The data from 2007 has just come out, but the story hasn't changed much. Bottom line: the rich pay the vast majority of taxes. The top 1% of income earners in 2007 paid about 40% of all federal income taxes. The top 5% paid about 60% of all federal income taxes, and the top 10% paid 70%.
Note that while the top income tax rate has dropped by half since 1980, the share of taxes paid by the richest 1% of Americans has doubled. This sums up the power of the Laffer Curve very powerfully.
As Mark Perry points out, the top 1% of income earners now pay more tax than the bottom 95%!
As the Tax Foundation points out, "We are definitely overdue for some honesty in the debate over the progressivity of the nation's tax burden before lawmakers enact any new taxes to pay for expanded health care."
California's fiscal problems stem directly from the fact that its tax structure relies heavily on the rich to foot the bills. That's fine when the economy is strong, but whenever we hit the inevitable recession or slowdown, that causes tremendous fiscal dislocations. The federal government relies very heavily on the financial health of the upper crust of society, something that is not necessarily healthy nor prudent nor fair. Imposing even greater tax burdens on this golden-egg-laying-goose to pay for a fantasy healthcare scheme is not a good idea.
How does the comparison look as a percentage of income?
ReplyDeleteIt's obviously a powerful statement to say the top 1% pay 40% of the taxes - but it's also unfair. As Dan ask, what about income?
ReplyDeleteIf I read the tax tables correctly it is as follows:
The top 1% share of income from 1986 to 2006 grew from 11% to 22%. Their share of taxes grew from 26% to 40%. The effective tax rate in 2006 was 23%, the lowest at any point in that period.
It would obviously make just as powerful a statement to say the top 1% earns 22% of all the income!
As an aside, I'm trying to figure out why my effective tax rate always seems quite a bit higher than 23%. I think it's because I make enough to get taxed heavily but not enough to have the resources to hide it better. Ahem - THAT BITES!
Anyway, I don't disagree with the premise that high tax burdens are a problem. But when the argument is framed in one-sided but sensationalist statistics, the proponents lose credibility to me.
Rather than one-sided arguments about relative burden, I'd rather highlight how the complicated tax code creates structural unfairness for taxpayers at most levels and should be replaced with a simple consumption tax. The only redistribution to debate in that framework would be the amount of the "prebate" given to all taxpayers.
Randy
Seems the tax base in the US is narrowing quite dramtically; is there a historical precedent for this in the US or elsewhere?
ReplyDeleteFrom where I sit, the effect of all these tax hikes will be brain drain/capital flight/less taxpayers in the higher brackets; several colleagues/former colleagues are planning to move abroad.
As a follow up to that last post, seems fairly unlikely that any greencard holders will stay in the US beyond eight years as a result of the exit tax that was imposed last year.
ReplyDeleteA chart tracking percentage of income that goes to tax by the top 10% would be interesting. Notice the amount of tax goes up steadily regardless of what the maximum tax rate is ... so clearly the effective tax rate and amount of income are relevant.
ReplyDeleteA few comments. All the data queried here can be found in a table if you follow the link. The share of income earned by the rich has risen, and the share of total taxes paid by the rich has also risen. If it weren't for the rich, we'd all be a lot worse off.
ReplyDeleteI think there is a big problem when a small minority pays the vast majority of taxes (e.g., the top 25% of earners pay 86% of total taxes, and the bottom half of income earners pay only 3% of total taxes). It's called "a tyranny of the majority." A huge majority of the taxpayers receive much more from government than they pay in; a very small minority receive much less than they pay in. The majority can thus keep voting itself more and more benefits from the minority. This has been the pattern for a long time, and Obama wants to do it on steroids.
I think it is immoral to allow this to happen. I think the tax code should be simplified, deductions eliminated, and tax rates should be flattened. I think anyone earning above a certain income level (40K?) should pay at least something.
When the crowd soaks a few rich guys to pay all the bills, the crowd ends up hugely vulnerable to the few rich guys deciding to pack up and leave. This is happening in the UK and it will happen here.
