Inequality in the USA (also, we have a flat tax system)

Conservatives are fond of citing how much of the tax burden is carried by the rich.   These usually consider only income taxes, not including payroll taxes.  A wonderful example is provided in “An Obama Gift for K Street“, Robert J. Samuelson, Washington Post, 15 December 15, 2008 — Excerpt:

Sure, the wealthy extract privileges from government, but mainly they’re its servants. The richest 1% of Americans pay 28% of federal taxes, says the Congressional Budget Office. About 60% of the $3 trillion federal budget goes for payments to individuals — mostly the poor and middle class. You can argue that those burdens and benefits should be greater, but if the rich were all powerful, their taxes would be much lower.

The New York Times provides a more complete picture in this graphic.  It deserves attention.  Here are a few items of interest, combining both income and payroll taxes (it does not appear to include the 1/2 of payroll taxes “paid” by employers).

  • Households in the top 1% of income collect 18% of total income in the US.
  • The top 10% collect 44% of total income.
  • The top 20% collect 60% of total income.

What fraction of their income do people pay in taxes as income rises?

  • Everyone (on average) with income over $100,000 pays aprox the same fraction of income:  21 – 22%.
  • Those with income of over $10 million pay a slightly lower fraction than those in the $100-200 thousand range 20.1% vs. 20.6%. 
  • The top 400 taxpayers pay even less:  17.5%.

For more on this I strongly recommend these three posts by Ezra Klein at The American Prospect:

(1)  “THE WEAK AND THE RICH“, 15 December 2008 — Excerpt:

So over the same period of time that the tax rates on the top 1% have fallen dramatically, their share of the national income has skyrocketed. The rich may not be “all powerful,” but it’s quite a leap to say that they are somehow cowering before the might of Robert Greenstein and the Center for Budget and Policy Priorities. Indeed, over the same period, they managed to (at least temporarily) eliminate the “estate tax,” which was a key tax on the rich. And if you don’t believe that was the rich flexing their political power, then you haven’t read this.

(2)  “MORE TAX AND INEQUALITY WONKERY!“, 16 December 2008 — How tax burdens have changed by time for the average taxpayers (flat) and the top 1% and 0.1% (down a lot).  Excerpt:

For the rich, effective federal tax rates fall throughout the century. The top 1% was paying around 45% in 1960, and that’s fallen to around 37%. But the real action has been in the subgroups above the top 1%: The top hundredth of a percent was paying above 70% of their income, and now they’re only a touch above 40%. But using Piketty and Saez’s paper on the progressivity of the US tax system, we can break that down even further…

As they say, “The contrast between the progressivity of federal taxes in 2004 and in 1960 is striking.” And a lot of the change has come in the top slivers of the income distribution. “The current federal tax system is relatively close to a flat tax rate within the top 1%,” write Piketty and Saez, and that’s no small statement. In 2006, the top percentile made around $380,000. The top hundredth of a percentile made around $5,000,000 a year, and controlled 9% of the nation’s income. But they’re not bearing a significantly heavier tax burden, as they would have been a few decades ago. Indeed, their burden has decreased. That’s a serious reduction in progressivity.

(3)  “MORE, MORE, MORE ON PROGRESSIVE TAXATION!“, 16 December 2008 — Excerpt:

And one more note on how Samuelson presented his data. “The richest 1% of Americans pay 28% of federal taxes, says the Congressional Budget Office,” he wrote, as if that meant something. But the question with the top 1% is not simply how much they pay, but how much they make. If they make 50% of the national income, paying 28% of taxes is paying very little. If they make 2% of the national income, then their tax burden is heavy indeed. What they pay only makes sense if you know what they make. And this is true for historical comparisons too.

You often hear conservatives argue that the rich pay a larger percentage of national taxes than they did in the 1970s, and that shows the system’s progressivity. But the rich make much more money than they did in the 70s. The question is whether their share of the national income increased faster or slower than their share of the federal tax burden.

