Tax Cuts for the Wealthy: Appearances v. Reality

A few weeks ago, the Internal Revenue Service released data on tax year 2003. They show that the top 1 percent of taxpayers, ranked by adjusted gross income, paid 34.3 percent of all federal income taxes that year. The top 5 percent paid 54.4 percent, the top 10 percent paid 65.8 percent, and the top quarter of taxpayers paid 83.9 percent.

Not only are these data interesting on their own, but looking at them over time shows that the share of total income taxes paid by the wealthy has risen even as statutory tax rates have fallen sharply. A growing body of international data shows the same trend.

On the first point, we see that in 1980, when the top statutory income tax rate went up to 70 percent, the share of income taxes paid by the top 1 percent of taxpayers was just 19.3 percent. After Ronald Reagan's tax cut of 1981, which reduced the top rate to 50 percent -- a massive give-away to the wealthy according to those on the left -- the percentage of income taxes paid by the top 1 percent rose steadily.

By 1986, the top 1 percent's share of all federal income taxes rose to 25.7 percent. That year, the top statutory tax rate was further cut to 28 percent -- another huge-give-away, we were told. Yet the share of income taxes paid by the top 1 percent continued to rise. By 1992, it was up to 27.5 percent.

Of course, it would be a mistake to conclude that tax increases will not raise the wealthy's tax share or that tax rate cuts always will. Nevertheless, it is remarkable that the percentage of federal income taxes paid by the top 1 percent of taxpayers almost doubled during a time when the top income tax rate fell by half.

A common liberal retort to these data is that they exclude payroll taxes, which are assumed to be largely paid by the poor. However, it turns out that when one includes payroll taxes in the calculations, it has far less impact on the distribution of the tax burden than most people would assume, because the wealthy also pay a lot of those taxes, too.

In a 2004 paper presented to the American Statistical Association, IRS economists Michael Strudler and Tom Petska calculated percentiles data that included both income taxes and Social Security taxes. In 1999, the top 1 percent paid 23.3 percent of combined payroll and income taxes, the top 10 percent paid 52.2 percent, and the top 20 percent paid 68.2 percent.

In recent years, a number of foreign countries have also started publishing tax shares data. They show the same trend of higher and higher burdens on the wealthy even when tax rates are cut sharply.

For example, according to Her Majesty's Revenue and Customs, the share of total income taxes paid by the top 1 percent of taxpayers was 11 percent in the United Kingdom in 1979, when the top income tax rate was 83 percent. Prime Minister Margaret Thatcher cut that rate to 60 percent, and by 1987 the share of income taxes paid by the top 1 percent had risen to 14 percent. The top rate was cut again to 40 percent, where it still stands, and the share of income taxes paid by the top 1 percent continued rising to a current level of 21 percent.

Statistics Canada recently released a study looking at tax shares in that country. It shows that the share of federal income taxes paid by the top 10 percent of taxpayers reached 52.6 percent in 2002 -- almost exactly the same as is paid by the top 10 percent in the United Kingdom. However, the top income tax rate in Canada is just 29 percent. (Provincial tax rates in Canada are very substantially higher than among U.S. states.)

Finally, we now have data for Australia from the Australian Taxation Office. In 2003, they show the top 5 percent of taxpayers paying 30.2 percent of all income taxes, the top 10 percent paying 41.8 percent, and the top 25 percent paying 63.8 percent. But the top income tax rate in Australia is 47 percent. Thus we see that the country with the highest top rate also brings in the least amount of total income tax revenue from its richest citizens in percentage terms.

At some point, those on the left must decide what really matters to them -- the appearance of soaking the rich by imposing high statutory tax rates that may cause actual tax payments by the wealthy to fall, or lower rates that may bring in more revenue that can pay for government programs to aid the poor? Sadly, the left nearly always votes for appearances over reality, favoring high rates that bring in little revenue even when lower rates would bring in more.

The statistics as posted mean nothing. Taxes are too high but I cannot abide the misuse of statistics.

It means nothing to say that the top 1% of wage earners paid 34.3% of the taxes. What matters is how much did they earn. If the top 1% of wage earners earned 34.3% of the total income then they should pay 34.3% of the taxes. As the data is presented and discussed we have no way to judge this.

I think most of us would agree that taxes should be the same percentage for everyone. The percentage is currently too high.

