buying a little bit better class of cake, and honestly so are those who make 100,000. They are saving a bit, but at some sacrifice to themselves, but they have enough... though it feels they are just getting by. They still have to worry about money. These people aren't rich, but they have a little extra, and generally they spend it.

I am sorry but everything over 100,000 a year is just plain extra. No one needs more than that, though I am sure those who make that WANT it. That little bit extra is what sets them apart from the lower income people.

Now though suppose it is tax time. The IRS sits down at the low income couple's table, and like any well mannered guest he feels guilty taking their last crumb, and leaving them starving. Still they litterally suffer even more hunger, for his taking what he does. I mean they were already living on half rations. The 40,000 dollar couple fare better, and the bite he takes is missed, but they survive, because again... you don't just invite yourself over to dinner and gobble down their last bite.

Now at the 100,000 dollar a year family the tax man can relax and eat a normal portion. These people want more, but technically they have plenty. No one is going hungry. Still he isn't a pig. He keeps an eye on his diet.

Because the numbers on that tax form are a bit old though, (before $4 gas) he gobbles up quite a bit at the residences of those who make over 100,000 a year. Those people though hide part of their food so he doesn't get it all.

When he goes to the house of the people who have 4000 cakes delivered daily though, he feels free to eat his fill, and take some home. What would they do with 4000 cakes anyhow.

 
At 8/23/2008 7:45 PM, Anonymous Anonymous said...

What would they do with 4000 cakes anyhow

That's utterly irrelevant. Didn't your parents teach you it's wrong to steal? No matter what high-concept rationalizations you use, it's just as wrong to steal from a rich man as a poor man.

 
At 8/24/2008 5:07 AM, Anonymous Anonymous said...

Didn't your parents teach you it is wrong to take food out of starving children's mouths?

Taxation is more than fair to the rich.

The system is simple and goes as follows.

Standard deduction for married couples filing jointly increases $200 to $10,900. Singles and married filing separately increases $100 to $5,450. Heads of households get a $150 increase to $8,000.

That is the standard deduction that everyone gets. It is theoretically survival money. It is enough for cheep food, cheep rent, and maybe the power bill. Period. Over that the tax brackets are as follows.

Tax Rate Single Married Filing Jointly
10% Not over $8,025 Not over $16,050
15% $8,025 - $32,550 $16,050 - $65,100
25% $32,550 - $78,850 $65,100 - $131,450
28% $78,850 - $164,550 $131,450 - $200,300
33% $164,550 - $357,700 $200,300 - $357,700
35% Over $357,700 Over $357,700

Now what exactly is unfair about that? The people who benefit the most owe the most. It is like buying tickets to a concert. If you want to sit in the front row, then you pay more. People making over #357,700 get more out of living. They use more resources, and enjoy more of the benefits of being an American. How many people do you know who would like to make $100,000 less a year just so they could pay 8 percent less tax? Keep in mind that there is a close tie between life expectancy and income level.

Also keep in mind we aren't talking about a lot of people. Here is an interesting graph site.

http://www.lcurve.org/

Only 5% of Americans make over 100,000 a year anyway. Those privliaged few are very fortunate indeed. Why shouldn't they help the rest of us?

 
At 8/24/2008 7:12 AM, Anonymous Anonymous said...

Didn't your parents teach you it is wrong to take food out of starving children's mouths?

In what way does lack of subsidy do that? It's not their money, so not giving it to them isn't theft. Redistributive taxation is coercive and immoral. If you are in fact starving, ask a charity for help, that's what they're for.

They use more resources

Really? Poor areas seem to have a much higher density of police, fire, and bureaucrats in general, not lower.

Keep in mind that there is a close tie between life expectancy and income level.

Why does that justify redistributive taxation?

 
At 8/24/2008 9:59 PM, Anonymous Anonymous said...

I wasn't talking about Government assistance. The government doesn't give assistance to most people who are make less than 40,000. Instead they bail out the banks the oil company, and air lines. If you want to complain about government subsidy. You have more room to blame your rich friends than your poor ones.

You were not complaining about subsidys though you were complaining about paying taxes. I don't think it would be fair to ask someone who makes minimum wage to pay taxes, and they don't, at least not very much, but when it comes to income they don't have very much either.

I get so sick of rich people thinking that everyone who is poor gets government help. They don't. I wouldn't either. They ask questions I wouldn't answer for any amount of money and no self respecting human would.

I am talking about the working poor and the Recently unemployed, and underemployed. These people can't get assistance. As long as you own your own home, even if it has a lien against it, you can't get help. As long as you work, and earn some money you can't get much help, and even if you don't you can only get help of any kind for two years. Unemployment insurance is just that insurance. It isn't a give away... and you can only draw that for six months. After that you aren't even counted in the statistics as unemployed... even if you still don't have a job. That is why the unemployment numbers are so deceptive.

You are living in the past if you think that any large percentage of people below median income are on welfare. Clinton effectivly ended welfare for most everyone.

I am talking about people who have worked all their lives and find themselves jobless in this economy. I am talking about young people who are finishing school, and not able to find work even the first time, because the minimum wage job they would normally get is hiring 40 year old bread winners. I am talking about people who are accustomed to making a little over the median, now making minimum wage. The economy is screwed to the point that half of the people are doing well to just survive, and you are talking about taxing them MORE?

The reason rich people pay more is because they are the only ones making MORE money than they were. Everyone else is making a lot less. It is that simple.

The top one percent are now estimated to own between forty and fifty percent of the nation's wealth, more than the combined wealth of the bottom 95%. They have more, and they owe more tax it is that simple.

The rich have taken all the money from the poor, and now they are complaining about paying taxes on it. I think it is rediculous. And you have the nerve to talk about theft.

 
At 8/25/2008 8:14 AM, Anonymous Anonymous said...

The rich have taken all the money from the poor, and now they are complaining about paying taxes on it. I think it is rediculous. And you have the nerve to talk about theft.

Indeed I do, because you're lying when you say "the rich have taken all the money from the poor".

 
At 7/26/2009 7:52 PM, Anonymous Anonymous said...

Where else would they make their money? We have already seen the wealth game hugely increase since the 80's and accelerated to the present. We also have seen the ramifications of what can happen when huge pools of wealth are used to buy votes in congress. Everyone jumped on Blagovich from Illinois but he just got caught. Everyone on the hill is playing the
same "Pay to Play". Just look at MediGap D and the Consumer protection laws. The Pharmaceutical Industry and Banks wrote both bills and afterwords some who helped champion those bills went on to work in those same industries that bankrolled their reelection campaigns year after year

 

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