Do The Rich Pay Their Fair Share?

The obfuscation of tax burdens is perhaps best seen ironically in this chart (link at end) by an artist who does data visualization, Stephen Von Worley. While pretty, it is presented as supporting the hypothesis “the rich are not paying enough” and hence “The middle class are getting screwed”.

Quite frankly I can’t really make heads or tails of the chart but I have a number of issues, like why is it only Single filing status and the use of a long term historical average as the fairness metric. As Briggs shows there are simpler plots to communicate the data. Perhaps we should challenge Mr. Von Worley to create some “hypothesis free” visualizations of the data.

That being said, he does post some interesting things. I especially like the “distance to McDonald’s” chart

http://www.datapointed.net/2011/03/relative-us-income-taxes-1913-2011/

In the top graph, the top 10% pay 45% of the taxes. In the bottom graph, the bottom 90% pay 30% of the taxes. That leaves 25% of the taxes unaccounted for. I’m sure this is easily explained by some difference in the data used, but I can’t think of anything that could explain such a large gap.

Does anyone know what is responsible for this?

The top graph is 1% not 10%

So the richest 10% in the US pay a higher share of all taxes than those in other countries. Doesn’t it also mean that the richest 10% in the USA have or make more money? I guess the answer depends on each country’s tax system, and we probably also need to examine the absolute amounts instead of percentage.

What is a “fair share”?

“True worth”? One friend who works on Wall Street once argued that he shouldn’t have to pay income tax at a higher rate because he works hard for his money. Which is not something that I can disagree with. (He was happy with the tax rates on capital gains.) There is no doubt that he is one of the smartest people I’ve ever known. But I asked him if he thought he works harder than those people who work at McDonald’s. He laughed!

Also, it should be noted that when displaying a plot of income tax, that doesn’t truly represent the *wealth* of the people being taxed.

The latest figures I’ve seen say that the top 20% of Americans own 84% of the wealth. Not only do they have the highest income, they have the highest actual wealth; those are the people who can most afford to pay taxes. Is it ‘fair’ in a classic sense? Probably not. However, is it ‘fair’ that someone in the lowest 20% has to work 45 hour weeks at minimum wage to put food on the table, while someone in the highest 20% can do no work at all and live simply off low-rate interest on savings, savings they may have inherited?

Fair is an interesting, and highly bias-laden word.

Just because you have less doesn’t mean that the rich should pay more. You all have the same 24 hours in a day and the same resources available that the rich have. Stop making excuses and go to work doing something else if you want more. Stop punishing the rich because of your incompetence. If you keep putting anchors on the locomotive, eventually the whole train will come to a stop. In other words, the rich are usually the business owners…the locomotives of the economy. The middle class are all of the freight and the caboose represents the poor. Stop the locomotive and you stop it all.

One last thing. YOU ARE NOT ENTITLED TO A THING!

The graphs appear to focus strictly on income taxes (NTTAWWT). I’d really like to see other forms of taxation separated and rolled up (payroll, VAT, sales, property, etc) in a similar analysis.

In the US, the separation of FICA taxes certainly has distorted the picture, since so much of those have gone right into the general fund. Of course, now the flow is the other way. I’m not sure how that’s been working, but I suspect a similar story applies.

Scott B wrote:
“The obfuscation of tax burdens is perhaps best seen ironically in this chart (link at end) by an artist who does data visualization, Stephen Von Worley. While pretty, it is presented as supporting the hypothesis ‘the rich are not paying enough’ and hence ‘The middle class are getting screwed.’
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While I love Mr. Von Worley’s beautiful data visualization, I too have issues with his analysis. The chart is mislabeled and should indicate that it shows the relative change in marginal tax rate compared to historical averages–and we all know how averages can distort. For example, the bottom rate was 0% for a decade, hiding the abuse of ALL taxpayers during the FDR/Truman/Eisenhower Administrations.

Here’s my deeper analysis of his visualizations. I include some historical basis and annotate two of his charts.

“Pretty Pictures and a Political Rorschach Test”
http://soquelbythecreek.blogspot.com/2011/03/tax-infographic-is-political-rorschach.html

Here are some other previous posts on tax issues.

