Monday, December 3, 2012

Tax shares update

The IRS recently released data on individual income taxes, and the Tax Foundation has nicely summarized the data, and I've put the data in the chart below. The story hasn't changed: upper-income earners continue to pay a hugely disproportionate share of total income taxes.


In 2010, it took $370K adjusted gross income to make it into the top 1% of income earners, and they paid almost 40% of all federal income taxes. The top 5% of income earners made at least $162K and paid almost 60% of all federal income taxes. The top 10% paid made at least $17K and paid a little over 70%. The top 25% included all those making $69K or more, and they paid over 87% of all federal income taxes. Meanwhile, the bottom 50% of income earners (those making $34K or less) paid only 2.4% of all federal income taxes, and the vast majority of them either paid no income tax or received money on net from the IRS.

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 tax code remains highly progressive despite big cuts to top tax rates.

Let's talk "fairness:" The top 10% of income earners in this country already pay over 70% of federal income taxes, and the top 1% (the rich) already pay almost 40%. Is that not enough? Almost half of those who work pay no federal income taxes. Is that fair? Is it healthy for so few to pay so much, and for so many to pay nothing? When almost half the population has no skin in the game, and another quarter pay only a very small share of total taxes, it is easy to demonize or exploit the rich—it's called the "tyranny of the majority."

These are very sobering statistics. Instead of asking the rich to pay even more, we should be thinking about how everyone should pay at least something. Just paying your social security taxes doesn't count, because in theory—if not in practice, since the rich will undoubtedly subsidize the social security income of a great many people in the future when social security revenues fail to cover expenditures—that is money you will get back when you retire. Income taxes, in contrast, go into the general fund. 

UPDATE: The chart below shows the share of total income earned by each of the groups in the chart above. Not surprisingly, top income earners make a large share of total income. However, if you compare the two charts, you see that the share of total taxes they pay is much larger than the share of income they earn. Our tax code is very progressive no matter you look at it. In 2010, for example, the top 1% of income earners made 19% of the country's total adjusted gross income and paid 37% of total income taxes. The top 5% earned 34% of total income and paid 59% of total taxes. The top 10% earned 45% of total income and paid 71% of total taxes. The top 25% earned 68% of total income and paid 87% of total taxes.



41 comments:

Jake said...

Once again you seem to be missing the input from the result.

The top 1% went from paying 20% to 35% of all income tax (an increase of 75%). The horror you say.

Since 1980, the percent of national wealth the top 1% earn went from 10% to 22% (120% increase --- see here: http://www.nytimes.com/interactive/2011/10/26/nyregion/the-new-gilded-age.html).

Taxes WENT down over the period. The issue is the wealth concentration!

Gloeschi said...

Scott, would you be so kind and post same information on the share of national income? No? Doesn't fit your narrative? I see.

marmico said...

The top 1% went from paying 20% to 35% of all income tax (an increase of 75%). The horror you say.

And the top 1% went from reporting 8.46% to 18.87% of AGI (an increase of 123%) Double horror I say. :-)

The top 1% effective income tax rate declined from 34.47% to 23.39%. In other words, the individual income tax system became less progressive which is clear in the increase in the gini indices since 1980.

Benjamin said...

I am disappointed with my favorite economics blogger on this post.

The really huge federal social programs--Social Security and Medicare---are largely paid through payroll taxes, not income taxes.

Payroll taxes stop at about $100k in wages.

If you ave income from other sources---dividends, interest, capital gains, property rents and so forth--- you do not pay Social Security taxes on those income streams.

Generally speaking, when Social Security taxes are taken into account, we see a federal tax "system" that is neither regressive nor progressive.

I am disappointed that right-wingers do not more aggressively advocate PIGOU taxes, including taxes on pollution, and a national sales tax, while reducing other taxes, including income taxes.

The acute concern on the part of GOP for the income tax rates on the very richest Americans is not a way to win elections, nor truly good classic economics.
.

Dr William J McKibbin said...

Americans in the 98% crowd are enduring declining real working wages, declining home values, and a declining employment-to-population ratio -- there's nothing left to take from the 98% crowd of Americans -- now is the time to either: a) tax the 2% club; or b) cut government spending by at least 40% -- I vote for cuts in government spending!

William said...

Let's simply go back to the much fairer tax under the second term of the Clinton administration.

The craziness began with the totally unnecessary Bush II tax cuts.

