Taxing the top 1%
Kurt Brouwer July 30th, 2009
I knew the percentage was high, but I didn’t realize that only 1.4 million taxpayers (the top 1% income earners) pay more income taxes than 134 million other Americans do. That’s startling and it is not healthy in my opinion. I understand the argument that the top 1% earn a lot of income and so on, but it cannot be healthy that so much of our government’s revenues are dependent on such a small group.
Source: Tax Foundation
As the chart shows, the top 1% are paying an increasing percentage of income taxes:
Tax Burden of Top 1% Now Exceeds That of Bottom 95% (Tax Foundation, July 28, 2009, Scott Hodge)
Newly released data from the IRS clearly debunks the conventional Beltway rhetoric that the “rich” are not paying their fair share of taxes and disproportionately benefited from the Bush tax cuts.
…Remarkably, the share of the tax burden borne by the top 1 percent now exceeds the share paid by the bottom 95 percent of taxpayers combined. In 2007, the bottom 95 percent paid 39.4 percent of the income tax burden. This is down from the 58 percent of the total income tax burden they paid twenty years ago.
…Some in Washington say the tax system is still not progressive enough. However, the recent IRS data bolsters the findings of an OECD study released last year showing that the U.S.—not France or Sweden—has the most progressive income tax system among OECD nations. We rely more heavily on the top 10 percent of taxpayers than does any nation and our poor people have the lowest tax burden of those in any nation…
Who would have thought that our tax structure would focus more heavily on top earners than France or Sweden? The next time you hear a politician suggesting we increase taxes on the ‘rich’ so that they pay their ‘fair’ share, you may want to ask yourself, how high can that share go? Should we just have the top 1% pay the freight for everyone? If so, problems are likely to ensue.
As an example, of how this works in one local government, New York City gets a huge chunk of income tax revenues from only 40,000 taxpayers. Mayor Bloomberg points out the issues with this situation:
…”One percent of the households that file in this city pay something like 50% of the taxes,” explained the Mayor. “In the city, that’s something like 40,000 people. If a handful left, any raise would make it revenue neutral. The question is what’s fair. If 1% are paying 50% of the taxes, you want to make it even more?”
That’s the problem. If a major portion of the revenue for a city or a state or even the country as a whole is tied to a very small taxpayer base, then tax revenues will be more volatile because top earners typically have incomes that are more volatile than normal wage earners. And, if they get tired of higher taxes, the rich can move more easily than most people.
Via: Carpe Diem
See also:
Taxes Are For the Little People
Is a tax revolt brewing in California?
- Economy , Geopolitics , Personal Finance , deficit , income taxes
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Not even the Scandis, who really know how to tax, have created such a skewed system.
Of course, the truth is that as longterm high tax states, they passed this “soak the rich” stage years ago and expanded the system bit by bit so that nowadays everyone gets nailed. Heavily. And by nowadays I mean even back in the 70s: 75% tax rate on every dollar earned over $30,000 back when I lived there in ’84.
So the good news is we have a long way to go before we get taxed like they do in Scandi-land. The bad news, of course, is that we’re moving that direction.
Kurt,
The important thing to consider is the source: the Tax Foundation. The Tax Foundation is a propaganda mill and not really a research organization. (I have even worse things to say about Mark Perry but they’re probably not postable. You at least are semi-rational.) When I first saw this chart it almost made my head spin.
First, I don’t trust the Tax Foundation’s figures but for the sake of consistency let’s look at what those numbers also say. The top 1% saw their share of AGI rose from 12.3% in 1987 to 22.8% in 2007. The bottom 95% saw their share of AGI fall from 74.3% to 62.6% over the same period. Thus the ratio of their income shares thus rose from 0.166 to 0.364. The average tax rate for the top 1% fell from 26.4% to 22.5% over that period. The bottom 95% also saw their average tax rate fall from 10.0% to 8.0% over that period. Thus the ratio of their average tax rates rose from 2.64 to 2.81. So individual income taxes did get slightly more progressive but this is more a story about how the top 1%’s share of income increased nearly 120% relative to the bottom 95% between 1987 and 2007.
