It’s an election year and we are being treated to the Democrats solutions to all problems – higher taxes.
Of course, raising taxes is never popular but the Democrats are trotting out their favorite ruse. We need to raise taxes, they claim, but we are only going to raise the taxes on the rich and on greedy corporations.
Let’s look at the idea of collecting more income tax revenue from wealthy individuals. We’ll deal with greedy corporations in a future post.
According to Democrats, rich people do not pay their fair share of the tax burden. The evil George W. Bush cut taxes for his wealthy friends. This, according to their view of the world, has caused a whole host of societal ills like higher budget deficits, fewer jobs, global warming, rising gasoline prices and Miley Cyrus going berserk and exposing her bare back to Vanity Fair photographers.
If we are going to raise taxes on the wealthy to a “fair” level, then it seems to me that we need to answer four questions: (1) What level of income makes one rich? (2) How much of the tax burden do these rich people currently pay? (3) What share of the taxes should the wealthy pay? (4) What system of values or ethics or morality is used to determine the “fair” tax burden to impose on these individuals?
Let’s assume that we define the wealthy as those who are in the top 10% of wage earners in the country. Let’s raise their taxes. These fortunate individuals can afford to pay more. We would only be raising taxes on 1 in every 10 Americans.
Regarding Question No. 1 then, exactly how much money do you have to earn each year to be in the top 10%? What is your guess? Is it $250,000 a year? Or, is it $500,000? Perhaps it takes a cool million to be in the top ten percent. Please stop reading right now and make your guess.
Thinking …
Thinking …
Guessing …
Okay, time’s up. Here is the answer: In 2005 (latest year for which we have data), anyone with a household income in excess $103,912 was in the top 10% of wage earners.
Please understand that this figure is HOUSEHOLD income! The majority of households in this top 10% are two income households. So, a school teacher married to civil engineer probably has income in excess of this level as does a policeman with a significant other who is a mid-level employee at a small business.
Are these people “rich”? If you are a college student, an income slightly over $100k per year probably sounds like a boat load of money. But if you are a married couple with two kids, you probably wonder how you’ll make ends meet on this amount. You probably do not think of yourself as rich and yet suddenly you find yourself being demonized as a rich American who is not paying enough in taxes.
Let’s take a look at Question No. 2. How much of the current income tax burden is paid by this “wealthy” minority?
In 2005, the IRS collected $935 billion in personal income taxes and the top 10% of household wage earners paid $657 billion of this amount. That’s right. The top ten percent paid 70.3% of all the personal income taxes collected by the federal government!
Just for the record, let’s look at some different income brackets and the amount of income tax paid by these brackets:
The top 1% ($365k or more household income) pay 39.4% of all income taxes
The top 5% ($145k or more household income) pay 59.7% of all income taxes
The top 10% ($104 or more household income) pay 70.3% of all income taxes
The top 25% ($62k or more household income) pay 86.0% of all income taxes
(Note: In case you are wondering, you are in the bottom 50% of wage earners if your household income is less that $31,000 per year. This group paid only 3.1% of all the personal incomes taxes collected in 2005.)
In essence, the United States federal government operates on the 80/20 rule. You’re familiar with the 80/20 rule, aren’t you? In churches, 80% of the giving is done by 20% of the people. In a business, 80% of the sales are made by 20% of the sales force.
It looks like the United States is pretty much run on the same principle. About 20% of the households in the country are paying 80% of the personal income taxes. Apparently, the left in this country does not think that this is enough.
This leads us directly to Questions No 3 and 4. If these rich American households are not paying enough, how much should they be paying? And what is the basis for deciding the “fair” amount? I’ve never heard a Democrat answer these questions.
The current Democrat candidates for president are quite vague on all these questions. Their web sites speak in generalities. Both candidates are in favor of lower taxes for low and middle income Americans and both agree that the wealthiest Americans need to pay more. Predictably, they do not define these income categories. They are intentionally vague.
There are so many more aspects of this issue to be explored but you don’t have unlimited reading time and I don’t have unlimited writing time. So let’s just look at one more facet to the tax question (but someone remind me someday to explain why Warren Buffet’s claim that his secretary pays a higher tax rate than he does is totally misleading and brazenly disingenuous).