I am for the "fiscal slope" - glide path! It's the best we can hope for from our present congress.
Truthfully neither the Republicans or Democrats want to decrease spending - they just want to spend our taxes differently.

Spending tax dollars is the bread and butter and easy part of being a congressman or senator - which is all that most of them want to do. Otherwise re-election become more problematic.

Let's face i:t we have heard about deficits and debt for 4 years and what has congress done about it?
And what did they do about it during Bush II's 8 years in office during which they had a Republican majority in congress for 6 years.

Dr William J McKibbin said...

PS: What needs to be cut is military spending, which should be viewed as a necessary evil to be tolerated only during periods of declared war...

Rick said...

@jake: wealth and income are different measurements. Not all high income people are wealthy. Not all millionaires have high incomes. In fact, higher income tax rates prevent more people from becoming wealthier through work.

@Benjamin: only the social security portion of FICA taxes stop have a cap. The Medicare portion does not have a cap. The reason for the cap is two-fold. First, the employer is matching the employee contribution. Second, social security retirement benefits are taxable to individuals who have more than $24,000 of provisional income.

@William - so you favor raising the lowest tax rate to 15% from 10% and returning the employee FICA tax rate to 7.65% from 5.65% currently. Also, capital gains rates were cut 25% in 1997 during Clinton's 2nd term.

Benjamin said...

Rick-

Excellent clarification.

But I stand by my basic premise:

In toto, federal taxes are roughly neither progressive or regressive.

The shame of federal taxes is that they are so complicated, and arbitrary.

Better a simple national sales tax, perhaps excluding medical and food outlays.

The more you consume, they higher taxes you would pay. That is fair---when you consume, you place a burden upon tax-supported agencies.

Add in some PIGOU taxes, and pollution taxes.

Cut federal spending to 15 percent of GDP.

And since the threat of foreign invasion is nil, we should privatize national defense, and spend as little money as possible on that.

A few submarines armed with nukes, and who would invade?




Jake said...

@Rick - top 1% of wealth owns ~40% of all U.S. wealth. Even worse by that measure. I understand your point, but my point was simply that this post was very misleading making it seem that rich paid a higher proportion of the share in taxes outside of the fact that they own more / earn more. It would be like saying there was an issue if the top 1% owned 100% of wealth and made all income. How dare they pay 100% of taxes!!!!

steve said...

so it seems to me the issue is several fold; A) yes, the top earners pay the line share of tax but they EARN way more than the line share of income. there's no questions that the 98% are squeezed. B) the tax code is overly complicated and anachronistic.
C) we spend too much GD money. I have NEVER met a 1% who was not opposed to paying more in taxes if we could inject some responsibility into govt spending.
I'd like to see govt spending FROZEN at current levels. take current tax code and throw it out and replace with flat tax of 20% with $12,500 exemption per dependent and NO deductions and all income including cag gains taxed at same rate. the more you make the more you pay both percentage and arithmatic. also implement a natl sales tax with exemption for food/clothing of say 5%. seems to me fair and balanced. eventually we would pay off debt without draconian cuts.

marmico said...

eventually we would pay off debt without draconian cuts.

Right now the issue is slightly tilted toward revenues. The fiscal 2012 outlays are 22.8% of GDP. Reagan rang up higher outlays in 1982 and 1983. The reason for the higher deficit today relative to GDP then is 4 consecutive years of revenues of less than 16% of GDP. Fiscal 2012 revenues were 15.8% of GDP.

Obama is proposing $1.6 trillion of 10 year tax increases and Boehner has countered with $0.8 trillion. Saw it off at $1.2 trillion and then argue about the composition between marginal rate increases and caps on itemized deductions. That should be doable.

The work to bridge the gap on outlays is the proportion of cuts to mandatory or discretionary spending. The GOP seems fixated on the mandatory (entitlement) side.

In any event, why does debt need to be paid off? It just gets rolled over like it has over the last 2 generations. The 30 year bonds from the Reagan era are finally being rolled. Portfolio investors will always demand "no risk" Treasury bills, notes and bonds to defease anticipated future risks.

Public Library said...

The problem is where Congress directed the tax incentives over the past three decades (wealthy + military + industrial). This is why we see the below outcomes.

