Wednesday, January 4, 2012

Income Tax Demagoguery; Who Pays US Income Taxes

This blogger is sick and tired of the demagoguery regarding "the rich" not paying their "fair share" of US income taxes!   IRS data shows that "wealthy" people pay an overwhelming amount of taxes (the top 10% paid 70% of the total taxes for last available data analyzed in 2009).  The reality is that the US Income Tax code is strikingly progressive!  The bottom 50% pay only a few percent.  If anything, the bottom 50% are not paying their fair share!  Much of the bottom 50% actually have a negative tax rate as they receive government benefits.

Here's the data.  It's interesting that the tax income tax collected, regardless of top marginal rates or capital gain rates has historically run about 14% (not including social security).  From the  IRS Study of Tax Progressivity (which has nice graphs) the following is a graph of various tax rates and average collection rates from 1970 to 1996. 


The average tax rate is nearly steady at 14%.    I believe that this doesn't includes Social Security withholding taxes.  The next graph shows the graph for tax rates by income percentiles.  The data is only to 1996 but recent data looks similar (but very difficult to compare apples to apples from the different sources). 

Tax collections remains relatively constant or increasing (14% of a normally rising GDP).  IT'S GOVERNMENT SPENDING THAT'S OUT OF CONTROL!   When government spending is 24% of GDP and taxes collected are 14%, then that's why we have a 1.5 Trillion dollar deficit (which is about 10% of GDP).


From a Tax Foundation analysis of IRS data, in 2009 the top 1% earns $343,900, the top 10% earned $112,100 (Adjusted Gross Income).     That same year the top 1% paid 24% and the top 10% paid 18%.    The top 10% paid 70% of the income tax paid in 2009;  a bit higher than previous decades.  The bottom 50% paid only about 2% in 2009.    That's progressive!  I don't mind removing all income tax deductions for more affluent Americans, but the bottom 50% should probably pay more tax!  The lower income (lower middle to middle class) earn most of the income (see below).  They are not paying their fair share!  (The bottom 50% is paying 3, 4 or 5% in social security taxes, so we have to add that to that group's taxes to take that into account).

Here's the income distribution out of interest:


Warren Buffett has done a disservice to the nation with regard to our nation's discussion of tax and tax reform in his recent comments when he comments that he paid less tax as a percentage than his secretary.  What he doesn't tell you is that the billlionaire pays himself a paltry $100,000 salary and much of his income is long term capital gains which is taxed at 15%.   He doesn't mention how much his executive secretary makes--that secretary might make $300,000.  We don't know because his doesn't say.   To base our nation's tax policy on one person's (or a small number of cases) tax circumstances is ridiculous.  That why I'm presenting the data to correct some common misperceptions. 

I agree with the idea of tax reform and reducing/eliminating deductions for wealthy or all people, For instance, why should the nation subsidize housing for many people (by allowing mortgage interest deductions)?  I'd say to get rid of all deductions.   But I'm also in favor of broadening the tax base to the bottom 50%.   My motto is "you can't vote if you don't pay taxes".  This safeguards the nation from the lower 50% of tax payers voting in politicians that demagogue (mislead) the public to "soak the rich"----which is exactly what we have with Obama the Populist in power.   Flat taxes of 15% would fix that (above a certain threshold income).

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