I hear a lot of grumbling about taxes, most especially about people and business paying their “fair share”. It is important to know who is paying taxes, and how much. Some of those numbers are easy to come by, some are hard, and some are impossible to even estimate. Let’s focus on who pays US Federal income taxes and how much they pay, since those are the easiest numbers to get.
The best place to go for US Federal income tax statistics is the IRS, as income tax returns are the best source of accurate information. Unfortunately, the IRS has not posted much information since 2009, and complete information on business taxes after 2003 is not available. They cite that the years 2004-2008 are “under review”, which likely means there are political or other unknown reasons for not releasing the information; no reasonable review could take that many years. Still, the numbers tell us a lot. First, let’s look at taxes on individuals, meaning people and their families:
Federal income taxes on individuals (2009 data)
| All incomes | Less than $50,000 | $50,000-$74,999 | $75,000-$99,999 | $100,000-$199,999 | $200,000 or more | |
| Number of returns | 141,458,638 | 93,832,822 | 18,759,162 | 11,419,877 | 13,516,673 | 3,930,104 |
| Total of AGI* (billions) | $7,801 | $1,892 | $1,153 | $987 | $1,800 | $1,969 |
| Total taxes (billions) | $968 | $95 | $95 | $94 | $232 | $450 |
| Ratio of AGI to taxes | 12.41% | 5.03% | 8.29% | 9.53% | 12.91% | 22.89% |
| Group % of total Fed tax | 100.00% | 9.83% | 9.88% | 9.72% | 24.00% | 46.57% |
| Tax per return in group | $6,843 | $1,014 | $5,098 | $8,238 | $17,190 | $114,715 |
| Group % of tax returns | 100.00% | 66.33% | 13.26% | 8.07% | 9.56% | 2.78% |
| Group % of total AGI | 100.00% | 24.25% | 14.78% | 12.65% | 23.08% | 25.24% |
* AGI – Adjusted Gross Income. Gross income is all your income added up from all sources (wages, tips, gambling winnings, etc.). Adjusted means certain allowed items are subtracted, such as pre-tax retirement contributions or alimony payments. AGI is not the same as taxable income, because exemptions and deductions are subtracted from AGI to calculate taxable income.
If you made more than $112,124 you were in the top 10% of AGI. If you made more than $343,927, you were in the top 1% of AGI.
If we look at the above table, we can see some interesting facts for 2009:
- Individuals earned nearly $8 trillion dollars and paid nearly a trillion in US Federal taxes – about an eighth.
- The bottom two-thirds of all tax returns earned about a quarter of all the income, but paid less than 10% of all US Federal taxes.
- The top third of all tax returns earned about three-quarters of all the income, but paid more than 90% of all US Federal taxes.
- The top eighth of all tax returns earned about half of all the income, but paid about 70% of all US Federal taxes.
- The top 3% of all tax returns earned about a quarter of all the income, just like the bottom two-thirds, but they paid about half of all US Federal taxes – nearly five times as much as the bottom two-thirds paid, as a group.
Businesses also pay a significant amount in taxes. For 2003, we have:
Business taxes (2003 data)
| Number of returns | 27,486,690 |
| Net income (billions) | $1,953 |
| Taxes paid (billions) | $471 |
| % of income to taxes | 24.12% |
Businesses made more money in 2009, but there is only tax information for corporations:
Corporations (2009 data)
| Number of returns | 5,824,545 |
| Net income (billions) | $919 |
| Taxes owed (billions) | $205 |
| % of income to taxes | 22.31% |
If we use the business numbers that are available and plug in the corporate tax rate for 2009, we can make a guess:
Business taxes (2009 data, with estimated taxes)
| Number of returns | 31,607,710 |
| Net income (billions) | $3,133 |
| Taxes paid (billions) | $699 |
| % of income to taxes | 22.31%* |
* This is a guess, using the corporate 2009 tax rate. 2003 shows a higher average tax rate.
Individuals paid $958 billion in US Federal income tax, while (if we accept the guess above) businesses paid $699 billion. Businesses paid somewhere around double the tax rate that individuals paid.
