Thursday, October 14, 2010

Our highly progressive tax code, illustrated

This chart (recently updated with 2008 data) needs wide distribution, especially now that Obama has rekindled the debate over whether the rich are paying their fair share of taxes. What it shows is that the top 1% of taxpayers (when ranked by income) pay about 40% of all Federal income taxes; the top 5% (which includes all those whose adjusted gross income exceeded $160K) pay about 60% of total taxes; and the top 10% pay fully 70% of all income taxes. You can find the data and commentary from The Tax Foundation here.

Those whom Obama would label as rich—those with incomes greater than 250K—and thus deserving of higher tax rates, paid (based on my interpolation of the data) about 50% of all Federal income taxes in 2008. Is that not enough of a burden?

There are other goodies here. Note that despite the 50% reduction in top marginal tax rates since 1980, the rich have paid progressively more and more of total income taxes. If that's not the Laffer Curve at work, I don't know what is. Plus, this shocker: the top 1% of income earners paid almost as much (92%) as the bottom 95%. We are deeply in a situation in which the few are supporting the many: the bottom 50% of income earners paid only 2.7% of total income taxes in 2008, and 52 million taxpayers paid no income taxes at all. This leaves the Federal government in the precarious position that has already crippled California: since only a relative handful of taxpayers pay the lion's share of taxes, government revenues are highly dependent on the health of the economy. The rich lose far more income in a recession than the poor, and that results in a huge drop in revenues whenever the economy hits a rough patch. The rich also have a greater ability to change the amount of income they earn, and to simply take their income somewhere else if they feel overly burdened.

Our tax code does not need to be more progressive. Instead, tax rates should be flatter and lower, and we should eliminate as many deductions as possible in order to broaden the tax base. The result would be a more efficient and stronger economy, and a more equitable distribution of the burden of government. Give more people some "skin in the game" by requiring them to share the cost of government, and we might find it easier to reduce the size of government. Allowing the burden of government to be borne by only a small portion of the population is not only inherently unfair but dangerous to the economy's long-run health.


marmico said...

the rich have paid progressively more and more of total income taxes

What a shocker!

The rich have cornered progressively more and more of total adjusted gross income.

In 1980, the rich (top 10%) paid 49% of the income taxes on 32% of the income pie. In 2008, the rich paid 70% of the income taxes on 46% of the income pie.

In 1980, the super rich (top 1%) paid 19% of the income taxes on 8.5% of the income pie. In 2008, the super rich paid 38% of the income taxes on 20% of the income pie.

It's a real shocker that in a progressive tax system, the higher your slice of the income pie, the higher your slice of the income taxes. Not.

The moral of the story is that the super super rich (top 0.1%) made out like bandits compared to the super rich and the rich.

Benjamin said...

Excellent commentary.

I would prefer we go to gasoline and sales taxes, and eliminate payroll and corporate income taxes.

Any tax system that is complicated is inherently unfair.


Again, I wish we could all agree to limit federal outlays to 16 percent of GDP, and then fight like cats and dogs over the shape of that 16 percent.

That said, the wealthy live better in America than royalty of 30 years ago. Better phones, better food, better TVs, better health care, better cars--all the same things that have filtered down to the middle class, and even lower classes (it is remarkable to think that a lower-class person today can have better phone service that a millionaire of 20 years ago. De-reg works).

I will try to summon up a few tears for the wealthy, but really they don't have it so bad.

Jake said...

marmico nails it and i can't believe anyone can look at the chart and see anything else.

if you create tax policy which makes the rich richer, then by simple math the poor become poorer all else equal (save the trickle down bs for another day). as a result, whatever tax rate you apply to the rich will increasingly make the rich pay a higher proportion of income as they become richer.

simple math.

randy said...

As Marmico correctly points out, the references to the percent of taxes the top x% pays is misleading without context of the amount of related income. The much stronger argument is that everyone should pay some meaningful portion of their income in taxes or they have no stake in controlling government expenditures.

