TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Wednesday, October 26, 2011

Johnston: Beyond the 1 Percent

Reuters, Beyond the 1 Percent, by David Cay Johnston:

The U.S. tax debate tends to focus on the top 1% — their share of income taxes and their tax rates. ... Problem is, the top 1% is a very misleading measure of who pays federal income taxes. It mixes doctors and billionaires, masking the taxes paid by the middle class and the affluent.

Everyone seems to know that about half of Americans paid no income taxes in 2009 and that the top 1% paid about 37% of the income taxes. But how many people know that households making make less than $75,000 collectively paid more federal income tax than those making $1 million or more? ... The fact is that the government relies far more on the bottom 99 percent than the top 1 percent for federal income taxes.

A much better measure than the top 1% would be the top tenth of 1%. The government does not break out this group, but Emmanuel Saez, a University of California economist, and others have. The Saez analysis of tax return data shows that through 2008, the top one-in-a-thousand taxpayers had average income in recent years that ranged between $5.2 million and $7.5 million annually. ... Furthermore, inside the top 1%, those with the highest incomes pay the lowest tax rates.

The top 1 percent paid an average income tax rate of 24% ...  The top 400 taxpayers paid a much lower rate. On an average income of $270 million each, their effective federal income tax rate was 18.1%. In a country with more than 300 million people, 400 taxpayers is a minute number. Yet those 400 made 1.3 cents out of every dollar of the country’s total adjusted gross income, almost doubling their share of national income since 2002.

Continuing to focus on the top 1% will mislead us about who pays federal income taxes. That focus should be on the middle class and the upper middle class, and then on the top tenth of 1%. And on whether our tax system is helping create wealth and jobs or destroying them.

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"households making make less than $75,000 collectively paid more federal income tax than those making $1 million or more? "???

The author needs to highlight the word "collectively" IF he was trying to make a point about the rich paying too little. There's probably a 100,000:20 ratio of middle class to the top 1% so of course they carry a large burden of the taxes.

As Abe Lincoln said, "God must live the common folks since he made so many of them."

Posted by: Paul Perkins | Oct 26, 2011 3:01:25 PM

Yet another misleading and deceptive story by Johnston.

The title of the chart is "Middle class jobs generate majority of income taxes".

It is captioned "Middle class workers paid far more in taxes than the top one percent, with the 15 percent bracket alone generating more revenue than the top two brackets plus capital gains combined".

He even highlights rates at 28% and below as "Middle class tax brackets" and those above 28% as "Highest tax brackets".

Where is the deception?

His definition of "middle class" is pretty darned loose.

In his "Middle class tax bracket" of 28%, fully 82% of the tax is paid by those with AGI of over $200,000.

In his "Middle class tax bracket" of 25%, fully 80% of the tax is paid by those with AGI of over $100,000.

Even in the "Middle class tax bracket" of 15%, over 40% of the tax is paid by those with an AGI of over $100,000.

When you're counting those with AGIs of $500,000 to $1 million "middle class", something has gone astray.

Posted by: Steve | Oct 26, 2011 11:05:51 PM

I think Paul's and Steve's comments are fair. Yet, I would argue that this analysis should yield thoughts anathema to class warriors. For example, the obsession on raising taxes on just the uber rich has nothing to do with raising revenues the debt (spending) crisis, since apparently that is not where the money is. Also, any time you are trying to raise money from what is just a handful of people, would it not be better to have a tax code that keeps politics out of revenue raising, since what is an "incentive" when the good guys take it, is a dastardly-average-tax-rate-lowering-loophole when those with the biggest tax liabilities take it.

Posted by: MG | Oct 27, 2011 5:39:18 AM

Remember what happened the last time the tub-thumping rabble-rousers got themselves and their middle-class constituents' panties in a wad over the fact that a few millionaires were escaping tax liability?

Yeah, that's right: the Alternative Minimum Tax

Long after the abolition (TEFRA) of the tax shelters that the rich were able to use to legally eliminate their tax liability, the AMT remained.

And like the rough beast it is, it slouches every April 15 towards suburbia to be born again.

And again.

And again.

Posted by: John | Oct 27, 2011 9:19:21 AM

@ Steve (who lacks the courage to identify himself fully), the column is much more nuanced than by necessity a graphic hed must be. There is nothing misleading to anyone who reads the column.

The 15% tax rate generates more taxes than all capital gains plus the 33/35% rates; incomes under $75k AGI generate more tax than the top one percent.

From questions I get at public lectures and on radio it is clear that hardly anyone knows that, the issue with which I launch this column.

As my column carefully pointed out, I was trying to get people to think about the reasons the top one percent is a lousy measure.

Posted by: David Cay Johnston | Oct 27, 2011 1:27:29 PM

I think both of you miss the point. It should be "dividends and capital gains" result in a low effective tax rate for the top 1%. The bottom 99% cannot take advantage of this "exception" in the tax code because when their investment in america is distributed to them (usually through IRAs, pension plans and 401(k)s) it is taxed at ordinary income. So who really benefits from this ain't the ordinary salaried stiff. I wonder why this is never pointed out on the FOX.

Posted by: Sid | Oct 27, 2011 3:11:05 PM