Taxes and the Rich

Whenever the issue of tax cuts gets brought up, a common complaint is that many tax cuts "only benefit the rich," and that the rich don’t pay their fair share. Typically, of course, there are no statistics to back this up. If there were, I think it would be a tougher argument to sell. Why? Because the rich pay a disproportionate share of federal taxes in the U.S.

Let’s look at the tax distribution by income percentile.

Here’s the distribution, provided by NTU, of which income groups paid what share of the income tax in 2005:

When the top 10% of earners are paying 70% of the total income tax, I think it’s tough to complain that they’re undertaxed. Meanwhile, the poor — the bottom half of earners — aren’t exactly being unfairly squeezed at 3%.

Ah, you say, but what about payroll taxes? An article in The American summarizes the tax data put together by The Tax Policy Center, a joint effort between two left of center think tanks (and no low-tax ideologues), Brookings and the Urban Institute:

The Tax Policy Center, run by the Urban Institute and the Brookings Institution, recently studied payroll and income taxes paid by each income group. The richest 1 percent pay 27.5 percent of the combined burden, the top 20 percent pay 72 percent, and the bottom 20 percent pay just 0.4 percent.

Again, this hardly looks like a wildly uneven or unfair distribution. Meanwhile, the same article points out that, since the beginning of the Reagan era, which saw top tax rates come steadily down from their previous astronomically high levels, most Americans are better off:

Median family income in America between 1980 and 2004 grew by 17 percent. The middle class (defined as those between the 40th and the 60th percentiles of income) isn’t falling behind or “disappearing.” It is getting richer. The lower income bound for the middle class has risen by about $12,000 (after inflation) since 1967. The upper income bound for the middle class is now roughly $68,000—some $23,000 higher than in 1967. Thus, a family in the 60th percentile has 50 percent more buying power than 30 years ago

(For more info on the Reagan tax cuts, check out this Cato paper and this report by the Joint Economic Committee.)

UPDATE: In the comments section, Sickle argues that:

Of COURSE the poor are not going to contribute as much tax revenue. They don’t make as much money! The real chart you need to post is the percentage of income the bottom rung pays vs. the percentage of income the top rung pays.

You request, I provide.  Here’s a look at the CBO’s chart of effective tax rates by income quintiles in 2003 and 2004.  (Taken from the report “Historical Effective Tax Rates 1979-2004”, page 5 [PDF]).

The chart measures what’s known as the “Effective Tax Rate,” the total tax burden when you add up all federal taxes.  (Click the chart to see a full sized version.)

And lo and behold, in both years, the bottom quintile paid significantly less in federal taxes as a percentage of income–4.6% and 4.5% respectively–than the top quintile, which paid 25% and 25.1%.  This is hardly surprising, really, considering our progressive income tax code, but it makes the point all the same: the income tax burden falls heavily on the rich. They pay significantly more in actual dollars. They pay significantly more as a percentage of total tax revenues. And they pay significantly more as a percentage of income. So the arguments about how the rich aren’t paying their fair share just don’t hold up.

*Post corrected to say that the chart came from NTU, not the Tax Foundation.