In 1979, the top 1% brought home 9.3% of the national income — which is to say, for every $100 paid in wages, $9.30 went to the top one% — and paid 15.4% of federal taxes. The ratio of tax share to income share was 1.65. Their tax burden was 1.65 times larger than their income share. In 2005, they brought home 18.1% of the national income — it had doubled — and paid 27.6% of federal taxes. The ration was 1.52. In other words, it has gone down. The rich pay less taxes as a share of their income than they did in the 1970s, and they control much more of the nation’s wealth.

This is worse than it even looks on first glance (and it looks quite bad). …

Other articles about income inequality

  1. Have we fallen behind our parents?“, Katharine Mieszkowski, Salon, 14 May 2008 — “Author Nan Mooney argues that the middle class is slipping, and fixing it is going to take more than cutting out lattes.”
  2. Income inequality and poverty rising in most OECD countries“, OECD, 21 October 2008

For more information from the FM site

Reference pages about other topics appear on the right side menu bar, including About the FM website page.  Of special relevance to this post:

Other posts about income inequality on the FM site:

  1. A sad picture of America, but important for us to understand, 3 November 2008
  2. America’s elites reluctantly impose a client-patron system, 5 November 2008

Afterword

Please share your comments by posting below.  Per the FM site’s Comment Policy, please make them brief (250 word max), civil and relevant to this post.  Or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).

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12 thoughts on “Inequality in the USA (also, we have a flat tax system)

  1. I have some doubts about the decline of the income tax. Deductions have changed as well as the rates. Here is a paper on the subject: “How Progressive is the U.S. Federal Tax System?“, Thomas Piketty and Emmanuel Saez, Journal of Economic Perspectives, Winter 2007.

    This paper suggests that the reductions in the corporate income tax and the estate tax are the major changes to our taxation system, not the changes to the income tax rates for the wealthiest.
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    Fabius Maximus replies: Thanks for the link to this paper. While this is a much more comprehensive analysis than anything in this post, the conclusion is almost identical. Note the authors’ primary conclusion:

    First, the progressivity of the U.S. federal tax system at the top of the income distribution has declined dramatically since the 1960s. For example, the top 0.01% of earners paid over 70% of their income in federal taxes in 1960, while they paid only about 35% of their income in 2005. Average federal tax rates for the middle class have remained roughly constant over time.

    This dramatic drop in progressivity at the upper end of the income distribution is due primarily to a drop in corporate taxes and to a lesser extent estate and gift taxes, both of which fall on capital income, combined with a sharp change in the composition of top incomes away from capital income and toward labor income. The reduction in top marginal individual income tax rates has contributed only marginally to the decline of progressivity of the federal tax system, because with various deductions and exemptions, along with favored treatment for capital gains, the average tax rate paid by those with very high income levels has changed much less over time than the top marginal rates.

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  2. These firgure are interesting, but perhaps more interesting are the figures cited in a catalog I received today from Jermyn St. shirtmaker, Charles Thrwhitt. ( Basically, it is only mildly inaccurate to state that Jermyn St. shirts are what you get if you want to look like James Bond. )

    Tyrwhitt wants us to to know that they have “FURTHER REDUCTIONS.” You can “Save up to 70%.” They add “Even More Shirts From $40.” ( They have a New York store. )

    And, according to the NYT, the Market for Corporate Jets Goes Into Free Fall

    There are two aspects to this. First, not only are the rich perhaps feeling some degree of pain but – as the recent shaming of the auto CEO’s over their jet transport suggests – it perhaps may no longer be quite so fashionable to be fashionable, if you know what I mean.

    Which causes me to wonder how the ghost of Thorstein Veblen is responding to all of this.

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  3. Warren Buffett has a standing million-dollar bet (payable to charity of the person’s choice) with the rest of the Fortune 100, which nobody has taken. He bets that if you compare the total tax rate of the person with the person’s secretary, including payroll taxes, the secretary actually pays a greater percentage of tax.