More important than the question of how the tax burden is distributed, is the larger question of the overall tax burden itself and the danger imposed on society by the government that collects it.
Total tax revenue collected in 2005 by federal, state and local governments was $3.25 trillion. The GDP was only $12.4 trillion in 2005 and this means the tax burden was around 26% of GDP. This is alarming.
Even more alarming is the comparison of taxes paid by individuals verses the income available for the payment of those taxes. From the $3.25 trillion in taxes collected in 2005, subtract about $0.25 trillion that was collected from corporations. A small portion of the remaining $3.0 trillion was property tax paid by corporations. I can’t tell you the exact amount, but the total property tax burden nationwide in 2005 for all properties was only $0.3 trillion – let’s guess that half of this amount was derived from residential property owned by individuals. This means that $2.85 trillion in taxes were paid by individuals in 2005.
Total personal income in 2005 was only $7.5 trillion. A whopping 38% of every dollar earned by individuals in this country goes to pay some kind of tax.
And – governments want more! This is the truly instructive and frightening reality in the whole tax debate.
Think about this with me for a minute. Can you think of any individual or family or business or church or non-profit organization or school that does not need more money? All of these entities have things that they are not doing because of their limited supply of money. They cannot print money and they cannot demand that their employers and patrons pay them more. As a result, they budget and prioritize.
But the government is unique. It alone can legally take money by force. And one of its tactics for doing so is to make you afraid of all the other entities mentioned above who cannot force you to give them money.
Politicians, especially those on the left side of the political spectrum, frequently demonize the rich. They have spoken so frequently about “greedy corporate interests” that the phrase now seems redundant to many people. But Oprah and Exxon cannot take away my money at the point of a gun the way the government can.
Do not let populist politicians entice you with their invitations to envy and fear and hatred. Rather, be on guard against greedy government interests run by manipulative politicians that suck up $4 out of every $10 earned by hard working Americans and then tell you that they need more money so that they can solve every problem – providing you with a utopian world of universal health care, cheap gas and a fully clothed Miley Cyrus.
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4 comments:
"The top 1% ($365k or more household income) pay 39.4% of all income taxes"
Mike, what percentage of their income did this represent? How does that number compare with the national median? And if it's lower, as I suspect it is, why? Should the rich pay less in percentage terms?
As to your comment about the "rich" not really being rich, come on... How do you think the other 90% are doing making their ends meet?
You obviously hit a nerve with that one Mike.
Hope you're well. :)
Hi, Mike. Thanks for the comments and questions -- and passion.
The top 1% had an overall tax rate of 23.1% in 2005. They earned 21% of all the income and paid almost 40% of all the personal income taxes.
The bottom 50% had an overall tax rate of 2.98%. They earned 13% of all the income and paid just over 3% of all the taxes.
The average income tax rate for all Americans was 12.45%. I don't know the median but it must be much lower. With the bottom 50% paying an average tax rate of 2.98%, the median tax rate must be somewhere in the 4% to 5% range.
The notion that the rich pay a smaller percentage of their income in taxes than the middle class is one that I'll have to deal with in a future post. It is clearly untrue as regards to income taxes but Warren Buffet and others have demagogued this issue by lumping income taxes and social security taxes together.
Regarding the other 90%, I in no way meant to imply that life is easy for them. I was simply making the point that raising taxes on the vaguely defined rich usually means raising taxes on people that are not rich by most people's estimation. A married couple with two kids making $100k is not taking their private jet to their home on the French Riviera or sipping adult beverages with movers and shakers in the clubhouse at Augusta after a round of golf.
While I could find no definition of the rich on the Obama or Clinton web sites, I recently heard an Obama spokesperson talk about raising taxes on the top 10% of wage earners. If we return to the 1990s tax structure, this family making $100k probably owes an extra two to three thousand dollars. Basically, I'm making the point that the top 10% is not a uniformly well-off group of people.
A couple more thing needs to be said about the other 90%. The government breaks income groups into five brackets (quintiles is the technical term) for a lot of different analytical purposes, e.g., if 83% of the people in the country make more than you, you are in the 1st quintile of 0 to 20%; if 38% of the people in the country make more then you, you are in the 4th quintile of 60% to 80%.
