Monday, April 13, 2009

Everyone Should Pay Income Taxes

A very small number of taxpayers -- the 10% of the country that makes more than $92,400 a year -- pay 72.4% of the nation's income taxes. They're the tip of the triangle that's supporting virtually everyone and everything. Their burden keeps getting heavier.

As a result of the 2001 tax cuts enacted by a bipartisan Congress and signed by President George W. Bush, the share of taxes paid by the top 10% increased to 72.8% in 2005 from 67.8% in 2001, according to the latest data from the Congressional Budget Office (CBO).

Contrary to the myth that Mr. Bush cut taxes only for the wealthy, the 2001 tax cut reduced taxes for every income-tax payer in the country. He reduced the bottom tax rate to 10% from 15% and increased the refundable child tax credit to $1,000 from $500 per child, both cuts that President Barack Obama says we should keep. In so doing, millions of lower income taxpayers were removed from the tax rolls, shifting the remaining burden to those at the top, even after their taxes were cut.

According to the CBO, those who made less than $44,300 in 2001 -- 60% of the country -- paid a paltry 3.3% of all income taxes. By 2005, almost all of them were excused from paying any income tax. They paid less than 1% of the income tax burden. Their share shrank even when taking into account the payroll tax. In 2001, the bottom 60% paid 16.3% of all taxes; by 2005 their share was down to 14.3%. All the while, this large group of voters made 25.8% of the nation's income.

When you make almost 26% of the income and you pay only 0.6% of the income tax, that's a good deal, courtesy of those who do pay income taxes. For the bottom 40%, the redistribution deal is even better. In 2001, these 43 million Americans, who earn less than $30,500, made 13.5% of the nation's income but paid no income tax. Instead, they received checks from their taxpaying neighbors worth $16.3 billion. By 2005, those checks totaled $33.3 billion.

Today, Mr. Obama and many congressional Democrats want the "wealthy" to pay even more so there is more money for them to redistribute. The president says he wants the wealthy to pay their "fair share." Who can argue with that? But he never defines what that means. Is it fair for 10% to pay 70% of the income tax? Does he believe they should pay 75%, or 95%, or does fairness mean they should pay it all? It's clever politics to speak like that, but it is risky policy.

~Ari Fleischer in today's WSJ


At 4/13/2009 7:51 AM, Anonymous Anonymous said...

Well, the gini coefficient has been on a one-way climb for about 40 years now, so to be fair, not all of your chart reflects a redistribution via tax policy. Median real wages per capita is more or less flat since 1980, so while the lower income folk are paying significantly less in taxes, it's not as if they're living the high life.

But yes, at some point this scheme will hit its breaking point. I dont think it'll be because of the displeasure over equitable treatment as Ari Fleischer notes, it'll simply be because the effective tax rates (include cap gains, estate tax, income, sales, etc) paid by the top 10% will become astronomically high.

At 4/13/2009 8:09 AM, Blogger juandos said...

I've still have yet to hear any sort of rationale for why the income tax is supposedly, 'progressive'...

Didn't we as a nation learn anything at all from that liberal fascist Woodrow Wilson?

Now it looks like the present administration wants to go down that path again...

At 4/13/2009 9:16 AM, Blogger Ironman said...

Mark - thanks for linking to our "original 1040" tool in another post!

Of course, we didn't stop there - we also built a tool where anyone can design and test drive their own income tax system for the U.S. from scratch. You can use the tool to see not only how much you might have to pay in income taxes, but also how much money the government might collect from your idea of how an income tax should work.

Here's some background data:

The Profile of Household Income in the U.S. - As long as you're taxing income by household, knowing how income is distributed by household in the U.S. is kind of important.

A Different Kind of Bracketology, Part 2 - It turns out that those complicated income tax rate schedules aren't as complicated as you might think. It's possible to model all of them using just three points of data!

Tax Credits vs Tax Deductions - If you're going to not tax some income, which method of excluding income is more transparent, tax credits or tax deductions?

Insights into Tax Exemptions - Speaking of tax exemptions, we used IRS data to show that household income tax returns cover 90-91% of all Americans. We also show how those exemptions are distributed by household income.

Because They Make the Most Money - We answer the question of why the U.S. government hates people earning between $30650 and $45115 so much. It's another distribution of income post that explains why certain income earners are likely going to be out-of-luck whenever tax rates are changed.

Connecting the Dots for Personal Income Taxes and GDP - Regardless of where it sets income tax rates, we can tell you within a narrow range how much money the government will be able to collect through income taxes.

There's more, but that's the basic background information you need to build your own tax code for the U.S.!

At 4/13/2009 10:14 AM, Blogger Marc Passy said...

However, the wealthiest Americans have seen their share of income paid in taxes drop SHARPLY from the highs of the 60s & 70s, where as the middle quintile has essentially stayed constant:

Your graph simply tracks the increasingly skewed distribution of income in the US.

At 4/13/2009 11:14 AM, Anonymous Anonymous said...

...tunnel-vision upon the 'income tax' only-- misses the big picture.

Income taxes are just a small slice of the tax problem... for most Americans.

2 out of every 3 American families now pay more in Federal payroll taxes than in income taxes.

Workers pay 15% of their paychecks in FICA taxes on the very first dollar of income earned all the way up to $70,000. The payroll tax is just a disguised income tax.

Onerous state/local income & payroll taxes add to the suffering by low income workers.

Look at the TOTAL tax burden.

At 4/13/2009 11:19 AM, Blogger misterjosh said...

Professor, you're always talking about real this and real that - this number is meaningless until you throw in how much of the income the top 10% of the country makes.

Now I'm not saying I disagree, but let's bring all the facts to the table.