    It is the case for him, and the case for at least two of his friends in the fortune 100.

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  4. Nothing here on the morality of the federal government forcing one, rich or poor, to cough up an increasing percentage of the national wealth to a government enterprise that gets more bloated and inefficient, but more importantly further and further from, and less accountable to, the people with every passing year. Or of treating people equally under the law.

    I would rather have Paul Allen deciding how he wants to spend (read invest) his billions (no, he doesn’t sit in a vault somewhere counting it) than some bureaucrat in The Imperial City who never created anything in his life. Now that would be a stimulus package.
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    Fabius Maximus replies: We went through this discussion in 1929 – 1932. I doubt that many Americans wish to repeat the experiment.

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  5. Ezra Kleins article is incorrect on percentage collected off the upper 1%. According to the IRS it is actually 34.27% in 2005. In 2003 it was 33.71%! Both numbers are higher than the one Ezra stated, 27.6%. Using his percentage of income and the IRS numbers they are now paying a ratio of 1.89. I think the numbers from some these articles are suspect. The politics of envy know no bounds. Not to mention they generaly pay more in sales taxes to the states because they buy more expensive items. Your right Fabius, I hope we learn from history and not repeat many of the mistakes of FDR and the great depression, but with the politics of envy I’m sure we will.
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    Fabius Maximus replies: Do you have a link to the IRS numbers you cite? Also, do they include (as does Ezra’s) FICA paid by employees and independent contractors?

    BTW — most of the data I’ve seen shows that sales taxes are regressive (i.e., flattish as % income) taxes — not progressive taxes (rich pay more) as you say.

    Update, based on FxConde’s reply here: I believe you own an apology to Ezra Klein for this comment. The article you cite explicitly says in footnote #4 that the taxes used in this report include neither FICA withheld or paid by self-employed people. Including those taxes were an important part of Klein’s data.

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  6. Until the US taxes either wealth or consumption, it won’t really tax the rich per se, anyhow. Income represents how much money a person currently earns. Wealth represents the total accumulation. The truly rich can easily live off their principle. Outside of property taxes, our current system doesn’t have any lever that actually forces the rich to pay a dime….

    Also, income can be a deceiving statistic. Earning $105K/Yr in New York City is way different than earning $105K/Yr in Temple, TX. I tend to thinkk the entire argumanet is based on statistics that don’t necessarily reflect lefestyle realities.
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    Fabius Maximus replies: I agree with your first point. As for “deceiving statistics”, you are right — but this is an inherent flaw in all analysis. Esp as we usually have to rely on fragmentary, inadequate analysis. After we die, God will show us the transcendent truth — but on Earth we must get by with the statistics we have, at least on blogs.

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  7. My point is that these articles talk as if it’s some huge moral obligation of the rich to pay more taxes to some theoretical “public good,” but the practical reality is that you are paying to a very poor distributor of public wealth. “Stimulus package” was a joke.

    In other words, if the federal government were a charity, would you voluntarily donate to it? I don’t think it would rate even one star.
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    Fabius Maximus replies: I do not understand your point. The government is not a charity. Pretending it is does not work when stopped by a policeman, when reading a draft notice, or when paying taxes.

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  8. Here is the IRS stats page: http://www.irs.gov/taxstats/index.html/

    Also “Individual Income Tax Rates and Shares, 2005“, Kyle Mudry and Justin Bryan
    2005 IRS report. It is pretty long but does go into to ATM and taxes on different investments. Have fun.

    Our current tax system taxes production and labor. I question if this is the best tax system for us to compete and rebuild manufactering with in a competitive environment.Europe uses a VAT, value added tax, perhaps we should consider going to a sales tax system, like the fairtax at fairtax.org. It gives us something to compare to at least.