Being in a lower quintile does not necessarily mean that you are poor. Speaking personally, I've spent time in all the income quintiles. As a college student, I was in the bottom 20%. When I graduated and got a job, I was probably in the 2nd quintile. In my 40s, with two incomes and three kids, I had worked my way into the 5th quintile. I was never poor and I've never been rich.
Again speaking personally, in the 2000s, there were many years where I knew the income and taxes being paid by myself and my wife along with my mother, my mother-in-law and my three children. Out of the six tax returns filed, five of them were in the lowest 50% of wage earners but none of them was poor.
I'm not claiming that everyone in lower income brackets is doing just fine. There are households with kids trying to get by on $25,000 a year and this puts them in the bottom 50% of wage earners. And they are obviously in a different category than one of my kids who made $4,000 for the year and lived a very upper middle class lifestyle thanks to their parents help.
But, the lower income households also receive a lot of assistance. A recent study showed that the 1st quintile (bottom 20% of wage earners) receive $8.41 in government assistance for every $1 they pay in taxes. In contrast, the 5th quintile (the highest wage earners) are net tax payers since they receive $0.41 in benefits for every $1 of income taxes paid.
But I guess my bigger point is that their are limits to government. Government already sucks up huge amounts of money and still demands more. I'm hoping that my friends on the evangelical left that are big on "speaking truth to power" will realize that this needs to be applied to governments that consume vast amounts of money and still demand more and especially so when Democrats are in power.
As always, I value your friendship and your thoughts and comments.
The following comments are just the first things that came into my head after reading the above, so forgive me if they don't sound well thought out....
1. The so-called "Payroll Tax".
Liberals in Congress like to point this out as something that unfairly burdens even the lowest wage earners. If you earn wages or a salary, then you pay this "tax."
I don't think that the word "tax" fairly describes this entity. It really should be seen as an investment one makes from today's income so that one can receive a future income stream after one retires from the work force. So it is far closer to the contributions that one makes to a pension fund than it is a tax. Anyone who expects to receive a pension should expect to contribute in some way to the fund from which the pension will be paid. The contribution might be a direct contribution [(like payroll deductions for Social Security (innvoluntary participation) or a 401-K (usually voluntary participation)], it might be indirect (such as simply not receiving income that one might otherwise receive if an employer were not making an investment into a pension fund from which you will later benefit), or it may be a personal investment portfolio from which you will draw income after retirement. Or you might have all three of these methods at work.
The whole subject of how the government has botched up the Social Security system, and whether a voluntary or compulsory personal investment portfolio should be part of it, is something for a separate discussion.
But the bottom line for me is this: if you want to receive social security payments in your old age, then you have to pay into the system. Don't expect to pay nothing then expect me to pay you later on. The Payroll Tax is not a tax; it is a compulsory investment in a retirement fund (a pretty lousy retirement fund, but a retirement fund nevertheless).
2. It is so easy to listen to a politician say "We must tax the rich." They always make it sound like they are talking about someone else, not me. And it is so easy to think, "Well I don't have to worry; they are not talking about me. I am not affected. Someone else will be." As long as I am not affected, I don't care.
This is a very dangerous attitude to have. In the "tax-the-rich" scheme, Mike C. has already pointed out that there are an awful lot of "rich" people who don't realize that they are "rich." But even if you escape this little scheme, there is always going to be another one coming along later. Eventually everyone will be affected.
Let's just tax those mean old oil companies. They are getting richer by the second on the backs of the working class. Never mind that those companies are making a normal profit based on percent of sales. We are just talking about BIG sales. Nevermind that a significant chunk of change is plowed back into research as well as to exploration and the building of refineries. Never mind that virtually everyone who participates in a retirement plan (other than social security) is part owner of big oil and therefore a beneficiary of those big profits.
Fundamental change rarely happens in a single leap. It usually happens in tiny increments, none of which taken alone seems to be very important, but when viewed as an aggregate can be seen to be major. Look how we as a western, "Christian" society have gone from total disapproval of homosexual behavior, to tolerance, to condoning it, to offering benefits to homosexual partners, to promoting it as a normal lifestyle alternative, to prosecuting people who speak against it...but then I am moving off-topic. Bottom line: if the politicians say that only some other group is going to have to pay higher taxes, we ALL must take notice and be on guard.