Second, the OECD study that the Tax Foundation is referring to is here (you must be a subscriber to read most of the content):
http://www.oecd.org/document/53/0,3343,en_2649_33933_41460917_1_1_1_1,00.html
Note that the study’s primary focus is inequality and poverty and not taxes nor even their degree of progressivity. The study is 310 pages long and the table that the Tax Foundation is cherry picking from is on page 112. It compares market income and tax shares for the top decile. (Market income includes wages, interest and dividends but excludes capital gains and other sources of income which accrue to the very wealthiest.) In the computation of taxes they include income and payroll but exclude estate, wealth and gift taxes which are quite heavy in countries like France. This was a strange table to construct, and for the life of me I don’t know why the OECD did it, because it doesn’t provide very much useful information on income inequality. The Tax Foundation naturally put it to good political demagogic use.
A really good paper on international and historical progressivity of taxes by, perhaps the undisputed experts, Piketty and Saez is here:
http://elsa.berkeley.edu/~saez/piketty-saezJEPdraft1.pdf
This study looked at the United States, United Kingdom and France from 1960 to 2004. It considers all sources of income and considers estate, gift, wealth taxes as well corporate taxes. Figure Six at the end of the study tells much of the story. Taxes in the UK and the US have become far less progressive between 1960 and 2004 whereas in France they have become slightly more progressive. In 1960 taxes in the US were more progressive than in France but less than in the UK. By 2004 taxes in the US had become the least progressive and taxes in France had become the most (particularily at the very highest incomes). (If I had similar data for Sweden handy I’m sure it would tell a similar story.)
Table Two shows data for the years 1970 and 2004 (US), 2005 (France), 2000 (UK). Note that the average tax rate in the US for the bottom 90% fell from 20.2% to 18.5% but for the top 0.01% it fell from 74.6% to 34.7%. The average tax rate for the top 0.1% was 61.5% in France (2005) and 47.8% in the UK (2000). The share of taxes paid by the top 1% rose from 22.0% to 28.2% and the share of of taxes paid by the bottom 95% fell from 67.8% to 53.8%. Over the same period the top 1% in the US saw their share of income increase from 9.0% to 19.7%. (The top 0.01%’s share amazingly increased from 0.76% to 3.48%, or nearly five-fold!) The bottom 95% in the US saw their share of income fall from 78.4% to 65.0%. Thus the ratio of income shares rose from 0.115 to 0.303. The average tax rate for the top 1% fell from 46.7% to 33.5% over that period. The bottom 95% also saw their average tax rate fall from 20.4% to 19.6% over that period. Thus the ratio of their average tax rates actually decreased from 2.29 to 1.71. Thus when you extend it further back to 1970, and include all forms of federal taxes, it’s clearly a story about rising income inequality and not about increased progressivity in taxes (total federal taxes have clearly become less progressive, not more).
So what’s startling in my opinion is not how much those at the top are paying in taxes, but how much of the nation’s income they are accruing, and how much that their share has increased over the past thirty-odd years. It can’t be healthy socially or politically (or perhaps even economically) in my opinion. And it is indeed an unhealthy situation that so much of our government’s revenues are dependent on such a small but increasingly powerful group.
P.S. A good source of information about the current total federal tax burden is the Tax Policy Center:
http://www.taxpolicycenter.org/numbers/displayatab.cfm?DocID=1818
TPC makes allowances for refundible tax credits like EITC (note the negative individual income tax burden for the bottom 40%). In 2008 the top 1% had 19.3% of the income, paid 27.7% of the taxes and had an average tax rate of 30.0%. The bottom 95% had 67.3% of the income paid 55.2% of the taxes and had an average tax rate of 17.1%. So this pretty much agrees with Piketty and Saez’s data.
P.P.S. This statement by the Tax Foundation was particularily ridiculous to me:
“Newly released data from the IRS clearly debunks the conventional Beltway rhetoric that the “rich” are not paying their fair share of taxes and disproportionately benefited from the Bush tax cuts.”
Their own data shows that the top 1%’s aggregate income increased from $986 billion to $2,008 billion between 2002 and 2007 and yet their share of the personal income tax burden barely budged over the same period. (Get real!)