    And as Arms Merchant pointed out, as well as Fabius, the Federal government has not proven to be very effective as distributing the public wealth. So why give them more? They will just attempt to buy the love and effection of the voters to remain in office.
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    Fabius Maximus replies: I believe you own an apology to Ezra Klein for this comment. The article you cite explicitly says in footnote #4 that the taxes used in this report include neither FICA withheld or paid by self-employed people. Including those taxes were an important part of Klein’s data.

    Note I mentioned this in my reply to your comment.

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  9. Re, #7. Ok, then, substitute “non-profit” for charity. The federal government is supposed to be an essential provider of national “services,” akin to the role of non-profits in our communities. But it’s also supposed to be our servant, not our master.

    Before, I was going to write, “If the federal were a business…” but then, of course I’d invest in it. It’s the only big growth enterprise around now!

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  10. What appears suspect to me is he uses a ratio to describe the difference in income verses taxes paid and a change over time. But you can not do a comparison between those who pay some rate of taxes and those who do not.

    From the CBO: “As for taxes, CBO calculates that the top 1 percent paid 27.6 percent of all federal taxes, including:
    * 38.8% of federal individual income taxes
    * 4.0 % of federal social insurance taxes (Social Security and Medicare)
    * 58.6% of corporate income taxes (indirectly, through stock ownership)
    * 5.5% of federal excise taxes (on such things as gasoline, tobacco, alcoholic beverages and telephones.)”

    It is not a personel insult to question numbers and how they are portraited! I do not believe he was being intentionally misleading but was justifing what he believed, it was written on the “The American Prospect” which claims “Liberal Intelligence”. If I gave that impression it was not my intent.

    The problem is not that there are rich people but why the government has failed to create the economic conditions necessary so those at the lower end of the income spectrum could make more! What remains unsaid is how this concurs with the growth of more government. We can also discuss illegal immigration and it’s impacts as well. I’m sorry I questioned his conclusion’s but I just don’t agree with them. I’ve seen how rich people adjust how money is made to pay less.
    So I know that will continue irregardless but what I care about is how to benefit all American’s from top to bottom and focusing on how rich some are, we create the politics of envy, it is an unintended consequence. This reminds me of a quote from Abraham Lincoln, March 21, 1864, speaking before the Coopers Union in New York City.

    “Property is the fruit of labor; property is desirable; it is a positive good in the world. That some should be rich shows that others may become rich, and hence is just encouragment to industry and enterprise.

    Let not him who is houseless pull down the house of another, but let him work diligently and build one for himself, thus by example assuring that his own shall be safe from violence when built”

    Sorry it’s a little long but on this subject we will just have to agree to disagree.

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  11. The inequality figures report only official income. In the US, many government transfer programs are not included in income and earnings from underground economy earnings are not included.

    The lowest quintile of US households spends twice what they (officially) earn. This has to be taken into account in making income comparisons.
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    Fabius Maximus replies: Thank you for mentioning this (I should have done so)!

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  12. “Warren Buffett has a standing million-dollar bet (payable to charity of the person’s choice) with the rest of the Fortune 100, which nobody has taken. He bets that if you compare the total tax rate of the person with the person’s secretary, including payroll taxes, the secretary actually pays a greater percentage of tax. It is the case for him, and the case for at least two of his friends in the fortune 100.”

    This is hardly surprising, given that we have in this country de facto separate systems of taxation for the very wealthy and everyone else. The current tax code is so complex and filled with trapdoors, loopholes, and arcane provisions that only the very wealthy can afford to retain the small army of tax attorneys and accountants need to navigate the system, and protect their income from Uncle Sam. Moreover, the very rich and influential have purchased more-often-than-not, via campaign contributions, access to legislators – who obligingly write exceptions into the tax code to protect them. The rest of us, will just have to smile and pay up.

    The U.S. legal system operates along the same lines; there is “rich man’s justice” and that of the poor man. The wealthy and influential can game the system, the unwealthy and unconnected cannot.

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