Tax burden by income level and “Shut up or cut!”

The tax debates always intrigue me, mostly because few of the people who are discussing things have much of a clue about the facts.   You hear all kinds of specious talking points – the most conspicuous from the left is that wealthy don’t pay much tax (they pay most of the taxes as in “most” of the taxes!).   From the right the foolish rant is that we’ll cripple economic development if we tax the rich even more than we currently do.   That’s not at all a reasonable assumption.     Most rich folks have a lot of wiggle room in terms of how much they spend, and the idea that foresaking an extra Rolls Royce will inhibit the global economy is preposterous.    As Warren Buffett reasonably notes, much of the tax burden on the rich is from capital gains taxes which are capped at a fairly modest rate.   He, and other wealthy folks, can pay more.

So, the rich CAN afford to pay more, but _should_ the rich pay more given that they already pay (by far) most of the total tax burden?

The answer in my opinion is simple, and involves both cutting spending and adjusting the incomprehensible tax system.     We should CUT SPENDING to match the revenues we take in, and ADJUST PROGRESSIVE TAX rates slightly to  make sure those with the best ability to pay continue to bear most of the payment burden.

To avoid negative economic “shock waves” from this simple but dramatic solution, we can phase it in over the next decade.    Cutting spending is easy – most of the current spend is easy to adjust downward as we’ve discussed before.   Government is incredibly inefficient in delivering well-being via entitlements and security via defense spending, so we just need to make gradual cuts over the decade until the spend matches the revenue.   Tea Party hypocrites who don’t call for defense cuts need to shut up since it’s impossible to balance a budget without cuts to a massively bloated military budget, as do liberal whiners who think money grows on trees and medicare and social programs are serving taxpayers and beneficiaries effectively.    Millions of recipients – most of whom have contributed only a fraction of their benefits – don’t even need them!    Common sense must prevail, and for that to happen the fringe people who have no interest in compromising their sacred cows should be disavowed.   This is not a time to advocate FOR spending, rather it’s a time to be talking about WHAT are the spending things you LIKE that YOU are going to  CUT?    I’m calling this the  “SHUT UP or CUT! ” approach to balancing the budget.

Table 1. Summary of Federal Individual Income Tax Data, 2008(Updated October 2010)

Number of Returns with Positive AGI AGI ($ millions) Income Taxes Paid ($ millions) Group’s Share of Total AGI Group’s Share of Income Taxes Income Split Point Average Tax Rate
All Taxpayers 139,960,580 8,426,625 1,031,512 100% 100% 12.24%
Top 1% 1,399,606 1,685,472 392,149 20.00% 38.02% $380,354 23.27%
1-5% 5,598,423 1,241,229 213,569 14.73% 20.70% 17.21%
Top 5% 6,998,029 2,926,701 605,718 34.73% 58.72% $159,619 20.70%
5-10% 6,998,029 929,761 115,703 11.03% 11.22% 12.44%
Top 10% 13,996,058 3,856,462 721,421 45.77% 69.94% $113,799 18.71%
10-25% 20,994,087 1,821,717 169,193 21.62% 16.40% 9.29%
Top 25% 34,990,145 5,678,179 890,614 67.38% 86.34% $67,280 15.68%
25-50% 34,990,145 1,673,932 113,025 19.86% 10.96% 6.75%
Top 50% 69,980,290 7,352,111 1,003,639 87.25% 97.30% >$33,048 13.65%
Bottom 50% 69,980,290 1,074,514 27,873 12.75% 2.70% <$33,048 2.59%
Source: Internal Revenue Service

23 thoughts on “Tax burden by income level and “Shut up or cut!”

  1. This is only federal income tax. The right never adds social security or medicare or any other revenue when they want to pretend working folks don’t pay taxes. But when it’s time to show spending, well then all you get is the huge pie chart with the “entitlements”. If you tell the WHOLE story, then you realize you’ve been robbed… if you let them get away with it. I’m Not Letting Them Take MY Social Security and Medicare.

    • Hi Sandy. I think yours is an important point but it does not really change the story all that much in my opinion. This graph would not significantly change if we added in all taxes paid such as property taxes and sales taxes. Social Security tax portion is a bit more complicated to handle so I might concede your point there, but that’s really a “pension” issue. As a self employed person I’d be thrilled if I could stop paying the 15% and invest that money myself, but that’s not going to happen because we’re using most of that money to pay all the current obligations. The key correct point from the right is that low income folks get more benefits than they pay in and rich folks get fewer. Most people would agree that’s OK to some extent, but the issue is how much more should we stick it to the rich to pay our burdens. I think “a little bit more” should be more than enough if we spend wisely rather than with the insane recklessness that characterizes both the military and entitlement fiasco political spending. It’s funny you think you are robbed rather than sending a thank you note to the folks who are actually paying your medicare and social security. You can save the postage on that by the way because it’s your own children who are getting robbed, and it’s…. by you as we push these obligations to the future!

