Will Rogers once said, “The income tax has made more liars out of the American people than golf has.” I read the following on the Commondreams.org website, following a Google search on President Obama’s tax plan. (Their website is: https://www.commondreams.org/view/2011/09/20-4).
Taxes on the Wealthy Have Declined Steadily for Decades. Over the last decade –and really over the last fifty years — the portion of income paid in taxes by our wealthiest citizens has steadily declined. In 1961, when Barack Obama was born, the effective rate paid by households with income over $1 million was 43 percent. Today it is 23 percent. The richer you are, as Warren Buffett has illustrated, the smaller the percentage of your income you pay.
Being naturally curious and wanting to have something to say when people ask me this question, it became time to do a little research. The Tax Policy Institute provides analyses on effective rates of taxation. The data are available at http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=366&Topic2id=48. What do we see for tax year 2002?
Chart 1: Tax year 2002:
First, being visual, we make bar charts that represent the percentage of each income group, defined by adjusted gross income, who pay at the range of effective tax rate listed on the horizontal axis. In the above chart, for example, we find that in total about 28% of the population paid no taxes, as indicated by the first ‘blue’ bar in the extreme left. In contrast, those with under $50,000 in adjusted gross income (the ‘red’ bar), 39% paid no income taxes. As the level of adjusted gross income increases, notice how the distributions move to the right, toward greater effective rates of taxation. For the greatest income group, in 2002, 10.3% paid between 30% and 35% of their adjusted gross income in taxes and 1.5% paid between 35% and 40% tax rates.
Chart 2: Tax year 2008:
Comparing 2002 to 2008 (Chart 2) , we find that for the greatest income group, 2.2% paid between 30% and 35% of their adjusted gross income in taxes, with a non-measurable percentage paying more than 35%. Thus, higher income households are paying less in 2008 than in 2002. But does this confirm the quote?
Looking further, we see that in 2002, 9.1% of the lowest income group (<$50,000) paid their highest tax rates of over 10%. By 2008, only 6% of the lowest income group paid at the highest category of taxation for the lower income households (10%, or over). It appears that households across the board are paying less in taxes in 2008 than in 2002. Importantly, we can conclude from both charts that the statement, “The richer you are, as Warren Buffett has illustrated, the smaller the percentage of your income you pay”, is not true, on average. It may, however, be true for Mr. Buffett but we cannot make policy based on the situation of a few wealthy individuals with large amounts of unearned income.
One more chart, from the Citizens for Tax Justice (2010a), is below. In it we see that when we divide the country into income quintiles (1/5 of the population in each quintile, as defined by income) a picture emerges. Notice that for the lowest three quintiles that each quintile’s share of income is greater than their share of all taxes paid. For the fourth quintile, upper-middle class, their share of taxes paid exactly equals their share of income. For the upper-income quintile, however, their share of taxes paid is 64.3% while they receive 59.1% of the income. As such, it appears that the desire for progressivity in our tax system is preserved with higher income households paying a higher proportion of their income in taxes than are lower income households.
Chart 3: Share of all income earned and all taxes paid, by quintile
Source: Citizens for Tax Justice (2010a).
This financial tip does not provide much in the way of a “tip”. It does, however, try to inform you with regard to the noise around one of the issues we face as a nation. You, as a taxpayer, have an obligation to pay taxes and we all enjoy benefits from the taxes we pay; such as our roads, schools, parks, and et cetera. Yet, our nation spends more on our benefits than our nation earns on our tax obligations. If households continually did this, they would fail. As a nation, we are coming to grips with the fact that our list of benefits is greater than what our taxes can continue to provide. If the benefits are worth that much to us, we must increase taxes. Otherwise, we must decrease expenditures. This is not quantum physics. It is, simply, budgeting to live within one’s means. We will make adjustments; probably both with respect to expenditures and taxes. We must. Our financial success depends on our freedom to act responsibly.