• Tax rates decreased across the board
• The top 10% paying a larger share
• Wealth concentration at 90yr highs

No honest person should talk about taxes without including wealth concentration into the discussion. At these levels, the concentration of wealth is not healthy at all (even if some of us benefit from it). Therefore, any solution requires increasing the size of the pie while improving the distribution. Otherwise if left unchecked, we will end up with a civil war on our hands.

Bill M said...

Typo:

"The top 10% paid made at least $17K and paid a little over 70%."

Scott Grannis said...

Note that I have updated the post to include a chart on income shares. What it shows is that while upper income earners earns a large percentage of total income, they pay an even larger percentage of total taxes.

Jake said...

"What it shows is that while upper income earners earns a large percentage of total income, they pay an even larger percentage of total taxes"

Unless you believe in regressive taxes (i.e. the more people make, the less they are taxed), then OF COURSE THEY WILL PAY MORE IN TAXES THAN THEY EARN AS A SHARE.

marmico said...

However, if you compare the two charts, you see that the share of total taxes they pay is much larger than the share of income they earn.

That's not particularly instructive. Chart the income share divided by the tax share or vice-versa. It becomes obvious that pre-tax progressivity has declined since 1980.

Tom said...

Why does everyone assume that wealth concentration comes solely from tax rates? There are many factors that lead to the concentration of wealth and the transition in the U.S. to a service and information-based economy surely has played a large role.

Jake said...

"Why does everyone assume that wealth concentration comes solely from tax rates? There are many factors that lead to the concentration of wealth and the transition in the U.S. to a service and information-based economy surely has played a large role."

Because if you reallocate wealth from wealthy to those with less wealth (i.e. you tax wealthy) that by definition reduces wealth concentration.

Is it the only thing? Of course not.

Scott Grannis said...

I would argue that most attempts to redistribute wealth end up being trumped by The Law of Unintended Consequences. The more government attempts to redistribute wealth, the more concentrated it will become.

For example, our steeply progressive tax code has created extremely high marginal tax rates for lower income earners. Many face marginal tax rates of more than 100%, and that punishes rather than rewards extra work. The single mother can have more disposible income if she works less. The poor end up getting trapped by high marginal rates. Climbing the income ladder is very difficult for lower income earners since high marginal rates create a "barrier to entry" to upper income levels.

That's why the best tax code would have flat rates and no deductions.

Dr William J McKibbin said...

Scott, I do not see how taxes used for excess defense spending equates to a redistribution of wealth...

Dr William J McKibbin said...

The US needs to cut spending, and the fiscal cliff cuts 10% of the lard out of defense spending immediately -- the fiscal cliff is good for America -- we need immediate cuts to all public spending programs -- I say go over the cliff, and begin negotiations afresh in 2013 regarding another phase another phase of government spending cuts -- the US needs to cut government spending by at least 40% immediately -- where those cuts are applied is irrelevant...

Jeff said...

Unbelievable comments!! Simply unbelievable.

And who is it that is going to decide how we "improve the distribution" of the wealth in this country??????

Public Library?

marmico??

Gloeschi???

Obama???

My goodness people, wake up. Marx said "from each according to his ability; to each according to his need". You are all talking the same rubbish.

Milton Friedman answered this very question on Phil Donahue in 1980:

http://www.youtube.com/watch?v=3X1mzadt7so&feature=player_embedded

And here:

http://www.youtube.com/watch?v=QeqPibwK_u4

And here:

http://www.youtube.com/watch?v=d8L3lb1cq2U&feature=player_embedded#!

How much wealth the 1%, the 5% or the 10% have is their business not yours. And what they do with it is their business, not yours. When Obama said at "some point you've earn enough" he was saying the same thing as Marx! When he told Joe the Plumber "we need to spread the wealth around", what economic philosophy was he exposing?

And if you raise taxes high enough, capital will flee and less revenue is the result. And we are past that point already.

Stop coveting! That's all redistribution is. That's at the heart of most of these comments. Plain and simple. Stop trying to spend other people's money and manage your own household.

PS Adding some new category of tax (e.g. consumption tax) is NOT the answer.

Jake said...

Wait.... you believe wealthy pay too much taxes, then you state this:

"our steeply progressive tax code has created extremely high marginal tax rates for lower income earners. Many face marginal tax rates of more than 100%"

and

"That's why the best tax code would have flat rates and no deductions."

So... what do you want? Rich paying less AND poor paying less of a share (we are ignoring levels here, just share as that is the focus of your post)? The only group left is the middle income.

So are you proposing middle income needs to pay a substantial higher burden of the overall tax base so poor and rich can pay less?

