51% of Households Pay No Income Tax; Share of Taxes Paid by Rich Growing Faster Than Income

The Senate Finance Committee yesterday held a hearing on Is the Distribution of Tax Burdens and Tax Benefits Equitable?. Here are links to the member statements and witness testimony:

• Max Baucus (Chair), Statement, Press Release
• Orrin G. Hatch (Ranking Member), Statement, Press Release
• Aviva Aron-Dine (Ph.D. Candidate, MIT), Testimony
• Scott Hodge (President, Tax Foundation), Testimony
• Alan Reynolds (Senior Fellow, Cato Institute), The Increasing Progressivity of U.S. Taxes And the Shrinking Tax Base
• Daniel Shaviro (Wayne Perry Professor of Taxation, NYU), Testimony

In connection with the hearing, Ranking Member Hatch released this letter from the Joint Committee on Taxation reporting 51% of U.S. households did not pay any federal income tax in 2009.

Wall Street Journal, High-Earning Households Pay Growing Share of Taxes:

As President Barack Obama pushes to raise income taxes on high earners, opponents are seizing on data that indicates these U.S. households already pay a large and growing share of taxes, even compared with high-tax European countries. And a new congressional study concludes that the percentage of U.S. households owing no federal income tax climbed to 51% for 2009. ...

 

Democrats note that the incomes of higher earners have been growing far more rapidly, so it's only natural that they would pay a higher share of tax. As for those Americans who pay no federal income tax, most of them still pay Social Security and Medicare payroll taxes that can take a significant share of their income, Democrats said. ...

Upper-income taxpayers have paid a growing share of the federal tax burden over the last 25 years. A 2008 study by the Organization for Economic Cooperation and Development, for example, found that the highest-earning 10% of the U.S. population paid the largest share among 24 countries examined, even after adjusting for their relatively higher incomes. "Taxation is most progressively distributed in the United States," the OECD study concluded.

Meanwhile, the percentage of U.S. households paying no federal income tax has been climbing, and reached 51% for 2009, according to a new analysis by the Joint Committee on Taxation. ...

[A]nother reason for the U.S. system's apparent progressivity is its lack of a value-added tax, according to some experts. VATs—a form of consumption tax common in Europe and Asia—typically place more of the burden on lower-income earners, because they spend more of their income.

Tax systems in emerging economies tend to be less progressive than either the U.S. or other developed countries, according to experts. They extract less in taxes as a percentage of GDP, and the role played by individual income taxes is "remarkably small," said Eric Zolt, a tax law professor at UCLA. Singapore's top individual income-tax rate, for example, is 20%. The highest U.S. marginal rate is 35%: Mr. Obama has proposed raising it to 39.6%.

To be sure, some experts say the share of tax borne by the wealthy is not the best measure of a system's progressivity. They say it's more important to look at the tax rates being paid by higher earners. In the U.S., the average tax rate for higher earners has fluctuated, but generally has declined for the top 10% from 29.6% in 1979, to 26.7% in 2007, according to the CBO, even as incomes for that group were rising. Average rates for the very wealthy are often lower than that because of low tax rates on investment income.

Some experts see an opportunity. "There's a potentially very large fiscal reserve" that the government could tap by raising taxes on higher earners, says Emmanuel Saez, an economist at the University of California, Berkeley.

Other press and blogosphere coverage:

• Accounting Today, Over Half of Households Paid No Income Taxes
• The Hill, Senate Republicans: The Wealthy Pay Enough Taxes