I'm currently angry at the tax man for 401K penalties. I became one of the top 10% last year when I took $$$ out of my 401K for a down payment on a home. Unfortunately, I've owned a home in the last 3 years ( no equity for purchase) so no exemption for me.

At 4/13/2009 11:56 AM, Blogger juandos said...

marc interestingly points out that a collection of Keynesian types who make the very questionable claim: "The progressivity of the U.S. federal tax system at the top of the income distribution has declined dramatically since the 1960s"...

Meanwhile in the real world the rich do pay more...

The TaxProf notes that the Tax Foundation shows that the Top 1% Pay More Income Tax Than Bottom 90%

At 4/13/2009 2:44 PM, Anonymous Anonymous said...

2 out of every 3 American families now pay more in Federal payroll taxes than in income taxes.

Workers pay 15% of their paychecks in FICA taxes on the very first dollar of income earned all the way up to $70,000. The payroll tax is just a disguised income tax.

Unbelievable! Do you want the rich to pay for your retirement and health care too? What the hell will you be paying for? FICA taxes cover Social Security and Medicare. You get this back in the form of benefits in old age. How much of the income tax, paid by the wealthy, do they get back? None. The wealthy not only pay a disproportionate share of federal income taxes, they pay most of the property taxes and state income taxes as well. These same wealthy people create most of the jobs. How many jobs have you created?

If we really "look at the TOTAL tax burden", we find that people, like you, are little more than ungrateful freeloaders. Maybe you should learn to say thank-you.

At 4/13/2009 6:49 PM, Blogger Dave Narby said...

Income tax is a canard.

Every way they take your money is a tax, including all fees, surcharges and tariffs.

When you figure that in on top of payroll taxes the lower income levels are getting soaked.

Worse, all of this deflects from the real issue:


This is endemic at the federal, state and local levels.

Nobody would mind if they were getting what they paid for, but it's obvious THEY ARE NOT.

I REALLY wish this blog would wake up to this, as it is the genuine problem with the issue of taxation.

At 4/14/2009 9:13 AM, Anonymous Anonymous said...

Dave Narby said it right. There are so many examples of how govt. does things vs. the rational efficient way that private concerns do them; here's an example:

Our school district in PA wanted to add a swimming pool to the high school. They voted to spend $10K to "do a study". The study group reccommended a $2million project to build the pool and a bath house.

Meanwhile, the local pool store sold INSTALLED IN-GROUND pools for $10K to anyone who wanted it.

Of course, the pool they wanted would cost a little more, and the bath-house would add a little, but you can see the irony.

At 4/14/2009 9:56 AM, Anonymous Mika said...

The school district reference is a poor example and shows how oversimplifying any example results in deception. I am quite sure the local pool store could not - for $10K - provide anything remotely close to what the school needed for a decent swimming program that serves hundreds of students for several decades . . . including an indoor facility, a pool sized for competition, dressing rooms, adequate bleachers for competition observers, office and storage space, etc. . . . The proposal probably included other instructional facilities beyond just the pool.

I know from personal experience that no entity - no corporation - pinches pennies and stretches dollars better than local school districts. They could teach businesses how to be frugal.

At 4/14/2009 1:29 PM, Blogger Unknown said...

I'll repost a nifty quote that I read earlier today on the WSJ forum discussing this article.

"If taxation without representation was/is wrong then representation without taxation is just as wrong."

It's not a question of who can afford to pay what, but a question of ethics. I really recommend checking out the forum discussion on WSJ as there are many fine, well-formed comments posted on about this article.

At 4/14/2009 6:33 PM, Anonymous Anonymous said...

Fleischer's Lies:

The most striking thing is that while Fleischer frequently mentions the tax burden of the top 10 percent, he never actually discloses what that group actually earns. With good reason -- the sentence, "A very small number of taxpayers -- the 10% of the country that makes more than $92,400 a year -- pay 72.4% of the nation's income taxes" is a lot more striking than if he'd written, "A very small number of taxpayers -- the 10% of the country that makes more than $92,400 a year -- earn more than 40% of the nation's pre-tax income and pay 72.4% of its income taxes."

Fleischer also engages in some game playing when it comes to income taxes vs. payroll taxes, which most Americans pay more of, and which are regressive. The former press secretary does a lot better when it comes to acknowledging the existence of payroll taxes than some of his Republican colleagues, especially since he writes that those taxes should be eliminated, but that doesn't keep him from presenting a less than complete picture when it comes to the statistics. Once again, though he takes payroll taxes into account when discussing the bottom 60 percent, he doesn't do it for the top 10 percent. Again, consider the impact of the sentence discussed above if he wrote it like this, "A very small number of taxpayers -- the 10% of the country that makes more than $92,400 a year -- earned 40.9% of the nation's pre-tax income in 2005, and paid 54.8% of its federal taxes."

Similarly, while Fleischer talks about the change in tax burdens that happened after George W. Bush's cuts went into effect, he never discusses the change in the distribution of the country's pre-tax income. If he'd done that, Bush would have looked a lot less progressive, because the increase in taxes paid by the top 10 percent can be explained almost entirely by a simultaneous bump in their income.

While the share of income taxes paid by the top 10 percent did in fact go up from 2001 to 2005 -- by 7.5 percent, to be precise -- and their portion of the nation's total tax liability rose 9.6 percent over the same time period, their share of the country's pre-tax income went up by 9.1 percent. (To be fair, the total tax burden on the bottom 60 percent of the country also went down, as Fleischer said, and in fact it fell about twice as much as their share of the nation's income did over the same time period. I could have left that stat out, of course, illustrating my earlier point about how easy it is to play games with all of this stuff.)

At 4/14/2009 9:47 PM, Blogger happyjuggler0 said...

Everyone Should Pay Income TaxesShould read

No One Should Pay Income TaxesThere, fixed it for you.


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