Seth said...

Yep, the shares of income taxes paid are wildly skewed. In fact the only thing more outrageously skewed than shares of income taxes is ... wait for it ... shares of INCOME.

And no this is not just a completely natural results of how hard various people work. A big part of it is rent extraction. There are a lot of privately-owned 'tapeworms' out there, not just the state.

Dr. McKibben: yes, let's cut defense down to where we're spending as much as the next 5 major powers, rather than 10 or 15. We don't need a globe-circling military empire.

Benjamin: Yes, we need some major Pigouvian taxes. Google 'club pigou' for the broad range of economists (left and right) calling for this.

A lot of conservatives want consumption based taxes instead of income taxes. What's not to like about a Pigouvian carbon tax? Great revenue source, regressive impact (unless rebated via income tax cuts/credits), side benefit in fostering truly market-based development of alternative energy.

Dr William J McKibbin said...

The problem is simplified as follows: a) the big government Democrats are guarding entitlement spending and seeking to transfer wealth to entitlement beneficiaries; and b) the military-industrial Republicans are guarding defense spending and seeking to transfer wealth into the military-industrial complex; and c) only Libertarians stand for across the board cuts in government spending, lower total taxes for everyone, and instead, a steadfast pursuit of liberty in the name of the people who own this country -- now is the time for everyone to reject the big government Democrats and military-industrial Republicans, and join the Libertarian Party, which is the only true party of principle -- more at:

http://www.lp.org

I plead with Americans to see the light and change their party affiliations -- for the record, I am a proud Libertarian, and I hate what the big government Democrats and military-industrial Republicans have done to our country and nation -- Libertarianism gives me hope.

Jeff said...

To Public Library (and all):

Just had to post this from the WSJ. Sounds like more than "3" to me...huh Public??

A funny thing often happens on the way to soaking the rich: They don't stick around for the bath. Take Britain, where Her Majesty's Revenue and Customs service reports that the number of taxpayers declaring £1 million a year in income fell by more than 60% in fiscal 2010-2011 from the year before.

That was the year that millionaires became liable for the 50% income-tax rate that Gordon Brown's government introduced in its final days in 2010, up from the previous 40% rate. Lo, the total number of millionaire tax filers plunged to 6,000 in 2010-2011, from 16,000 in 2009-2010.

The new tax was meant to raise about £2.5 billion more revenue. So much for that. In 2009-2010 British millionaires contributed about £13.4 billion to the public coffers, or just under 9% of the total tax liability of all taxpayers that year. At the 50% rate, the shrunken pool yielded £6.5 billion, or about 4.4%.

The British press is abuzz with the notion that 10,000 millionaires left the country in the interim, and no doubt some did make for their chalets in Gstaad. Others may have brought forward more income in 2009-2010, knowing the higher rate was on its way. No doubt, too, the overall lousy economy took its toll.

Jeff said...

Scott, what happend to your post on currencies. It was good. I just sold all my Aussie bonds a week or so ago.

BTW, just sold all my GLD about 2 days before your post on gold a couple weeks ago.

I would say great minds think alike, but I can't come close. I am just a padawan to you Master Obi Granobi.

Public Library said...

Jeff,

The flaw in your argument is that neither Democrats or Republicans are serious about cutting spending or leveling the asymmetric legal/tax structures. The same issue applies in China. Eventually the government subsidized debt financed industrial/export growth model will come crashing down because entrenched interest do not want to share their power + resources + government supported advantages to create a more sustainable system.

At a micro level nobody wants to give up their bounty. Regardless of how they accumulate it. However, as with all empires, once the tables tilt far enough in one direction, everything falls off the cliff.

If we actually had a credible system, a libertarian would have no problem garnering the necessary votes to challenge the two-party system. Instead, both Democrats and Republicans laugh their way to the coffer knowing that both sides want the same thing. Keys to the vault to redirect assets, income, and wealth to their chosen constituents. To argue otherwise is ridiculous.

So offer a comprehensive platform because hollering about a 33% OR 35% tax rate misses the forest for the trees.

Jeff said...

Public, moderate Republicans have done along with Democrats giving us high taxes and spending. That is obvious.

But my argument (that you say is flawed) is the people flee from high taxes. You call my argument flawed and then ignore it.

Libertarians are fine. Economically I agree with you and the good Dr. But I want a strong military. And drugs should not be legalized. There are certain things a good, moral government should say no to.