I think we need to reverse these trends, but I don't see it happening anytime soon. I think these trends are in the end unhealthy, because we are taking too much from the most productive people, and giving too much to the least productive. We have bad incentives, and that will lead to less growth and a slower rise in living standards for all. It's very short-sighted, not to mention confiscatory.
I find it interesting that many of the people who belong in the top 1% tax bracket say that they should be taxed more - Buffet, Gross, tech billionaires.... but the people who fight for them are in a different (higher) tax bracket.
ReplyDeleteWhen I first saw the Tax Foundation's chart it almost made my head spin. As the Center on Budget Policy and Priorities has suggested the Tax Foundation is a propaganda mill and not really a research organization. (I have even worse things to say about Mark Perry but they’re probably not postable.)
ReplyDeleteFirst, I don’t trust the Tax Foundation’s figures but for the sake of consistency let’s look at what those numbers also say. The top 1% saw their share of AGI rose from 12.3% in 1987 to 22.8% in 2007. The bottom 95% saw their share of AGI fall from 74.3% to 62.6% over the same period. Thus the ratio of their income shares thus rose from 0.166 to 0.364. The average tax rate for the top 1% fell from 26.4% to 22.5% over that period. The bottom 95% also saw their average tax rate fall from 10.0% to 8.0% over that period. Thus the ratio of their average tax rates rose from 2.64 to 2.81. So individual income taxes did get slightly more progressive but this is more a story about how the top 1%’s share of income increased nearly 120% relative to the bottom 95% between 1987 and 2007.
(continued)
Second, the Tax Foundation said the following:
ReplyDelete"Some in Washington say the tax system is still not progressive enough. However, the recent IRS data bolsters the findings of an OECD study released last year showing that the U.S.—not France or Sweden—has the most progressive income tax system among OECD nations."
The OECD study that the Tax Foundation is referring to is here (you must be a subscriber to read most of the content):
http://www.oecd.org/document
/53/0,3343,en_2649_33933_41460917_
1_1_1_1,00.html
Note that the study’s primary focus is inequality and poverty and not taxes nor even their degree of progressivity. The study is 310 pages long and the table that the Tax Foundation is cherry picking from is on page 112. It compares market income and tax shares for the top decile. (Market income includes wages, interest and dividends but excludes capital gains and other sources of income which accrue to the very wealthiest.) In the computation of taxes they include income and payroll but exclude estate, wealth and gift taxes which are quite heavy in countries like France. This was a strange table to construct, and for the life of me I don’t know why the OECD did it, because it doesn’t provide very much useful information on income inequality. The Tax Foundation naturally put it to good political demagogic use.
(continued)
A really good paper on international and historical progressivity of taxes by, perhaps the undisputed experts, Piketty and Saez is here:
ReplyDeletehttp://elsa.berkeley.edu/~saez
/piketty-saezJEPdraft1.pdf
This study looked at the United States, United Kingdom and France from 1960 to 2004. It considers all sources of income and considers estate, gift, wealth taxes as well corporate taxes. Figure Six at the end of the study tells much of the story. Taxes in the UK and the US have become far less progressive between 1960 and 2004 whereas in France they have become slightly more progressive. In 1960 taxes in the US were more progressive than in France but less than in the UK. By 2004 taxes in the US had become the least progressive and taxes in France had become the most (particularily at the very highest incomes). (If I had similar data for Sweden handy I’m sure it would tell a similar story.)