If I lived next door and came to you, Mike T. and told you I wanted you to pay my health insurance, or a portion of my mortgage interest, or to just give me a check for $1200, what would you say? If I told you that I had made some bad investments and wanted you to bail me out because I did not want to suffer any consequences, how would you feel about that? Without the coercion, you might see me as a person who needed help and you might willingly help me. But what if your neighbor on the other side came and told you that you had no choice--he demanded that you pay for all these things for someone you didn't know and had never seen. And if you did not cough up the cash, he was going take it from you. Would you be happy?
That is the way "the government" operates. They force target groups and individuals to give up what is rightfully theirs for purposes that they have defined. And "the government" has an insatiable appetite. It always wants more. And more. It always comes up with new things to spend my money on, and your money. Things that go far beyond those things that our founders defined as the basic functions of government. We have equality of opportunity in this country. We were never supposed to have equality of lifestyle, and certainly no right to expect others to be forced to contribute to our comfort.
So if the "rich" have been clever enough, skillful enough, and fortunate enough to accumulate wealth, why should they be forced to pay more and more to support government programs which are ill-conceived, poorly run, fail to accomplish their purposes, and which never, Never, NEVER go away? It is the rich who create jobs. It is the rich whose entrepreneurship makes the economy hum. If you demand and then take away the income which you regard as "excess," you will remove the incentive for investment, for job creation, etc.
Just a few more thoughts on taxes.
Although I see the Social Security system as inefficient and poorly run, I do view it as a retirement pension program to which its future beneficiaries contribute. The government calls the contributions the "Payroll Tax". I think we should view this as a compulsory contribution to a poorly run retirement program from which we will receive future payments. I do not regard it as a true "tax."
So what is left?
1. Income taxes. Under our present system, the more you earn, the higher the tax rate you pay. So the "rich" pay an increasingly higher percentage of their incomes in taxes. Under our income tax system, it is even possible for some who pay no income taxes to actually receive money from the federal government through the "earned income credit."
2. Property taxes. Those with higher incomes tend to own more expensive homes. Since property tax rates are generally steady across all income levels, this means that everyone pretty much pays the same rate regardless of how expensive their property is. However, there is another consideration. I don't know about Colorado, but in Florida, everyone gets an exemption for the first X amount of value of their "homestead". That means that those with the least valuable property (i.e. the "poor") may not pay any property tax, or their property tax as a percent of the total value of their property is lower than what the "rich" pay. Furthermore, we have additional exemptions for disabled veterans, and the elderly. Of course, if you are a renter, then you do not benefit from the exemptions (but you don't directly pay property taxes, either).
3. Sales taxes. In Florida, as in many states, food, medicine, and many essential services are exempt from sales taxes. That benefits everyone, but if food and medicine represent a high percentage of your total expenditures, then you "feel" the benefit more than others. That most likely covers the poor. On the other hand, the more money you have, the more things you tend to buy, and therefore the more sales taxes you will pay. So not only will the "rich" pay more sales taxes in an absolute sense, but the amount of tax paid as a percent of total purchases will be higher than for the "poor." In my opinion, this is the fairest sort of tax because the taxpayer is somewhat in control. If you choose to spend more of your earnings on non-necessities, you will pay more in taxes. If you want to pay less in taxes, then you can choose to save more of your money.
3. Other taxes. There are all sorts of other taxes (communications taxes, gasoline taxes, etc.). Many of these are a form of sales tax with a different name. There are also "fees" for various services. But to a certain extent these are controllable by the payee who can choose to spend or not to spend.
What I am getting at is that the current system is already weighted to benefit lower income earners. It already is geared to transfer wealth from one group to another group. To look for ways to further increase this transfer is simply wrong. Instead, we should be looking for (and implementing) ways to make our tax system fairer. Yes, I think that the "rich" should pay their fair share, but the Libs would not agree with how I define that. And yes, lower income earners should pay their fair share as well. I firmly believe that you do not value what you do not have to pay for. We should be eliminating wasteful and ineffective programs and giveaways, not trying to create more of them.
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