Mark — you must be having a rough day. Calling the the Tax Foundation a propaganda mill is pretty far out, even for you. I have found them to be very reputable. From their web site, here is their history and their point-of-view:
Our Mission
The mission of the Tax Foundation is to educate taxpayers about sound tax policy and the size of the tax burden borne by Americans at all levels of government. From its founding in 1937, the Tax Foundation has been grounded in the belief that the dissemination of basic information about government finance is the foundation of sound policy in a free society.
What Do We Stand For?
As a nonpartisan educational organization, the Tax Foundation has earned a reputation for independence and credibility. However, it is not devoid of perspective. All Tax Foundation research is guided by the following principles of sound tax policy, which should serve as touchstones for good tax policy everywhere:
Simplicity: Administrative costs are a loss to society, and complicated taxation undermines voluntary compliance by creating incentives to shelter and disguise income.
Transparency: Tax legislation should be based on sound legislative procedures and careful analysis. A good tax system requires informed taxpayers who understand how tax assessment, collection, and compliance works. There should be open hearings and revenue estimates should be fully explained and replicable.
Neutrality: The fewer economic decisions that are made for tax reasons, the better. The primary purpose of taxes is to raise needed revenue, not to micromanage the economy. The tax system should not favor certain industries, activities, or products.
Stability: When tax laws are in constant flux, long-range financial planning is difficult. Lawmakers should avoid enacting temporary tax laws, including tax holidays and amnesties.
No Retroactivity: As a corollary to the principle of stability, taxpayers should rely with confidence on the law as it exists when contracts are signed and transactions made.
Broad Bases and Low Rate: As a corollary to the principle of neutrality, lawmakers should avoid enacting targeted deductions, credits and exclusions. If such tax preferences are few, substantial revenue can be raised with low tax rates. Broad-based taxes can also produce relatively stable tax revenues from year to year.
Kurt,
I know very well what the Tax Foundation *says* their mission is but I’m hardly alone in thinking their *real* mission is something else entirely:
http://www.cbpp.org/cms/?fa=view&id=158
http://www.centeronbudget.org/cms/index.cfm?fa=view&id=100
http://www.cbpp.org/cms/?fa=view&id=209
http://www.cbpp.org/cms/index.cfm?fa=archivePage&id=taxday98-2.htm
http://www.cbpp.org/cms/?fa=view&id=515
And so on and so forth.
And I’ve always felt this way. I didn’t acquire this opinion from CBPP. I just find the Tax Foundation’s graphics and stories sensationalistic, deceptive and devoid of context.
P.S. Actually I’m having a good day. The only thing even remotely offensive I’ve said in the last 24 hours was to tell a glibertarian medical student, who described how he harrassed Dr. David Himmelstein (author of that widely touted paper on medical bankruptcy) at a conference, that if I were Himmelstein the thought probably would have occured to me of wringing his neck for wasting my time. (I didn’t say that I’d actually do it.)
Kurt,
I know very well what the Tax Foundation *says* their mission is but I’m hardly alone in thinking their *real* mission is something else entirely:
http://www.centeronbudget.org/cms/index.cfm?fa=view&id=100
http://www.cbpp.org/cms/?fa=view&id=209
And so on and so forth.
And I’ve always felt this way. I didn’t acquire this opinion from CBPP. I just find the Tax Foundation’s graphics and stories sensationalistic, deceptive and devoid of context.
P.S. Actually I’m having a good day. The only thing even remotely offensive I’ve said in the last 24 hours was to tell a glibertarian medical student, who described how he harrassed Dr. David Himmelstein (author of that widely touted paper on medical bankruptcy) at a conference, that if I were Himmelstein the thought probably would have occured to me of wringing his neck for wasting my time. (I didn’t say that I’d actually do it.)
You need to focus on effective tax rates, not on numbers of people, in constructing your graph.
In a nation with 100 people, 99 of whom pay no tax and one of whom does, 100% of the tax is borne by 1% of the population, regardless of whether the tax bill is one cent or a trillion dollars. That’s what your graph would show – 1% paying 100% of tax.
Yet, in that example, 99% of the people have no taxable income and the tax rate paid by the one taxpayer is unknown, so it’s hardly a meaningful statistic, and certainly a less than fair presentation of data.
Mark–in terms of the so-called medical bankruptcy issue, one thing the good doctor’s paper left out is that bankruptcies have declining quite rapidly. That is, the number of bankruptcies is falling.