However, I have come to the conclusion that the tax rate or how we tax is irrevelant to the discussion. What is revelant and what appears to have lost all traction in the congress is spending cuts. The federal government is too large and needs to be cut.

Finally on the points about payroll tax. Again the percentage paid by the diffent percentiles of wage earners mean nothing. What matters is the percentage of income that they earned compared to the amount paid. From that standpoint, it is obvious that the payroll tax is regressive and punishes the poor. I am surprised that the left has not taken this up except that the solution would be to do away with it and allow people to stand on their own and that will never happen from the left.

Why do I say it is regressive, well if I earn 200,000 I will pay a much lower percentage of my income into the payroll tax than someone who makes 30,000. Yes I know that our return will be relative, but the person making 200,000 has extra income to invest and to provide retirement and should not be dependent upon social security. The person making 30,000 is forced into a poor investment and does not have extra income to make up for it.

Basically for the poorer folks in our country, we force them into a terrible investment. Payroll taxes are evil in this sense but again we are stuck with them and until someone does something somewhere about the spending and new iniatitives then the tax rate and payroll tax rate will not matter because government will keep spending more and more.

Taxes will always be high, in my mind or yours or someone else's. However I believe on average that the rate of tax as applied across a wage earning group or bracket is becoming less skewed. It is by no means even but slightly fairer.

The rich are paying a larger percent of the entire tax burden than in the past. No I believe most tax dollars are from the middle income bracket. However that bracket, if I'm not mistaken, has more wage earners in it. Some a higher percentage of the final total comes from here.

As for payroll taxes they have many components not just FIT Withholding. These need to be looked at separately. I believe the article only spoke to federal income tax.

I also believe everyone should pay the same percentage on whatever amount of income their income is. As should corporations, but calculated on a predetermined base which does not include items which an individuals personal income tax is calculated on. I am also realistic enough to know that to do that Congress will lose so much power that they will not allow it to happen.

Hypothetically, if everyone, including business, paid 10% of their income (above $X level for poverty) with no deductions or exclusion (or a fixed amount figured in and agreed on up front for personal income tax, not corporations) then Congress would have more money than they currently spend. But would budget to spend the excess any way.

The other side of the coin to make this work is Congress must "cut the fat". Stop giving to pet projects and research to ensure constituents will vote for them again and again. Families, Moms & Dads, must do this all the time. Only our Congress has no will to do this since it would mean a loss of power and loss of esteem for them. And a bigger loss to them - possibly their jobs.

It only means something if you show that the wealthy are not earning an ever increasing percentage of the total income. A much better statistic would be to show that the top 1% of wage earners earned 10% of the total income but paid 34% of the taxes. That would show something skewed, but unless the number is tied to income it means nothing.

Another example to help you understand what I mean. What if the top 1% of wage earners earned 50% of the total income in the country? Would it be fair and correct that they pay only 34% of the taxes. No it would not.

That is my point. The statistics as presented mean nothing. Income must be reported to show that proper or improper percentages are being paid.

I totally agree with the last part of your statement but for me I have given up on it. The populace seems to want more spending so that is what we will continue to have. I will say I do not blame it on the fed, government or politicians. The blame or rather the responsibility of how our government functions and spends rests squarely on the shoulders of the the majority of voters who allow these things to continue.

You make good points and back up what I was saying, the problem is not really on the tax side, it is on the spending side. No matter what type of tax system we use, congress would spend to excess.

I have given up that it will be changed or can be changed since congress will not give up the power to control society through the tax code and they will never give up their ability to buy votes through the spending. It is sad that so many of our population do not mind being bought. As the old saying goes, democracy will only last until the population realized that they can vote themselves money from the till. We have reached that point. It is one of the reasons that the founding father founded a republic instead of a democracy but we have kept moving closer to a democracy and we keep voting money from the till.

The only question now is When will the barbarians arrive?

I see what you are saying.

But I have to disagree with you regarding the way Govt achieved the ability to tax for whatever spending they fancy.

This is the crux, that without which, the mob with it's hands out to Govt for services wouldn't be able to do so.

I rests primarily with the reinterpretation of the Gen'l Welfare clause under FDR. For in it's original intent the "general" meant that if Govt spends from the people's purse, that spending MUST benefit each and every citizen equally. Well the Socialist Security system is the prime example - each generation living off the backs of the next generations = redistribution of incomes, which is socialist. Pioneered by FDR and made worse thru the Dem's control of both houses of Congress for 44/48 yrs from 1932-80, or 92% of those 48 years. The period of the greatest damage to our constitution thru judicial fiat. SS and unionism have been the vote buying slush funds for the Dems that enabled their harmful rule.

