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March 13, 2007
Who Shoulders the Tax Burden?
Don Boudreaux
The IRS just released some data. One of the most interesting reported facts is this:
For tax year 2004.... Taxpayers with an AGI [adjusted gross income] of at least $328,049, the top 1 percent of taxpayers, accounted for 19 percent of total AGI, representing an increase in income share of 2.2 percentage points from the previous year. These taxpayers accounted for 36.9 percent of the total income tax reported, an increase from 34.3 percent in 2003 [emphasis added].
(HT: Andy Roth at the Club for Growth)
Posted by Don Boudreaux in Data | Permalink
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Comments
And as more and more of them therefore flee, the tax consequences become evermore dire for the middle class (or what's left of it):
http://www.actionamerica.org/taxecon/tickfast.shtml
Posted by: David White | Mar 13, 2007 9:49:24 AM
But why assume that this group is actually paying the tax? It seems more likely that they simply collect it.
Posted by: Randy | Mar 13, 2007 10:05:53 AM
Two questions:
1) Where do these people get their income? If a man "earns" $500,000 from a business whose sole customer is the federal govt, then he is a tax consumer, not a tax payer.
2) Isn't this a sign of inflation? Tax rates are supposed to be pegged to inflation, which is attempted by using the CPI to adjust the boundries of the various rates. The CPI underreports inflation (due to statistical massaging) as compared to the now discontinued M3. Thus, peoples' incomes will creep into higher and higher brackets over time - leading to a reduction in payments from lower tax brackets and an increase in payments from higher tax brackets.
In the end, comparing tax burdens is precisely the same act as a bunch of shop-keepers getting together to discuss the protection money they pay to the local Mafia family, and getting into an argument as to whether the more affluent shop-keeper is paying his "fair" share.
Posted by: tarran | Mar 13, 2007 10:24:42 AM
I understand that the point of the post is that the top 1% pays a vastly outsized share of income tax. But the way the IRS phrased this is potentially misleading in at least one way. Despite the increase in their share of total taxes, the rate at which their earnings were taxed actually fell relative to the rest of the population.
That is, 36.9/19.0=1.94 for 2004, which is less than 34.3/16.8=2.04 for 2003, so share of income tax per share of income has dropped. [For the entire population, the ratio is 1.00, of course.]
Figures for the bottom 99% are 0.79 and 0.78 for 2003 and 2004, respectively. That might seem counterintuitive (relative tax rates dropped for both groups?) but it's not really paradoxical. A greater percentage of income was taxed at the higher relative rate.
Posted by: Morgan | Mar 13, 2007 10:42:50 AM
"The CPI underreports inflation (due to statistical massaging) as compared to the now discontinued M3. Thus, peoples' incomes will creep into higher and higher brackets over time..."
Tarran, you might find that some around here would argue that the CPI actually overstates inflation. Besides that, peoples incomes "creep" into higher brackets due to their wages increasing - which is not the same as inflation. Wages can increase faster than inflation if productivity increases. But yes a
Posted by: metis314 | Mar 13, 2007 11:07:28 AM
As one who earns substantially less than $329,048 annually I would like to say thank you to all those who do earn that much and who pay such a substantial part of their income to the government. Those of you in that income category are remarkably gracious in your acceptance of this injustice and I commend you for it. You are making my life, and my tax burden, much easier and I am pleased to express my gratitude.
I hope to join you sometime in the future and when I do assume that burden and responsibility I hope to receive from those still on their way up the thanks and gratitude that I express to you today.
Posted by: Flash Gordon | Mar 13, 2007 11:39:45 AM
What I get out of the data is evidence against the tired line "tax cuts for the rich" that we have heard over and over from politically-minded people. Whatever the current tax rates are, relative to other income brackets, the rich are paying more than the year before. I believe this trend has been true for several years.
Posted by: python | Mar 13, 2007 3:41:38 PM
Im confused as to why we need a thirty percent tax bracket. Let me get this straigh, left liberals are in favor of taking thirty plus percent of wealthy people's money. However, the government simply redistributes it right back to the wealthy in the form of private goods such as special interest contracts to certain businesses. So basically the real injustice in this country is the vast majority of profesionals who earn 250k plus a year but dont make enough to have the political connections in order to recapture the money from the government. So basicaly the current tax code favors the mega rich at the expense of the decently well off. That seems to be the main source of tax code exploitation if you ask me. I say the U.S government needs to implement some sort of flax tax starting at about 75k and up. Taxing the incomes of the middle class and the poor is worhtless because they really dont make enough to justify taking a portion of their income in the first place.
Posted by: John Pertz | Mar 13, 2007 8:19:23 PM
I think one of the biggest problems with the tax code is that there are many people who pay absolutely nothing in federal income tax. Thus, tax-cutting, budget-slashing politicians automatically have zero support from a significant segment of the population. Everyone, except those who are completely destitute, should have to kick in something towards the financing of our government.
Posted by: Gooner | Mar 13, 2007 11:07:07 PM
John Pertz,
I happen to believe that the poor and the middle class actually pay very high taxes. If government is taking roughly 25% of GDP, then roughly 25% of the price of everything is a tax.