Public Library said...

Jeff,

I agree capital flees high taxes. However, other considerations factor into investment equations. Such as property rights, civil rights, access and proximity to capital and high skilled labor etc. There is a good article floating around about how GE left CA in the 50’s for Arizona to avoid taxes on their computer business. This basically put the nail in the coffin because the local talent pool and lack of proximity to the real innovation left them completely in the dust. Even though they were a leader in some portions of the industry at the time.

Btw, once you bring morality into the picture, you've already lost the battle because there is no single version of the truth. This is exactly what Congress and the Fed feeds upon. People would rather sink billions of tax payer dollars into losing “wars” (drugs, afghan, Iraq, iran, syria), bailing out banks, enrich the military industrial complex, subsidized farmers, telling women how to manage their persons, all the while hollering about the unfairness of taxes and government encroachment on our civil liberties.

Smacks of hypocrisy and irony.

Here are some sure fire ways to kick the economy into high gear.

1.End the Fed
2.Deregulate the minting of money
3.Flat Taxes
4.Reduce government in EVERY facet of our lives
5.Shrink the Military-Industrial complex by half
6.End the war on drugs
7.Open up the immigration spigets
8.Limit Congressional posts to a max of one 6 year term

Public Library said...

"The transformation of moral virtue into laws of coerced obligation by American presidents is evident in their use of tax dollars..."

Public Library said...

Jeff,

Timely post by Richard Branson regarding the "War on Drugs".

http://www.cnn.com/2012/12/06/opinion/branson-end-war-on-drugs/index.html?eref=mrss_igoogle_cnn

Here is one place our hard earned tax dollars go to complete waste.

Jeff said...

Public,

Well, finally, we can agree capital flees high taxes. Your other points are obvious.

Morality is already IN the picture. You can't have 2 wives, you can't steal from your neighbor, etc. so don't even go there. All law has a moral basis...it just depends on whose morals.

As for "telling women how to manage their persons" you can only be refering to abortion which has nothing to do with HER person and everything to do with the life that is being killed. Which, by the way, the constiution specifically requires our government to protect "life"!

If it's not a life, then do whatever you want with it, just like a tumor. But if it is a life, then the constitution demands it's protection.

You be the judge. Here is a picture of 12 week old fetus in the mother's womb. Person or tumor?

http://soldiersofchrist.org.uk/wp-content/uploads/2012/05/baby-in-a-womb.png

What about this little guys "civil liberties" and the 1 million plus others that are killed every year in this country alone? To group the war on drugs and bailouts with killing babies is disgusting.

Jeff said...

BTW, on your list I agree with 1, 3 and 4.

And I could care less what Branson has to say.

Public Library said...

How you can rationalize a colossal military complex that takes countless lives (friend and foe) while espousing the sins of abortions is sad. Forget about the tax implications of these strategies. It simply smacks of hypocrisy and irony.

BUt this is why Sean Hannity loves you.

Jeff said...

Do you really see no difference between killing babies and terrorists? National defense IS one of the enumerated powers in the constitution. I want the biggest, baddest, most well equipped military money can buy. There are many people out there who want you and me dead because we don't believe in their god.

Public Library said...

Problem is, the military kills innocent husbands, wives, children, babies, and fetuses. Our hands are already tainted by it my friend. If you beleive in God, there is no way around your contribution to it. Creating abstractions will not save you.

Back to economics. Based on the above thread, I believe you want higher taxes and more government spending. No way around that either. You just want the taxes allocated to your liking. This is American politics today.

Jeff said...

This is why I called you an idiot. Because you make no sense. An idiot see the plainly obvious and calls it something else.

The US military goes beyond every possible mean and expense to limit civilian casualties. You know that. Debate a ground war in a foreign land and I'd probably agree with you. But to say the US military kills innocent women and babies is simply moronic. And to compare any of it to sucking babies out of a uterus is asinine.

You also know I want much lower taxes and spending. By saying the opposite you once again show your idiocy.

You also know fully well that defense is some 18% of the budget and is one of the FEW things the Federal govt is empowered to do constitutionally.

You simply spew nonsense.

PS I can also guarentee that you are not part of the 1%. That was another statement made with zero grasp of reality.

Zagen Germaine said...

I'm starting to put my tax brackets together now and looking for ways to reduce earned income. Good thing I can contribute to an IRA until April.

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