As you can see from these tax rates, people who earn more money are taxed at a much higher rate and pay far more of the taxes each. This is labeled “progressive”, and the United States has one of the most progressive tax systems in the world*, especially when refundable tax credits are included.
* See the book, “Growing Unequal? Income Distribution and Poverty in OECD Countries”
When I hear people saying, “The rich need to pay their fair share!” I like to show them these facts. The rich are paying far more than their fair share. This will be examined in a later post, since “unfair”, “morally incorrect”, and “detrimental” are not the same thing — something can be unfair, but morally correct and beneficial at the same time.
Avoid waging class warfare, for if it were to succeed, we would all be equal in misery and poverty.
I thought that when people said “the rich need to pay their fair share”, they were talking about capitol gains or “investment” income. Which I honestly don’t know what that rate is but I’ve been lead to believe that it is across the board lower than the tax rate for “earned” income. I think it was Bernie Sanders who said basically “I pay less taxes than my secretary” inferring that as a wealthy man he has a lower tax rate on his “income” than does his secretary who is paying an earned income tax rate. The very rich don’t work, so they don’t pay an earned income tax.
I think you are referring to Warren Buffett, as he is the person who made that misleading politicized statement that his secretary paid less taxes than he did. That certainly isn’t true and has been debunked. Warren was misleadingly referring to the overall percentage of his earnings that he pays in taxes versus the percentage his secretary pays from her earnings, which is going to be higher because earnings from capital gains are taxed differently than earnings from income. In a given year Warren probably pays more in taxes than his secretary will in her entire lifetime.
There are many versions of what exactly “fair share” means, but in general that phrase is used as a complaint that somehow the well-off should be paying more taxes than they already are. Fair is a difficult word because its meaning depends almost entirely on your perspective. If a rich person earns $10 billion a year in capital gains, and pays 15% in capital gains tax ($150 million per year) instead of 36% as income tax ($360 million), is that fair or unfair? If you consider the fact that the rich person is paying orders of magnitude more in taxes than he consumes in services, his taxes could be said to be unfair even at the 15% level, and the 36% level could be considered even more unfair. On the other hand, a person who earns $100,000 in regular wages and ends up paying 20% income tax ($20,000 per year), might consider his higher effective tax percentage rate unfair. You are never going to get general agreement on what constitutes a “fair” set of tax rates because there’s neither an objective standard nor any kind of general agreement about what fair means.
Instead of using a nebulous standard such as “fair”, to set effective laws one must consider facts along with cause and effect. Imagine someone opened a doughnut shop and used the US Federal tax model to set prices on a sliding scale similar to the tax chart above. Scaling down by a factor of 10,000, the price for a doughnut would look like this:
So, someone who made $40,000 would pay ten cents for a doughnut while someone who made $200,000 would pay $11.47 for a doughnut — more than 100 times the ten cent price.
How long do you think this doughnut shop would stay in business with this price model? How many people, and at what income levels, would think that this was fair? Finally, consider the fact that for the doughnut shop to succeed without raising the prices for the lower income people, the higher income people must continue to pay the higher prices rather than doing business somewhere else. Whether they will decide to do that depends on both how unfairly they perceive the prices to be, versus the difficulty of doing business somewhere else. That is why we have the Laffer Curve / Moore’s Law, that show that the amount we can collect in taxes is limited. Britain tried to assess a 50% surtax on millionaires and ended up collecting considerably less taxes the next year as most of their millionaires disappeared. Essentially one could say they did their business at another doughnut shop.
Taxes, which pay for many essential government services, can’t exactly be compared to doughnuts. Still, people’s perceptions are their reality. See the posting explaining progressive taxation for a more in-depth discussion on tax rates and fairness.
As a second comment to fairness I must reference one of the best written articles on fairness I’ve ever seen. It was written by Matt Gemmell about why people pirate DVDs.
*** Warning: there is some profanity used in the article ***
The Piracy Threshold, by Matt Gemmell
This is the same motivation for why people decide to avoid taxation when, in their opinion, it becomes sufficiently unfair. I am sure it is exactly the way the disastrous British 50% surtax on millionaires played out.