      • Actually some research is needed before I claim the graph would not change. Property tax tends to be greater as home value goes up, but sales taxes are not progressive and hit everybody equally so that might skew the share paid by the poor upwards. But unless I’m really mistaken the big ticket in terms of total tax revenues … is the income tax.

      • “The key correct point from the right is that low income folks get more benefits than they pay in and rich folks get fewer.” — This is simply not correct, and shows the flaw of listening to Republican talking heads for 30 years.

        It has been well documented that the rich receive more than $1.2 trillion in corporate welfare each year. From ethanol subsidies to bloated Halliburton contracts, the big change in the last 30 years in America is that the rich are stealing from the middle class.

        I wish the poor were stealing from the middle class. That would be easy to fix because the poor have very little political power. Alas, the federal government doesn’t even have a “welfare” program anymore, and the food stamp program only costs $56 billion per year (with more than half of the food going to children under 18, and more than half of the subsidy going to large U.S. food processing corporations).

        Instead, the rich are stealing from the middle class, to make themselves richer each and every year (just look at ANY graph showing wealth or income disparity over the last 40 years). And they keep succeeding by selling the lie that it’s the poor that our taking all our money.

  2. Sandy’s mostly correct.

    Another point the teabaggers overlook is history: historically speaking, marginal income taxes and capital gains rates are low They were higher–approx 50%– even under Reagan (until ’86 or so, when they dismantled the old bracket system). Clinton raised them slightly– then Bush slashed away (especially for the very wealthy via estate tax cuts). Sort of explains the deficit–the demopublicans continue to spend without sufficient tax revenues coming in.

    • Horatiox you’ve made the correct point many times that our history of taxing the rich is to be more aggressive with them, but that hardly justifies the practice. The CATO gang argues – with some justification – that lower taxes inspire more investments and that the private sector is more likely to invest wisely than government. They’d also suggest that the economy benefits to the extent that there’s a much bigger pie. My view is that the pie probably does not increase enough to recover the lost taxes, though I don’t think that justifies higher taxation.

      My MAIN frustration as you know is overspending. The tax talk / trash talk isn’t really even needed if folks started thinking about progressive SPENDING rather than the political nonsense spending we have now. Pork barrels and gun barrels are compromising everything while both the Tea Partiers and the Left whine and moan about insignificant spending issues.

      I say, paraphrasing Patrick Henry, Give ME LIBERTY or give me … spending cuts!

      • Economics, that dismal science, tends to get redundant–but one reason for that is the rightists don’t listen, or rather don’t examine the evidence and data that shows the supply-side/trickle-down hustle does not work in the long run, certainly not for citizens as a whole. And as you have noted, the GOP/TP program slashers generally want everything BUT the DoD budget cut, when that’s the biggest part of the pie–the massive deficit from war/military spending. Cut the DoD budget and there would be more shekels for other programs such as Medicare.

        Im opposed to a welfare state and massive bureaucracies, but Im not convinced by the libertarians or Ryanettes who want to axe social security–many people have paid into that for years, and even if they aren’t 55, they deserve a secure pension plan–which is really what this is about. The GOP-TP have powerful investors/bankers behind them and they want access to the pension funds–ie, they want a slice of workers’ checks, instead of having it put in the big SS accounts–which however bloated, secure to some extent (that was the point of SS in the first place–so ma and pa didn’t have to gamble their retirement savings via bonds, stocks, etc) .

      • “…. they want a slice of workers’ checks, instead of having it put in the big SS accounts–which however bloated, secure to some extent (that was the point of SS in the first place–so ma and pa didn’t have to gamble their retirement savings via bonds, stocks, etc) .”

        I agree they “want the money” but only because they believe it’s better to let folks make these decisions themselves. I’m not convinced that is true even though I personally would like to have control of my own funds and probably could outperform the pathetic returns typically assigned to SSA’s activities, though I think that whole mess is very compromised by many things such as intergovernmental transfers and the fact the burden is easily shifted forward as it’s been for years.