Graduated tax rates fly in the face of the Equal Protection clause, also a Communist Manifesto plank.

And the Commerce Clause's only reason for being was to prevent states from tarrifing other state's goods/services - IE a "free trade" agreement among them, period. Now it's tax sop for just about everything.

Each of these reinterpretations have given Congress the ability to tax which they did not have prior.

One my favorites and beautifully said by Franklin:

…I am for doing good to the poor, but I differ in opinion of the means.—I think the best way of doing good to the poor, is not making them easy in poverty, but leading or driving them out of it. In my youth I travelled much, and I observed in different countries, that the more public provisions were made for the poor, the less they provided for themselves, and of course became poorer. And, on the contrary, the less was done for them, the more they did for themselves, and became richer. There is no country in the world [but England] where so many provisions are established for them; so many hospitals to receive them when they are sick or lame, founded and maintained by voluntary charities; so many alms-houses for the aged of both sexes, together with a solemn general law made by the rich to subject their estates to a heavy tax for the support of the poor. Under all these obligations, are our poor modest, humble, and thankful; and do they use their best endeavours to maintain themselves, and lighten our shoulders of this burthen?—On the contrary, I affirm that there is no country in the world in which the poor are more idle, dissolute, drunken, and insolent. The day you passed that act, you took away from before their eyes the greatest of all inducements to industry, frugality, and sobriety, by giving them a dependence on somewhat else than a careful accumulation during youth and health, for support in age or sickness. In short, you offered a premium for the encouragement of idleness, and you should not now wonder that it has had its effect in the increase of poverty. Repeal that law, and you will soon see a change in their manners. St. Monday, and St. Tuesday, will cease to be holidays. SIX days shalt thou labour, though one of the old commandments long treated as out of date, will again be looked upon as a respectable precept; industry will increase, and with it plenty among the lower people; their circumstances will mend, and more will be done for their happiness by inuring them to provide for themselves, than could be done by dividing all your estates among them.

[From Benjamin Franklin, "On the Price of Corn and the Management of the Poor" (1766), Writings (New York: Library of America, 1987), 587-88.]

The Dems are the only ones who allowed their party to be infiltrated by communists, still bash McCarthy (that ahole Cloony) - who didn't really do enough - who was vindicated beyond all doubt by the opening of the Kremlin's archives containing the Venona decodes which proved FDR was surrounded by spies taking their orders from Moscow. Hiss being at his side at Yalta when to Churchill's chagrin, FDR handed Poland over to Stalin. It was heartening that W finally was the one to apologize to Poland for the genocide that followed FDR's unconscionable atrocity.
Food for thought.

I think most of us would agree that taxes should be the same percentage for everyone.

I certainly would NOT agree. I think the tax rate should go down as income goes up. That way everybody would strive to earn additional income, as it would be penalized less.

From that standpoint, it is obvious that the payroll tax is regressive and punishes the poor.

The Payroll tax is a dedicated tax tied to a benefit program. It is not regressive when considering the benefits are heavily skewed to the poorer worker. A poor worker living off welfare, food stamps, and $5K/yr of reported earned income their entire lives is promised a rate-of-return on their "investment" in SS of 8% (5% above inflation). That is not a bad investment. It hardly qualifies as a tax. That is at worst, enforced savings. In fact, the EITC credit will probably refund all of it and their rate of return is actually infinitely high. The person earning at the top of the SS cutoff of $90K their whole life is promised only 6.6% (1.6% above inflation), and their retirement income will be heavily taxed due to their income from their other investments. Your $200,000 earnings also means you would contribute $6,000/yr for your whole life to receive the same Medicare benefit that the $5,000 worker will get -- even though they only contributed $150/yr.

What if the top 1% of wage earners earned 50% of the total income in the country? Would it be fair and correct that they pay only 34% of the taxes. No it would not.

You are correct. It would not be fair. They should only be paying 1% of the taxes. What is "fair" about charging two people wildly different prices for the same good or service ? In this case, that "good or service" is government. If the people really want a government that spends $8,000 for every man, woman, and child, then that is what they should be ponying up -- $8,000 for every person in their household. Too stiff ? Vote for less government.

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