Imagine a country with 100 people and a total income of $100, with total federal income taxes of $11. Imagine further that one person made $100 and paid all $11 of the taxes, and the other 99 people made and paid nothing. In this case the top 1% of income earners paid 100% of all federal income taxes! If you read this in a column, would you be shocked and dismayed?
Imagine something a bit more realistic. Imagine that one person made $21, and paid $2.20 in taxes. The rest of the 99 made $79, and paid $8.80 in taxes. The person who made the most money, $21, paid a 11% of his income in taxes, or 22% of all income taxes paid; the rest of the people made the rest of the money, and paid about 11% of their incomes in taxes, or 78% of all taxes paid. This would be a flat tax. If you read in a column that the top 1% of income earners paid 21% of all federal taxes, would you be shocked and dismayed?
For a more realistic portrayal, image that the one highest earner earned $21 and paid $4 in taxes; the rest of the people made $79 and paid $7. The wealthiest 1% earned 21% of the income and paid 36% of all taxes. The rest of the people made 79% of the income and paid 64% of the taxes. The wealthy are paying taxes at twice the rate than if we had a flat tax; the rest are paying at less than the flat-tax rate. This is more or less the situation in the United States in 2009. If you read in a column that the top 1% paid 36% of all taxes, would you be shocked and dismayed?
I have read many columns, some listed below1, which present half the information needed to come to a reasonable opinion, and use that half-information to stir up outrage. They will state that it is the wealthy who pay such an inordinate amount of our federal income taxes, without stating that it is the wealthy who make an inordinate amount of the nation’s income.
Since 1980, the percentage of the national income earned by the top 1% has risen from around 10% to around 20%. At the same time, the percentage of federal income taxes paid by the top 1% has risen from about 18% to about 37%. As the top 1% of earners have doubled the percentage of the national income which they earn, they have doubled the percentage of the federal income taxes they pay2. The following graph shows this relationship. The ratio of the percentage of all federal income taxes paid to percentage of all national income earned since 1980 has been as low as 1.57, twice during the Reagan/Bush I years, and as high as 2.13 in one of the Bush II years; as of 2008, it was 1.81 (38% of the taxes divided by 21% of the income).
Since the scale of the graph flattens the “ratio” line, I have reproduced it in a separate graph below. What it shows is that the share of federal income taxes paid by the wealthiest 1% of income earners in the United States is about double the share of the national income that they make. As stated above, the wealthiest 1% of Americans make 21% of the national income and pay 38% of the national federal income taxes.
Is this too much to pay? or too little? Should we have a true flat-tax? or preserve some progressivity? How much progressivity? These are questions about which we can have intelligent discussions and differences.
In followup articles, I would like to explore the relationship between income earned and taxes paid, not just federal income taxes, but total federal taxes, or even total taxes, including state and local. I would also like to compare total wealth to taxation. This should give us a better idea of our general tax burden.
1 Some examples of articles telling half the story:
Tax Burden of Top 1% Now Exceeds That of Bottom 95%
2 The data come from Top Incomes in the Long Run of History and go back to 1913. Because I don’t have tax shares back that far, those early years didn’t make it into the graph, but wouldn’t it be great if I could find that information. There’s a nifty graph of this information at Share of the Nation’s Income Earned by the Top 1 Percent. Also, I found the information on the share of taxes paid by the wealthiest 1% at Summary of Latest Federal Individual Income Tax Data; similar information can be found at Historical Effective Federal Tax Rates: 1979 to 2002.