Table Two shows data for the years 1970 and 2004 (US), 2005 (France), 2000 (UK). Note that the average tax rate in the US for the bottom 90% fell from 20.2% to 18.5% but for the top 0.01% it fell from 74.6% to 34.7%. The average tax rate for the top 0.1% was 61.5% in France (2005) and 47.8% in the UK (2000). The share of taxes paid by the top 1% rose from 22.0% to 28.2% and the share of of taxes paid by the bottom 95% fell from 67.8% to 53.8%. Over the same period the top 1% in the US saw their share of income increase from 9.0% to 19.7%. (The top 0.01%’s share amazingly increased from 0.76% to 3.48%, or nearly five-fold!) The bottom 95% in the US saw their share of income fall from 78.4% to 65.0%. Thus the ratio of income shares rose from 0.115 to 0.303. The average tax rate for the top 1% fell from 46.7% to 33.5% over that period. The bottom 95% also saw their average tax rate fall from 20.4% to 19.6% over that period. Thus the ratio of their average tax rates actually decreased from 2.29 to 1.71. Thus when you extend it further back to 1970, and include all forms of federal taxes, it’s clearly a story about rising income inequality and not about increased progressivity in taxes (total federal taxes have clearly become less progressive, not more).
So what’s startling in my opinion is not how much those at the top are paying in taxes, but how much of the nation’s income they are accruing, and how much that their share has increased over the past thirty-odd years. It can’t be healthy socially or politically (or even economically) in my opinion. And it is indeed an unhealthy situation that so much of our government’s revenues are dependent on such a small but increasingly powerful group.
P.S. A good source of information about the current total federal tax burden is the Tax Policy Center:
http://www.taxpolicycenter.org
/numbers/displayatab.cfm?DocID=1818
TPC makes allowances for refundible tax credits like EITC (note the negative individual income tax burden for the bottom 40%). In 2008 the top 1% had 19.3% of the income, paid 27.7% of the taxes and had an average tax rate of 30.0%. The bottom 95% had 67.3% of the income paid 55.2% of the taxes and had an average tax rate of 17.1%. So this pretty much agrees with Piketty and Saez’s data.
P.P.S. This statement by the Tax Foundation was particularily ridiculous to me:
“Newly released data from the IRS clearly debunks the conventional Beltway rhetoric that the “rich” are not paying their fair share of taxes and disproportionately benefited from the Bush tax cuts.”
Their own data shows that the top 1%’s aggregate income increased from $986 billion to $2,008 billion between 2002 and 2007 and yet their percentage share of the personal income tax burden barely budged over the same period. (Get real!)
I've always found the Tax Foundation’s graphics and stories sensationalistic, deceptive and devoid of context.
Scott,
ReplyDeleteAnd your statement about California's revenue system is only partly true. It is true that California's revenue system is less regressive than most states. But California's revenue system is not overly dependent on those with high incomes. It is actually quite regressive as virtually all state revenue systems are. In fact taking into account the federal offset for state income taxes the average tax rate paid in California is inversely related to income and falls from 11.2% for the bottom quintile to 7.2% in the top 1%:
http://www.itepnet.org/
wp2000/text.pdf
This is of course due to the fact that California (as most state are) is heavily dependent on sales and excise taxes and for revenues. Personal and corporate income taxes (the most progressive taxes) represent only about 27% of California's total revenue.
I'm sorry but it just sends me into fits of apoplexy when I hear nonsense like that.
Mark: The data and the spreadsheets used by me and the Tax Foundation come straight from the IRS. Alan Reynolds of Cato has put together some pretty strong criticism of the Piketty and Saez study, and he has also critiqued the notion that there is something untoward about the rich getting richer.
ReplyDeleteTo me the only obvious conclusions that merit anyone's attention are in my comment of July 30th above. I see no problem with the rich getting richer, because they can only do that by doing something of value to society. And their wealth can't possibly be spent, so they end up investing most of it and that benefits everyone.
All the nitpicking about tax rates and incomes ingnores the obvious fact that when the takers outnumber the givers and the takers have a vote, they continue to vote themselves more, until the givers quit giving. It happened in ancient Rome where the dole became an overbearing burden to the public wealth. It's starting to happen in the US. Eastern US is a microcosum of the national trend toward more government and more subsidies. More and more residents of Eastern states are moving to more tax-favorable places: Florida, Virgin Is., etc.
ReplyDeleteIf you're delinquent on your property taxes you're almost guaranteed a late payment penalty plus administrative fees.
ReplyDeleteIssacqureshi Tax Specialist in London