        What we *should* all be able to agree about is transparency. However we get people money for retirement – and that is a crucial thing to do – we should be much clearer about who is footing the bill. For example early SS beneficiaries only pitched in a very tiny fraction of the benefits they got back. My understanding is that the system could be made solvent with fairly small benefit and contribution tweaks if we do them NOW, but barring that all hell will break loose in 15-20 years as demands on the system increase even as contributions dwindle.

      • Actually I agree, reluctantly, to an opt-out clause on SS and medi. taxes, I think (what about the portion of..DoD that goes to FICA?). Wealthy-successful workers–say 300 grand +– can afford their own pension, and so they could opt out–and SS/,med portions of their checks could be ..used for taxes. But I think middle class and working class should be allowed their SS, and pay the portion of the checks for it.–they paid into it, and they’ll need it Miss Ryan’s a bunko artist like most Teabuggers, IMHE (if not…crypto-klansman. Yep. Like Mitt Romney hisself, Duck). A few tax increases on very wealthy and deficit problems could be solved in a few years

  3. Social security was not enacted as some sort of generalized old age pension program but as a pension program for the unfortunates who were needy.

    We always have disproportionate benefits: the 747 pilot uses the whole runway, the Cessa 150 pilot uses a fraction of it, but pays for all of it. The trucking company pays whopping tax bills but they are miniscule compared to the damage done by heavy trucks. The repair burden does not fall on the trucking companies. The West’s aqueducts benefit California truck farmers but are paid for by everyone.

    Until the US decides whether it will pay off its debt or renounce all foreign debt, why should anyone try to attain an equitable taxation system?

    • I’m not following you well on this one FoolsGold. Big trucks and I assume also planes *do* pay more – a lot more – in fees and taxes. They should and do pay more as the rich should and do pay more in income taxes.

      There are probably some examples of public absorbing costs that flow to interest groups but on balance I think the tally would favor the bureaucratic middle class more than any other group. It’s fashionable right now to argue the rich are getting away with murder, but that’s not where the money flows. Rather, it’s flowing to defense and entitlement spending.

      • Federal spending is going to defense and entitlements. But GDP is going to the wealthy. The share of total income going to the top 1%, .1%, .01% has been growing dramatically since 1979, and this discrepancy is growing at an almost exponential rate. Yet the share of their income going to taxes has declined dramatically. Top income tax rates, taxes on investments, estate taxes, corporate taxes, and taxes on the rich and the filthy rich are all at historic lows, which results in the fact that tax revenues as a percent of GDP are also at historic lows. We pay a smaller share of GDP in taxes than all OECD countries except Japan, Korea, Turkey, and Mexico, and we tax corporations less than all but 4 OECD countries as well. Tax loopholes, on the other hand, have skyrocketed since RR became president.

        Agree on cutting military spending. What a boondoggle. Wish we had another Eisenhower to run for office.

        Contrary to what other posts are saying, SS is not really in trouble. If we make no changes at all we can pay 100% for something like the next 15-20 years, then 75% of benefits for another 20 after that. We can cover 100% if we just increase the income cap.

        Medicare is a big problem, but rather than solve it by making people without means pay more, requiring them to eat less, Medicare can be fixed better by cutting medical costs, and there are plenty of good proposals out there that could accomplish this. There are answers to all of these problems that don’t require bashing the middle class further. But there is no political will, because there is no profit in it.

      • GDP is not income, It is a record of spending for some period of time. GDP = Private Consumption + Investment Spending + Government Spending + (Exports – Imports). There is no meaningful sense in which GDP flows to any particular income group. There is a Gross Domestic Income measure, which I have not yet researched, but I believe it is more difficult to measure.

  4. I was trying to point out that the amount of the “more” in taxes a big truck pays is not in proportion to the damages that it causes, its sort of a substantially public relations oriented “more”.

    Defense spending and entitlement spending is always the major segment. Our Peanut Farmer President introduced Zero Based Budgeting but it was in name only. Everything is “how much more do you need in this coming year” rather than “should you even exist in this coming year” much less “what are you really accomplishing in this coming year”.

  5. I’ve seen defense contractor engineers who did nothing but stare down the clock ALL day long. The moment it went to break time, they went to the commissary. The moment it was lunch time, they went to the commissary. The moment it was afternoon break time, they went to the commissary. The moment it was quitting time, they left. There was not even a piece of paper on their desk for the pretense of work. Not ever. They did nothing all day long, but be physically there to qualify for their paycheck. Somewhere hidden in the federal budget is their salary being paid to a defense contractor, but the newspaper editorials only complain of inner city residents being paid to do nothing.