But the argument about inequality is even murkier. When income is adjust to include entitlements, paid health care, and corrects for other deficiencies, you get a different picture. I have been concerned about rising inequality, but more detailed review has convinced me it's not so simple as CBOE stats. If you really have time, read this article.

"Those enraged by inequality tend to be careless with their statistics, often painting a distorted picture of American life. Their opponents have accepted these false premises, rejecting only the solutions the outraged wish to pursue. Both sides ignore the real threat to the American Dream.

A standard measure of inequality employed by Burkhauser and many other researchers is the ratio of income at the 90th percentile of the income distribution to income at the tenth percentile. If this ratio rises over time, we can conclude that inequality has increased. Burkhauser finds that the 90/10 measure of inequality increased nearly 25% during the 1980s, declined by 7% during the 1990s, and was more or less flat in the first five years of the 2000s. By another standard measure of income — the Gini coefficient that measures changes along the entire income distribution — income inequality increased by about 15% in the 1980s, fell by over 2% in the 1990s, and held steady between 2000 and 2005."

John said...

Scott's chart is a reflection of a rising Gini Coefficient and growing inequality, a hollowing out of the middle class and a new Guilded Age, which, like the last one, will end badly, then get better.

If not for progressive taxation, the U.S. Gini would probably resemble that of Namibia. No middle class there, either.

marmico said...

But the argument about inequality is even murkier. When income is adjust to include entitlements, paid health care, and corrects for other deficiencies, you get a different picture.

Not really. The latest CBO report on household income shows that the real pre-tax comprehensive income of the upper decile increased by 115% since 1979 whereas the lowest quintile increase was 11% and the middle quintile increase was 19%.

John said...

Supply-side Labor Policy:

1. Bust the unions.

2. Offshore manufacturing jobs to access a global labor market and put downward pressure on wages.

3. Threaten to offshore more jobs if they complain.

4. Cut health and retirement benefits.

5. Raise their taxes so they have some "skin in the game."

zumbador said...


I assume you can copy and paste this report to your browser in order to access it. I thought the report was thought provoking especially page 8 and the brief quote on page 4. Hope you find it of interest and Thank You for your continued commentary.

randy said...


I think the issue of inequality is important. Thank you for pointing to those stats. I will take the time to consider how the CBO stats reconcile with National Affairs commentators arguments. Are you sure you have all the facts you need?

marmico said...

Are you sure you have all the facts you need?

Yes. It doesn't matter whether one analyzes IRS data (you should put Saez on your reading list), Census data, CBO data, the direction is the same. The income pie has increased for all but the share (inequality or concentration) has risen. The only issue is the magnitude of the inequality or concentration.

I've done enough computations on this thread. Why don't you simulate the Burkhauser Index with a 90/20 ratio utilizing the CBO data for the last 3 decades and report back how it matches the Gini coefficient? Thanks.

Jeff said...

marmico is all wet.

First, you made Scott's point...the rich are paying MORE of the tax burden even relative to the income that they make.

Second, the fact that the "rich" earn more of the pie DOES NOT mean the rest of the pie is getting smaller! The whole pie has gotten much bigger.

Finally, who determines the definition of "inequality" as you state? You? Obama? How much is too much?

Here is a clue for you: Speaking on behalf of the super-rich of the world, it is none of your damned business. Nor Obama's. It's my money not yours.

Go back to sucking on your cool-aid popcile.

Buddy R Pacifico said...

In what other country would the 40% who do not pay income tax (ex FICA or Medicare) get a tax rebate as part of federal stimulus?

John said...

You may want to move to Somalia. They have no income tax there.

John Wilkinson said...

@Jeff. According to your blog you are quite the christian "enthusiast". So you probably remember when Jesus said "it's my money, not yours". Oh wait, you probably don't because it never happened. Also, learn basic math skills. When a larger portion of "pie" is taken, there isn't magically more pie. Or is Jesus making magic pies now in addition to fish and bread? (can a brotha get some dessert?)