Thomas–I’m sorry, but I really don’t understand your point. Our system is such that a small number of taxpayers carry most of the income tax burden. Do you disagree? Even Mark would not dispute that point. I personally have long felt that our citizens should bear some of the financial burden of running the country. The system we have is such that high income folks pay the freight and I think that gives them too much power and it lets ordinary people off the hook for fiscal responsibility. If they know they don’t pay anything, then they will be more easily swayed by politicians who want to raise taxes. I also have a major beef with our politicians because, as we have seen, many of them play fast and loose when it comes to tax time (Charley Rangel, Tom Daschle, Chris Dodd…).
Mark–Incidentally, I checked the Tax Policy Center report you cited. It actually agrees quite closely with the Tax Foundation chart. According to the TPC, the top 1% of income taxpayers forked over 37% of the income tax paid in 2008. The Tax Foundation chart for 2007 was about 40% or a bit more.
You used a different statistic because you included more than just income taxes. Clever.
Kurt,
The main reason I don’t trust the Tax Foundation’s data is not that it doesn’t “smell” right, it’s how they present it and advertise it. The Tax Policy Center’s data is more comprehensive and so they make it easier to test different claims about taxes on a wider variety of aspects (and they don’t have those sensationalistic stories and graphs). (And, with respect to your use of the word “clever,” I don’t think anything I stated was improperly qualified.)
P.S. On a different note, medical bankruptcy it is the major cause of bankruptcy (62%) in the United States according to Himmelstein. Using similar methodology other studies on other countries have suggested that universal health care would dramatically reduce that rate (to 7-14%).
As for your claim that bankruptcies in general have been declining, thanks to the “great recession” I no longer think that is true.
Mark–I have as many concerns about Dr. Himmelstein’s ‘study’ as you do about the Tax Foundation. I read the study and interviews with the good doctor and I find him to be a self-confessed advocate for single payer (universal) health insurance. His study was based on a small and, I suspect, carefully selected sample. This piece from Real Clear Markets is one of several that cast serious doubt on the study’s methodology.
Kurt,
I read the same RCM piece. Ms. Furchgott-Roth’s article spends several paragraphs criticizing his methods and then closes by suggesting that a single-payer system might raise medical bankruptcy rates. She “forgets’ to mention that essentially the same methods were employed in a study on Canada (the results of which were discussed in Himmelstein’s paper) and found far lower rates of medical bankruptcies. It was a blatant effort at fear mongering.
P.S. I mentioned this on the comment thread. If you look towards the end of the comments thread you’ll find my nasty comment to the medical student. That was pointless but I couldn’t resist.
Isn’t the income tax an invasion of privacy? As for universal health care why would you consider Canada as a model, we have outlawed all private health care that is covered by the government. That means months of waiting even if we want to pay direct we can’t. It is the most immoral system.
gordzilla,
This is completely off topic of course but I think the main implication of the medical bankruptcy research on Canada as compared to the US is that universal health care reduces the medical bankruptcy rate.
I personally don’t think Canada’s health care system is superlative but one is always free to buy supplementary private health insurance coverage there. When one looks at other universal health care systems there is an amazing variety. The UK of course has a more or less entirely socialized system but you are always free to purchase supplementary health insurance. France has national health insurance with optional supplementary health insurance (and short wait times) and some of the health care delivery system is socialized (and cancer survival rates are among the very best). (And some of the health care delivery system is in the US is also socialized. For example the VHA is entirely socialized.) The Netherlands has the same as France but you have the option of opting out of the national health insurance system (as one third of the population does). Switzerland has a completely private health insurance system, but it is nevertheless essentially universal, and some of the health care delivery system is socialized. Cuba is of course entirely socialized (and no private health insurance or health care is permitted). (And, interestingly, Cuba has the highest age adjusted cancer survival rates in the the world, and that is a measure of quality widely advocated by Republican leaning economists like Gary Becker.) I personally have no firm conviction on which is the best model but I am absolutely convinced that, thanks to issues of moral hazard and adverse selection, laissez-faire economics will not work with the health insurance market and, furthermore, thanks to positive externalities, that universal health care is a socially and economically desirable goal. I do not, on the other hand, believe that government owned and operated health care delivery is optimal.
