Tuesday, November 15, 2011

Tax shares update


I've updated this chart to include data recently made available for 2009. The big-picture takeaway hasn't changed: the rich pay a hugely disproportionate share of federal income taxes. The top 1% of income earners paid almost 40% of all federal income taxes; the top 5% paid almost 60%; and the top 10% paid about 70%. The bottom 50% of income earners paid only 2.3% of all federal income taxes, and some 59 million tax filers either paid no income tax or received money on net from the IRS. This puts us perilously close to a "tyranny of the majority" in which there are more people receiving net benefits from the government than there are paying into the system.

One other important thing to note is that the share of total income taxes paid by the top 10% of income earners today has risen by 40% since the early 1980s, despite the fact that the top income tax rate has been cut in half. This is powerful evidence that the Laffer Curve is alive and well: cutting tax rates that are too high can and does yield a lot more in the way of revenue than a static analysis would suggest, because lower tax rates create bigger incentives to work and risk-taking, and they reduce the incentives to shelter, evade, or defer income, thus broadening the tax base. I also note that federal income taxes as a share of GDP were approximately the same in 2009 as they were in the early 1980s, thus proving that lower tax rates do not necessarily translate into reduced tax revenues.

Note: this chart does not include social security taxes, which are much more regressive, thanks to a cap on taxable income. But, given that social security taxes are supposed to be equivalent to a defined contribution plan (i.e., the benefits you receive are proportionate to the what you pay in), this is only fair. What you pay into social security is presumably your money, whereas what you pay in income taxes goes to fund the government.

21 comments:

Junkyard_hawg1985 said...

The first step needs to be the elimination of the negative income tax rates. The federal government spends about $60 billion annually on tax refunds of money that was never paid in taxes. If a person's income tax refund due exceeds person's income tax paid, only the money paid in taxes should be refunded. This represents over $600 billion in a 10 year period. Do you think that the "super"committee is considering this? I seriously doubt it.

Scott Grannis said...

The best solution to that problem is to eliminate deductions and earned income tax credits in exchange for lower and flatter tax rates.

Benjamin said...

The chart, as noted, excludes Social Security taxes, and so tends to overstate the case.

That said, I worry more about the size of the slice taken, than who it is taken from.

If we cut federal taxes to 16 percent of GDP, and raise it through luxury consumption taxes only, I would vote for that.

Being rich in the USA is a great deal in life. The rich in the USA live better than anyone in all history--better than royalty of only a generation ago (better health care, better foods, better technology etc).

Limit government, but largely tax the rich to pay for it. we seem to have capital gluts anyway, so this might actually help returns.

Public Library said...

What about sales tax, property tax, and other state taxes? The bottom 50% get pummeled....

Benjamin said...

Public Library-

Despite the national boo-hoo-a-thon conducted on behalf of the wealthy, in fact--when all taxes are taken into account, state, local and federal--the tax code is roughly flat, or neither regressive or progressive.

I have worked at minimum wage jobs, and know a few people making $10 an hour or less. I contend such people should not be taxed at all.

Actually, cutting taxes on wages might be anti-inflationary, as wages make up such a large share of total business costs (60 percent).

Right now, inflation is not the problem, but perhaps in the future....

John said...

With all due respect, your argument is a canard.

What does the U.S. government pay out in contracts to private corporations? This seems like basic economic data. I can't find it. Do lobbyists pay to keep it hidden?

Mr. Grannis, do you know? Can you put up some pie charts, please?.

Those "overtaxed" millionaires cast their bread (taxes) on the waters and it comes back to them in fat procurement contracts and wierd financial instruments that legalize crooked gambling schemes at the expense of average earners.

It's disingenuous to focus on one side of the ledger. What happens to all that tax revenue collected? It doesn't all go to crack heads.

How much ends up in ExxonMobile's pocket? Or Walmart's pocket? Or with private medical corporations?

Lets look at what the government pays out, as well as what it collects. Where does Medicare money go? Bill Frist's HCA?

