Paul L. Caron

Friday, August 26, 2011

The Rich Already Pay More Than Their Fair Share of Taxes

Tax Policy Blog, Maybe the Rich Can Afford to Pay More Tax, But Should They?:

As the following graph shows, in 2007 those households in the highest income quintile (the top 20%) had an effective tax rate of a little less than 15%.  This has changed very little since 1986 or anytime in the 1980s. 

Contrast that with the lower income quintiles, which all pay dramatically less tax now than they did in the 1980s.  The trend is most pronounced among those in lowest income quintile, which had an effective rate of about zero up until that magical year 1986, and thereafter a more and more negative rate.  In 2007, those in the lowest income quintile not only paid no tax, they got paid at the rate of 6.8% of their income!  Starting in 2002, the effective rate for the second lowest income quintile goes negative as well.  This means that the bottom 40% of households are now getting paid through the income tax code.

This is why the OECD finds that the U.S. has the most progressive income tax system in the industrialized world.  That means the rich in the U.S. pay a greater share of income taxes than in any other OECD country.  The top 10% pay about 70% of income taxes.  Mr. Bartlett's argument that the rich should pay even more doesn't hold water.

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Add in the payroll taxes if you want. However, the bottom quintiles receive the Earned Income Tax Credit, which is refundable beyond income tax paid. It is a refund of those payroll taxes. So if you add them in, you will have to take them back out.

Posted by: Cheyanna Jaffke | Aug 30, 2011 4:38:12 PM

Refreshing. An asset tax proposal. It at least has the advantage of being overtly redistributionist.

Posted by: Slartibartfast | Aug 29, 2011 5:24:20 AM

The top 20% own 85% of the assets in the US- they should pay 85% of the tax bill.

Posted by: Nick | Aug 28, 2011 9:42:04 AM

Add in the Payroll taxes and self employment taxes and see where that gets you.

Posted by: James Bowen | Aug 27, 2011 4:32:14 PM

Of course, the lower four quintiles all pay payroll taxes on all of their income, while the highest quintiles does not. So, to get to reality, add 6% to the lower four quintiles.

Then there is sales tax. The lower four quintiles pay sales tax on a much higher percentage of their income than does the highest quintile, because the lower four quintiles all spend essentially 100% of what they earn. Add 1% to each of the four lowest quintiles.

Thus, the focus on income tax alone distorts the true picture of the allocation of the tax burden.

Posted by: Jeffrey Killeen | Aug 27, 2011 10:15:07 AM

Lt. Dangle, I agree. The whole discussion is next to worthless unless we establish reasonable contemporary working definitions for "rich," "wealthy," "middle class," etc.

This graph shows U.S. earners divided in quintiles. That puts the numerous $70k earners in with the few $100m earners. Irrespective of what tax rates should be, this graph fails to show the tax burdens across any meaningful subsets of earners.

Posted by: spad | Aug 26, 2011 2:02:19 PM

I wonder how many countries have a separate tax for safety net programs such as our Social Security and Medicare. If we were to factor those U.S. taxes into the above graph I think we might well see a dramatic shift due to the very regressive nature of our payroll taxes.

Posted by: Hal Kellerman | Aug 26, 2011 12:30:14 PM

We really are going to argue about this until the end of time, aren't we? Sigh.

I would really appreciate it if we could first define the term "rich." Every time I read one of these articles, "rich" means something different. From now on, the term "rich," in the context of whether one should be taxed more as being rich, should mean that person or couple has income over $1M a year.

Posted by: Lt. Dangle | Aug 26, 2011 10:35:48 AM

Really interesting counter, thanks for the good post and graph!

Posted by: Kevin Porter | Aug 26, 2011 10:24:37 AM