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The Rich Pay for the Federal Government
Despite all the deductions, loopholes and clever accountants the federal income tax is strongly progressive. Moreover the federal tax system remains progressive even if you include the payroll tax, corporate taxes and excise taxes. The chart below with data from the Congressional Budget Office, shows the effective tax rate by income class from all federal taxes. Effective tax rates are considerably higher on the rich than the poor.
The effective tax rate is higher on the rich and the rich have more money – put these two things together and we can calculate who pays for the federal government. The final column in the table shows the share of the 2.4 trillion in federal tax revenues that is paid for by each income category. The remarkable finding is that the rich and especially the very rich bear by far the largest share of the federal tax liability. The top 10% of households by income, for example, pay more than half of all federal taxes and the top 1% alone pay over a quarter of all federal taxes.
(Click the table if it is not clear.)
Posted by Alex Tabarrok on December 18, 2007 at 08:34 AM in Economics | Permalink
Comments
Can you explain to me how the top 10% can pay a higher percentage of the total than the top 20% do?
There must be a screwed up formula in there somewhere.
Posted by: Bill at Dec 18, 2007 8:42:37 AM
Thanks Bill. I transcribed a few numbers from the wrong column. I have fixed.
Posted by: Alex Tabarrok at Dec 18, 2007 8:50:04 AM
I'd be curious to see the same chart, but covering ALL government taxes & fees, federal, state, and local, such as sales taxes, property tax, social security, etc. I'm not sure if this would make the situation look more "progressive" or not, but I think it would be a much more interesting number. For me as a taxpayer, the distinction between "federal income tax" and all the other taxes and fees is pretty close to meaningless - because over time I've seen that when one set of taxes goes down another set seems to go up about an equivalent amount. Thanks.
Posted by: Steve R at Dec 18, 2007 9:01:57 AM
How does net worth by each income category compare to share of tax revenue? Is that data available as well?
Posted by: Bob at Dec 18, 2007 9:13:49 AM
The "left" likes to criticize the progressivity of the tax system by pointing out how much income the rich keep. The "right" instead tries to focus on how much the rich pay into the tax system. It is this conflating of metrics that politicians will continue exploit in their arguments.
Posted by: Riemannian at Dec 18, 2007 9:14:33 AM
I should have mentioned the word "percentage" in there somewhere.
Posted by: Riemannian at Dec 18, 2007 9:20:33 AM
I feel like there is a deeper meaning. Like, maybe politicians do what the rich tell them to because they pay the government more than anyone else?
Posted by: brainwarped at Dec 18, 2007 9:24:06 AM
Excellent. We can see that at given point in the recent past (at least between 2004 and 2005), the “rich” paid higher tax rates than everyone else. My only question is why is this interesting? Who actually questioned whether this was the case?
Not even Paul Krugman has claimed that the US doesn’t have a progressive tax system. At most, he has claimed that the tax code has grown less progressive in recent years (particularly since the 2001), a claim that cannot be tested fairly with only two years of data.
Posted by: Student at Dec 18, 2007 9:26:58 AM
So the bottom 40% pay about 5% of all federal taxes paid. Of course this is in large part due to the fact that so many people have no tax liability at all. No wonder there isn't an outcry for tax relief in this country.
"From those according to their ability to those according to their need."
Posted by: Colin at Dec 18, 2007 9:42:29 AM
A better twist on this table is not average income for each bracket (which is a mathematically sloppy term anyway -- I presume they mean mean and not median?) would be the minimum cut-off (e.g., if you make more than $X, then you are in the top 5%, etc.)
Posted by: KipEsquire at Dec 18, 2007 9:45:14 AM
I find this assumption rather troubling:
Far less consensus exists about how to attribute corporate income taxes (and taxes on capital income generally). In this analysis, CBO assumes that corporate income taxes are borne by owners of capital in proportion to their income from interest, dividends, capital gains, and rents. (The shares of various tax liabilities borne by different income groups in 2004 and 2005 are shown in Summary Table 2.) Over the long term, however, some models suggest that at least part of the burden falls on labor income.
What is the net effect on the table of the imputation of corporate income tax to individual owners? To not attribute at least a portion of this to labor income strikes me as wildly unrealistic, frankly.
Posted by: Stephen at Dec 18, 2007 9:49:41 AM
Student - lots of people question whether the rich pay more. Try five seconds on Google, e.g.
http://www.sptimes.com/2007/08/05/Opinion/America_is_taxing_for.shtml
Posted by: Alex Tabarrok at Dec 18, 2007 9:50:17 AM
Student -- As a taxpayer, I find the data *very* interesting. ;-) More importantly, one argument that politicians seem to trot out regularly is that taxes on the rich should not be cut because the middle class is being "squeezed." But the data suggest that the middle class is, if anything, getting a good deal in terms of what they pay in relative to their share of total income.
Posted by: jp at Dec 18, 2007 9:50:55 AM
Who gets the greatest financial benefit from government? How much wealth would each person have, and keep, if there were no government?
The top 1% are getting a very, very good deal by that metric.
And yet some of them complain that the system is unfair to them.
What chutzpah!
Posted by: A student of economics at Dec 18, 2007 9:52:47 AM
The commie, egalitarian lefties hope nobody realizes this. Just a modicum of rational thought reveals that even a flat tax results in the rich filling a grossly unfair percentage of the government trough. If the so-called "fair-minded", "egalitarians" really gave a "damn" about "equality". They'd propose a tax system where the bottom quintile has an effective tax rate of 35% and the top quintile has an effective tax rate of 2.5%. That way they'd both be paying for equal shares of the government.