P.S. And, interestingly, although the US has a rather poor record on life expectancy at birth, it has one of the highest life expectancies at age 65, when our single payer Medicare system (with short wait times) kicks in. (And to be clear, single payer means socialized health insurance, but not health care delivery.)
Mark–I had to laugh when I read your comments about Cuba’s system. Not only is no private healthcare allowed, there is no freedom of speech, freedom of assembly, no free press and so on. It is a dictatorship so it controls all information in and out. Therefore, it controls all statistical input and output. I find it shockingly naive that people still give credence to Cuban statistics as it is well known that dictatorships lie about almost everything.
Also, life expectancy at birth statistics are not calculated the same around the world. In the U.S. we count all births, even premature ones. Other countries do not. I know you know this, so suggesting we don’t have a good record on this is very unfair. And, our cancer survival rates are significantly higher than most other countries over many types of cancers, not to mention the fact that most health innovations and pharmaceuticals come from the U.S. Finally, if moral hazard and so on are impossible in a free market for health insurance, who don’t the same factors make life insurance, car insurance, liability insurance, homeowners insurances and so on, unfeasible?
Kurt,
All good points. (I’m a little leery of the Cuban data myself but Becker’s the one pushing the study.) But I didn’t say a private market for health insurance isn’t impossible, only that laissez faire economics wouldn’t work there. And with health insurance, the stakes are a little higher than with other forms of insurance, wouldn’t you agree?
No I wouldn’t agree that the stakes are higher with health insurance than with life insurance or homeowners insurance, car insurance or liability insurance.
If the main breadwinner dies and has no life insurance, that is a huge hit for that family. If someone’s car gets wrecked and they have no insurance, then the cost is borne by that family.
Whereas, if a family does not have health insurance, they still have healthcare at the emergency room, community health clinic and so on.
So, no I do not agree with that at all.
Kurt,
Well, then let me explain the difference to you. The other forms of insurance pay out after a loss. Health insurance promises to pay out before there is a loss (of life or limb). Emergency rooms and community health clinics are not a substitute for health insurance. By the time you end up there it is usually too late.
I don’t get it. How does health insurance prevent the loss of life or limb? For the most part, Americans want health insurance to protect themselves against a catastrophic loss such as major expenses for a bad accident or cancer. That is precisely the same purpose that other types of insurance fulfill. Life insurance pays off after the loss of a breadwinner.
The big difference is that the lack of health insurance does not mean that someone gets no healthcare. However, if your life insurance policy did not pay off, that would be it. There is no alternative to getting that check.
Kurt –
So what percent of the *income* do the top 1% of earners make? That is the crucial question in this discussion, and you only address it long enough to disimiss.
If it’s also at 40%, then what’s the problem? What if it’s far below or above 40%?
Dave: In 2007, the top 1% earned 22.83% of the income and they paid 40.42% of income taxes. That was referenced in the comments above with a slightly different number for 2008. The top 1% pay roughly twice as much in income taxes as the percentage of income they earn. These tables spell it out.
Incidentally, my primary concern is not so much the amount or the rate, but rather that so much of our tax revenues are dependent on a very small base of people. It’s unwise and bad for our system of governance in my opinion. Also, it makes tax revenues much more volatile.
Fair enough, thanks.
I do have to add that I prefer looking at the total federal tax burden and not just personal income taxes — it gives a more accurate look at the burden of each income group.
Viewed this way, the federal tax burden of the top 1% drops to 28.3% (in table 1)
http://www.cbo.gov/ftpdocs/100xx/doc10068/effective_tax_rates_2006.pdf
Dave–I’m not surprised that you would prefer to look at total taxes. Mark does too. The problem is that income taxes pay the cost of government. Payroll taxes go to Social Security and Medicare and those who pay into those two programs get significant benefits that is, retirement income and medical care. Payroll taxes bring a benefit to those who pay them, but they do not pay for the cost of running the Federal or state governments.
Income taxes — both individual and corporate — are the main source of government revenues.
So I will reiterate my point, which is that the top 1% are paying an enormous percentage of the cost of running our government. Many citizens pay little or nothing and I do not believe that is healthy.