Before I sink into the bowels of this post, it’s important to realize who we, as human beings, are.
Many of us like to think we are fair-minded, and in the arena of taxes and tax legislation, armed with some very superficial facts, tend to feel that those in the “Top 10%” of earners are not paying their fair share. Indeed, when one sees that often the brackets are foiled by the much lower capital gains tax and we witness the extraordinarily affluent driving past homeless camps in their Bentleys, we shudder in horror and say to ourselves “How is this right?”
Further, when we look at those less fortunate, we often simply hold fast to the very basic moral concepts of right and wrong. How can it be that in a country such as ours that children go hungry, people live on the streets, and families are losing their homes to bankers that remain wealthy and seem to be relatively unscathed by an economic downturn?
Instinctively, people start pointing fingers at the most fortunate, and this is recently exacerbated by growth in income disparity and troubled economic times. They certainly don’t blame themselves… After all, they say, I can barely pay my own bills on my current salary! Therefore, it must the result of decadence and debauchery by the super-rich.
Sadly, we all must face the fact that this belief is the result of social psychology, and not the result of any genuine malice of the wealthy (which DOES exist – but not in the case of fair taxation, and not by every wealthy person in the country) or deservedness of disproportionate contribution to the public welfare. Lest we all start expounding the virtues of true socialism, we have to be equitable to everyone, wealthy and poor alike in matters of taxation.
So, before I get into statistics, how much responsibility for the national debt and individual tax burden should any one particular group of earners pay?
In 2009, the top 1% of earners in the United States paid 36.7% of all income taxes paid to the IRS for that year. In other words, 1,379,822 people paid 36.7% of all Federal Income Tax revenue in 2009. $318,043,000,000 total paid by 1% of our country’s people. The top 5% paid over half a trillion dollars, and paid 58.7% of the revenue.
The numbers do not become any more attractive as we move down the list.
If we shift our thinking to the top 10% of earners in the United States, again using figures from 2009 (the heart of the recent ‘Great Recession’) we see that 13,798,220 filers paid a whopping 70.5% of all Federal Income Tax revenue. In other words, 10% of the people paid 70.5% of the income tax revenue the government raised.
Is this really fair? If you answered yes, you probably aren’t in the top 10%.
People often cite the average tax rate vs. the actual salary earnings bracket. Taxpayers in the top percentages of earners often derive much of their wealth from investing as opposed to a salary, so they pay a mix of (or sometimes only) capital gains tax and salary, so they do not pay at the 33% bracket spread across all their income.
In the top 1%, the average tax rate in 2009 was 24.01%. In the top 10% it was 18.05%, both below the 33% bracket many would be in if all of their taxable earnings came from salary.
What about everyone else?
Well, the average tax rate for the bottom 50% in 2009 was 1.85%. They paid just 2.3% of all income tax revenue collected in this country. The top 50% paid 97.7% of all revenue.
Given what we have already learned, that the top 10% paid 70.5% and the bottom 50% paid 2.3% of revenue, those filers with Adjusted Gross Incomes between $32,396 and $112,124 paid 27.2% of the revenue. The balance.
Not really looking quite right at this point, is it? Would you say?
But wait a minute.
That bottom 50% is skewed a bit.
The Federal Government paid 60.4 billion in Earned Income Tax Credit funds to 27.4 million taxpayers in 2009. This tax credit for low-income couples and families generally results in a negative tax liability (qualified filers receive more money back from the government than they actually paid in taxes) and averages out to a credit of $2204.38 per recipient of the credit.
Keep in mind that in 2009, the cutoff for this tax credit was greater than the average income of the bottom 50%; the midrange to take the credit was $33,995.00, while the bottom 50% earned less than $32,396.00.
Here’s where it gets ugly. The total revenue taken in by the government from this group (the bottom 50%) was 19.5B. Now, while not everyone qualified for the Earned Income Tax Credit, this still means that the bottom 50% actually cost the Federal Government ~40B in revenue.
59 million people either paid no tax at all whatsoever, or received more money back from the Federal Government than they paid.
This is just one example of many, but it provides a stark contrast to what many citizens choose to believe today.
The desire to hold comprehensible things accountable for these issues is a strong one, and is fueled by the media. While the media don’t influence our thinking and ideals (this has been proven time and again) they do contribute to how passionately we vocalize and galvanize around a completely erroneous concept that plays to our emotions.
We, as individuals, cannot possibly decipher government spending and waste, nor can we browse the budget and come up with waste and have those ‘Eureka!’ moments, or be like the unlikely POTUS in the film “Dave” and solve the nations’ budget crisis to save our schools through an all-nighter with our Anytown, USA tax accountant.
It is the easy, lazy way out to just expect more from a group of citizens that are already giving to excess.
We must learn to control our government better, and find the right solutions, and not simply keep extracting more money from this country’s population, rich or poor.
Look at it this way, if you over limit your credit cards, do you go to your boss at work to demand more money? By telling the Federal government you want it to tax any citizen unfairly, that is exactly what you are asking the government to do. (Please, don’t play on this analogy and use it as a means to state that the rich are the ‘boss’ of the government. WE are – the people. The wealthy, the poor, and the middle class. ALL of us.)
It’s the same as a cigarette tax – 80% of the people who are not effected by the tax can vote or through their public representatives legislate a tax on a small portion of the population. It doesn’t make it right, it just makes it populist.