Posted by: Randy | Mar 14, 2007 9:24:23 AM
Randy's comment illustrates, I think, the difficulty of keeping a discussion on taxes versus expenditures on an apples-to-apples basis. The 25% of GDP that represents gov't spending includes social security and medicare. I'm guessing that the income tax discussion excludes the 15% social security/medicare tax that everyone pays, but only up to level of middle-class wages.
Although I agree with the sense that everyone bears some of the pain of income taxes nominally shouldered by wealthy individuals, I think that what the government gets in income taxes should be compared to what the government spends net of what it collects in other taxes and fees. Yes, I know that SS/M taxes are spent on non SS/M projects, etc., which complicates the discussion greatly, but ignoring the arguably regressive SS/M taxes when talking about overall government spending is more distortive.
Posted by: M. Hodak | Mar 14, 2007 10:06:31 AM
Politicians have scrambled the fiscal eggs so that it is difficult to clarify what is actually going on.
Posted by: Sam Grove | Mar 14, 2007 11:38:37 AM
Here is an interesting story on carry trade.
Posted by: Novice | Mar 14, 2007 2:35:06 PM
I don't get it. The reason why the proportion of the federal income tax paid by the top 1% has increased is because the income tax is progressive. Since income rose to a share of 19%, then it follows that the share of taxes paid would increase as well. End of story. What's the big deal about that?
Posted by: Alex | Mar 16, 2007 12:21:13 AM
Tarran:
“Where do these people get their income? If a man "earns" $500,000 from a business whose sole customer is the federal govt, then he is a tax consumer, not a tax payer.”
But this isn’t a large scale problem in the U.S. Go to freetheworld.com’s annual report. They have such things calculated, and subsidized income, while extant, is not a widespread problem in that one could reasonably conclude that those in the top 1% are making their money in such a fashion.
And your reading of the CPI has already been addressed, but I’ll pitch my two cents in by concurring that many do think the CPI overstates inflation.
So ignoring productivity while citing wage creep is entirely too narrow a scope.
Randy is talking about overall taxation, and not just income tax, but he has a good point. I would like to see something stating the exact amount the govt spends percentage wise of the GDP though. His point does brush up against the only good argument against a broadly based flat tax in that the lower tiers of society will pay a larger share of their income for basic goods and services. Likewise, cutting income taxes while keeping other user taxes high, still hurts the lower tiers of income earners. (Using the word poor in America is almost dishonest.)
Posted by: Ray G | Mar 16, 2007 9:48:47 PM
Economics 101 as explained by a University of Georgia professor
Let's put tax cuts in terms everyone can understand.
Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:
· The first four men (the poorest) would pay nothing.
· The fifth would pay $1.
· The sixth would pay $3.
· The seventh would pay $7.
· The eighth would pay $12.
· The ninth would pay $18.
· The tenth man (the richest) would pay $59.
So, that's what they decided to do.
The ten men drank in the bar every day and seemed quite happy with the arrangement, until on day, the owner threw them a curve. "Since you are all such good customers," he said, "I'm going to reduce the cost of your daily beer by $20. "Drinks for the ten now cost just $80.
The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still drink for free. But what about the other six men - the paying customers? How could they divide the $20 windfall so that everyone would get his 'fair share?'
They realized that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being paid to drink his beer. So, the bar owner suggested that it would be fair to reduce each man's bill by roughly the same amount, and he proceeded to work out the amounts each should pay.
And so:
· The fifth man, like the first four, now paid nothing (100% savings).
· The sixth now paid $2 instead of $3 (33%savings).
· The seventh now pay $5 instead of $7 (28%savings).
· The eighth now paid $9 instead of $12 (25% savings).
· The ninth now paid $14 instead of $18 (22% savings).
· The tenth now paid $49 instead of $59 (16% savings).
Each of the six was better off than before. And the first four continued to drink for free. But once outside the restaurant, the men began to compare their savings.
"I only got a dollar out of the $20,"declared the sixth man. He pointed to the tenth man," but he got $10!"
"Yeah, that's right," exclaimed the fifth man. "I only saved a dollar, too. It's unfair that he got ten times more than I!"
"That's true!!" shouted the seventh man. "Why should he get $10 back when I got only two? The wealthy get all the breaks!"
"Wait a minute," yelled the first four men in unison. "We didn't get anything at all. The system exploits the poor!"
The nine men surrounded the tenth and beat him up.
The next night the tenth man didn't show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn't have enough money between all of them for even half of the bill!
And that, boys and girls, journalists and college professors, is how our tax system works.
The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.
David R. Kamerschen, Ph.D. Professor of Economics University of Georgia
For those who understand, no explanation is needed. For those who do not understand, no explanation is possible.
Posted by: Eric F | Mar 22, 2007 11:11:11 AM
How much did you pay as taxes - You can estimate how much you paid as taxes the previous year, and how much more or less will you be paying this year? You can do this by getting the details of the previous year's personal income tax returns and comparing it with your present income tax. All information in this regard are found in form 1040; line 62, which also give detailed information on your total tax liability for the year.
Posted by: deepak income tax | Jul 29, 2008 4:17:35 AM
Posted by: laptop battery | Oct 13, 2008 3:17:38 AM
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