  6. Social security was not enacted as some sort of generalized old age pension program but as a pension program for the unfortunates who were needy.

    That’s not entirely accurate. The Social Security Act was aimed primarily at the elderly (in those days, approx 50% of the aged lived in poverty) workers about to retire, widows, and the disabled. It wasn’t just welfare , but a secure pension plan. There was a reason for that as well–perhaps a bit “do-gooder-ish” (one reason the teabaggers of the time disliked it):many retirees were preyed upon by bunko financiers who wanted them to put their life savings/retirement funds in junk bonds/stocks, which went belly up (by then the shyster who had sold the junk pensions was long gone). So retirees lost their shirts , and or were kicked into the street. So FDR’s people–real democrats, not the chi chi sort we have now– created the modest pension plans (based on T-bills IIRC). The Ryanettes who just want to axe SS don’t really understand the historical context of the SSA, or what the great depression was about either.

    Now, here’s Horatiox’s ad hoc SS reform plan: the problem, IMHE, relates to middle class or upper middle class people receiving too much in benefits (ie Fed payouts) when the program was aimed primarily at the poor and lower middle class. Someone with a nice house, big family, secure job, and usually another pension plan (due to work, etc) does not need SS benes. So…remove the SS benefits elgibility from the successful, say those making approx. $100,000 per annum (and taking into consideration net worth/assets, etc). Of course that’s what many want–not to have pay into a program, when they can make a choice–Teabaggers would be pleased, and…the middle class are happy! But there’s one catch. The payroll tax used for SS is not just completely removed from those no longer elgible, but..a portion (approx. 50%) still goes to the Fed. govt. and is used to help the costs of the real SS (ie for blue collar retirees, poor, disabled). The retirement age stays the same, and no need for the Ryanette axe. In brief……

  7. The essential problem with making adjustments to Social Security based on need is that people who receive Social Security or expect to receive social security are voters. You all remember LBJ raising Social Security benefits on the day before election day. You think anything has changed? You think anything will change. Thats like a politician being soft on crime or not wanting to build prisons or not wanting to take a razor to child molesters. Ain’t gonna happen!

    Tax burden is not related to income. Tax burden is related to spending. Its merely the distribution of tax burden that is being discussed and like anything else it ebbs and flows but generally it just spreads so as to fill every nook and cranny available to it. You can count and classify and describe all you want but the net result is that there is no neutral balancing point for tax burden.

  8. Have Google execs pay their taxes and we’d probably have enough shekels to pay for a few hundred drones.

    (ie, the charts don’t show how US corporations avoid taxes via overseas accounts/banks/foundations etc)

  9. Thanks to my beautiful wive, I was reminded that all of us pay taxes whether or not we actually write the checks. Her correct example is the renter who pays the property taxes for the landlord. In principle, all successful business, that is those who are profitable, pay very little in taxes. My own principle is, only individual persons pay taxes, either directly or indirectly.

    BTW, I really like the discussions and comments I have read above. I learned a good deal from them. Thank you.

  10. Nice blog. Well written, and I’m always refreshed when I see the suggestion that Lefty and Righty both stop howling about that evil other side’s horrors, and start asking themselves “what’s wrong with my own side?”

    I also loved that the first comment was to the tune of “but check out that evil other side’s HORRORS!!!” As Kurt Russell said in Tombstone, “didn’t leave a dent.”

    Ah, humanity. But still, yeah, nice blog! Props!

  11. There is no meaningful sense in which”income” can be distributed. One can count the taxpayers and sort them into percentile groups according to the income each earns.That is there is a finite number of taxpayers. However, there is not a finite number of “income”. . The income dollars are not finite. Person A’s dollar of income is not a dollar of income taken away from person B at least globally. . My wage at Wal Mart neither diminishes nor increases the wage of any other associate. Not one of the million$ earned by a high income person is a dollar of income taken away from me. The same dollar of income can appear in several persons’ incomes.

    Try an analogy. Income is like the Colorado river. My little mill driven by a water wheel takes a certain amount of income from the river. I have a small income. Hoover Dam takes in a lot of the river … it has a big income. My income is neither diminished nor enhanced by Hoover Dam. That is unless some one stops the river from flowing or redirects the river to far away locations, in which case both my and Hoover Dam’s income is decreased.

    Therefore, the sentence,”The top XX percentile gets YYY% of the income.” is statistically meaningless.

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