Of course, the lefties get apoplectic when this is pointed out, because total spending would decrease and the handouts to the lazy, unproductive "unfortunates" would have to disappear.
;-)
--MostlyASatirist
Extrapolating to ridiculous conclusions so that you don't have to!
Posted by: MostlyAPragmatist at Dec 18, 2007 10:04:33 AM
Here's some context for Alex's table. According to the CBO report (see page 6, table 2),
http://www.cbo.gov/ftpdocs/88xx/doc8885/12-11-HistoricalTaxRates.pdf
The top 1%, 5% and 10% received: 18.1%, 31.1% and 40.9% respectively of income.
The top 1%, 5% and 10% paid: 27.6%, 43.8% and 54.7% respectively of all Federal taxes.
Their share of state and local taxes, which tend to be less progressive or even regressive, is likely to be lower.
All in all, it appears we have a mildly progressive federal tax system. Alex may find the shares of total taxes paid by high income groups "remarkable", but a few minutes of googling reveals this to be mainly a reflection of an increasingly unequal distribution of income. In 2005, the top 10 percent and top 1 percent and received the greatest share of income since 1929.
Posted by: A student of economics at Dec 18, 2007 10:11:43 AM
About these numbers--so what?
Posted by: Person at Dec 18, 2007 10:15:33 AM
The FICA tax rate alone is 15.3% (employer and worker combined) for those under $102,000. This table claims to "include the payroll tax, corporate taxes and excise taxes. The chart below ... shows the effective tax rate by income class from all federal taxes." Seems pretty dubious. Without the math it is hard to believe such a counter-intuitive result.
If there was a real point being made here it might be interesting to understand how the numbers were put together. For example, where is my college student son? (Income $4,000, FICA tax rate 15.3%, income tax rate 0.0%, federal alcohol taxes not non-zero.) Or my 90 year old father? (Income $120,000, FICA tax rate 0.0%, income tax rate roughly 10.0%.) Without some context, it is hard to know what to make of this especially when most wage earners in the bottom 80% pay 15.3% off the top.
However, at the end of the day, it is not clear what the point is.
Posted by: Ernest at Dec 18, 2007 10:17:50 AM
“The remarkable finding is that the rich and especially the very rich bear by far the largest share of the federal tax liability.”
Why is this remarkable? With gross income inequalities, it of course has to be the rich who pay for the bulk of govt spending. You cannot take much off those who have little in the first place. A table over at Mankiw’s shows that the share of taxes paid by the rich has been increasing over time – but so has their share of income…
http://gregmankiw.blogspot.com/2007/12/progressivity-of-income-tax.html
The pattern of tax revenues reflects income inequality rather than somehow correcting for it.
Posted by: Mark at Dec 18, 2007 10:19:28 AM
There is no semantic difference between Student's "mildly progressive" and "remarkably" progressive. The line separating regressive from progressive is fairly clear, but who can tell me what the distribution is which demarcates "mild" and "remarkable" progressiveness? In matters like this there are always going to be some people saying "that's too much" and others saying "that's just right" and there's no way for them to convince each other because these are completely subjective views.
That said, if we wanted to measure relative progressiveness of two tax systems, I'd say we should take the difference of the area under the Gini curves of income and tax burden. Does that seem reasonable to any one else? And does anyone know where I might find some well-formatted historical data for this?
Posted by: Jared at Dec 18, 2007 10:37:53 AM
To those who wonder what Alex's point is: stop being so nice. Alex's point is that his table refutes the claim that the tax rate isn't progressive with respect to hedge-fund managers. I understand it's hard to believe such a hare-brained thesis would appear on a blog that is frequently as insightful as this, but that's what he's saying.
Posted by: MostlyAPragmatist at Dec 18, 2007 10:39:01 AM
If you take away 31.2% everything someone makes, you're not "correcting" for his high income by some mysterious somehow-- you're "correcting" for it by taking away 31.2% of everything he makes. (Scare quotes around "correcting" are for the purpose of highlighting the tendentiousness of that word.)
The only people who are entitled to regard payroll taxes as taxes are those who do not regard them as insurance premiums. How many lefties does that leave us?
Posted by: Paul Zrimsek at Dec 18, 2007 10:42:59 AM
It is barely progressive. It used to be MUCH more progressive. Every time a Republican gets elected, the tax burden is shifted down towards the middle class. This has been happening since the New Deal. With each tax cut, the rich are paying less and less and guess who's paying more? You and me. Read Paul Krugman.
The tax rate IS NOT progressive with respect to hedge fund managers! The table shows averages. Hedge fund managers probably pay a smaller fraction of their income in taxes than you do.
Why is WORK taxed higher than INVESTMENTS? The rich simply collect their dividends without working and pay less in taxes than folks working 50 hours per week.
Posted by: Eric S. at Dec 18, 2007 10:53:43 AM
Where do corporations fit in to this?
Didn't the founding fathers intend for corporations to pay for the federal government?
Posted by: Jeremy at Dec 18, 2007 11:01:54 AM
Jared writes: "I'd say we should take the difference of the area under the Gini curves of income and tax burden."
An easy way to provide a general sense of this would be for Alex to include a column in his table labeled "share of income" adjacent to the column labeled "share of total Federal tax revenue". Such a column is in original CBO report, but Alex omitted it. See my post above.
Alex: it's still not too late for you to update the table so we can have the relevant facts as we discuss this issue.
Posted by: A student of economics at Dec 18, 2007 11:03:02 AM