Where does the DOD budget go? Haliburton, Martin Marietta Raytheon, General Dynamics, some of the most profitable companies in the world. What do their execs make in bonuses?

How much goes to Big Pharma?

If the rich pay taxes, it all comes back to them, but even more so.

How is it the rich have gotten so much richer while paying higher taxes? Where'd they get all their money? I'll tell you where. THEY SUCKED IT OUT OF THE MIDDLE CLASS. THEY MORTGAGED THE FUTURES OF THE CHILDREN OF THE MIDDLE CLASS.

And what did they do with all the profits that came from U.S. government contracts? Why, they invested overseas, of course.

Sorry, I got a little excited.

Dr William J McKibbin said...

Unfortunately, the "lucky" rich people who geneally did not earn their wealth simply do not pay for their luck -- let's face it, life isn't fair -- and that lack of fairness applies to rich people as well -- rich people whine too much -- and that's probably because they are lucky...

marmico said...

I also note that federal income taxes as a share of GDP were approximately the same in 2009 as they were in the early 1980s, thus proving that lower tax rates do not necessarily translate into reduced tax revenues.

You are flat out misinformed. Income tax revs as a % of GDP were 9%+ in the early '80s and 6.5% in 2009.

One other important thing to note is that the share of total income taxes paid by the top 10% of income earners today has risen by 40% since the early 1980s

What you neglect to note is that the income share of the top 10% has also risen 40% since the early '80s.

mmanagedaccounts said...

MARMICO is right. The individual income tax revenue as a % of GDP has fallen from 9% in early 1980s to 6.5% in 2009.

Maybe if those 47% of households that pay no income taxes started paying, that % would go back to 8% plus.

Benjamin said...

Marmico and Mmanaged account are right. Personal income taxes are a declining relative to GDP. Corporate income taxes also.

What is rising is payroll taxes.

And yet the national boo-hoo-a-thon is conducted on behalf of the wealthy. Go figure.

Benjamin said...

I am sure Scott will post it, but CPI fell today.

So we have PPi falling, CPI falling, and unit labor costs going down. And 9 percent unemployment.

You think the Fed realizes it has a dual mandate?

Public Library said...

Good post by Mark Cuban on taxes.

http://blogmaverick.com/2011/11/15/my-views-on-corporations-taxes/

Simple truth is: tax rates play no role in strategic business decisions or hiring unless you want to line your own pocket.

Scott Grannis said...

It is nonsensical to argue that taxes have no impact on business decisions. What about the $1 trillion in corporate profits that are being held offshore? Corporations have already paid foreign tax on those profits, and they resist the idea of also paying a huge U.S. tax if the profits are repatriated. Taxes play a very important role in almost every business and personal decision.

Public Library said...

In all of the startups I invested in or launched, the tax rate was never a consideration. The product and competitive market were number 1 + 1A.

Those are simple facts I am willing to bet are reflective of most businesses in America.

Junkyard_hawg1985 said...

These comments that tax rates do not play a strategic business decision is total BS based on what I have seen. I work for an American company with U.S. and overseas assets. I have seen us transfer production overseas in a down market despite a lower cost of manufacture in the U.S. Why did we do that? Because the tax rates were lower overseas. I also saw us expand overseas when the investment cost in the U.S. was lower AND the cost of manufacturing was lower. Despite the best pre-tax income from the U.S. locations, the expansion went overseas because the afterax profits are greater there. Tax rates matter a huge amount.

Ed R said...

This chart is entirely disingenuous. It picks out just about the ONLY major tax that is disproportionately paid by higher income earners. There are many other forms of taxation that are highly regressive.

Hans said...

"Ed R said...
This chart is entirely disingenuous. It picks out just about the ONLY major tax that is disproportionately paid by higher income earners. There are many other forms of taxation that are highly regressive."

Ed, you are out of touch, as federal taxes, represents my second largest household expenditure and I am far from a 1%er..

Moreover, the home next to me is worth twice ours, do not think that this person is not paying a higher tax bill for the same level of services?

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