“The Rich Don’t Pay Taxes” Lie: Purposely Deceptive, Or Backed Up by Data?”
http://soquelbythecreek.blogspot.com/2010/02/rich-dont-pay-taxes-lie-purposely.html

“The Oppressive Progressive Income Tax: California Edition”
http://soquelbythecreek.blogspot.com/2009/07/oppressive-progressive-income-tax.html

The problem is that most of the voters are poor. So the clear solution is to give extra votes to those who foot the bills.

My idea is to give individuals an extra vote for every $10,000 in taxes they pay. If you pay $100,000 in taxes, you get 11 votes: your base one vote for being a citizen plus 10 more for the taxes you pay.

That way the people who pay for government would have more influence over taxes, spending, etc. They would be incentivized to reduce taxes and spending, until some point is reached such that taxes are so low that everybody gets just one vote, whereupon the poor would vote for more taxes and more spending (on them). A balance would thus be achieved between the takers and the givers.

Matt wrote:
“The graphs appear to focus strictly on income taxes (NTTAWWT). I’d really like to see other forms of taxation separated and rolled up (payroll, VAT, sales, property, etc) in a similar analysis.”
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Here’s an interesting breakdown of total taxation by income quintile for 2009. It shows income tax, payroll tax, and corporate tax.
http://www.taxpolicycenter.org/taxtopics/currentdistribution.cfm

CHART: http://www.taxpolicycenter.org/taxtopics/images/currentlaw2_5.gif

The top quintile pays more in all categories except payroll taxes. Why? Because these are defined benefit-style taxes. There’s an income cap on Social Security taxes, just like there is a cap on benefits.

Sales, VAT, property, gas, etc. taxes vary by state. One good source is the information from the Tax Foundation. Now there’s a group that could benefit from a little data visualization!

State and Local Tax Burdens: All Years, One State, 1977-2009
http://www.taxfoundation.org/taxdata/show/335.html

I don’t particularly care for their “per capita” measurements. California has a very progressive state income tax that relies too heavily on a very small population of wealthy taxpayers (just one of the reasons for California’s budget fiasco).

See also “2011 Facts & Figures: How Does Your State Compare?”
http://www.taxfoundation.org/files/ff2011.pdf

Lastly, this page has a wealth of interesting information. Again, to bad that the Tax Foundation seemingly doesn’t know how to graph information.

Summary of Latest Federal Individual Income Tax Data
http://www.taxfoundation.org/taxdata/show/250.html

Fair is a vague and ambiguous word with no objective meaning. When a politician starts talking about fair, it usually means whatever he is talking about makes him feel good. When a politician starts saying something is fair, you better grab your wallet and hang on tight.

I suppose it all depends where one gets one’s numbers from.

I’ve just checked a site called The Stanford Center for the Study of Poverty and Inequality and got very different results.
http://www.stanford.edu/group/scspi/

At the link to their “Inequality Facts”:
http://www.stanford.edu/group/scspi/cgi-bin/facts.php

they have some charts, one of which is this:
http://www.stanford.edu/group/scspi/cgi-bin/fact3.php

where they say that (as of 2001) the top 10% held 71.5% of the total wealth. So if this is still true, and if they are paying 45% of all taxes as you say above, then it looks to me like they are paying significantly under their fair share.

Quote from chart:
“The ownership of wealth among households in the U.S. became somewhat more concentrated in the 1980s and 1990s. The top 10% of households controlled 68.3 percent of the total wealth in 1983 and 71.5% of the total wealth in 2001.”
Source: Edward N. Wolff, 2006. Changes in Household Wealth in the 1980s and 1990s in the U.S.” in Edward N. Wolff, ed. International Perspectives on Household Wealth. Northampton, Mass: Edward Elgar.

These graphs don’t jibe with my political views, so they must be riddled with errors. Next time please be more careful with your data and post graphs that support my views. Thank you.

Francisco,

Total wealth does not necessarily equal income. The tax is an income tax. The top 10% are (or should be) the top 10% earners.

You have an interesting position. The more they have; the more they should share? Does that apply to you as well? If I make/have no money then I should get a share or yours? I presume then you would be willing to support me if I sit on my butt and earn less than you. How generous. I’m sure Briggs will give you my e-mail address. Don’t worry, though. I don’t want the whole world — just your half.

It would be interesting if you investigated property taxes as well. Probably most homeowners would tell you that the property tax burden is excessive and seems to be increasing every year. Yet there are groups and organizations who are exempt from property taxes. Because of this those who do pay property taxes pay far more then thier “fair share”.

Another issue is that the rich have the ability to avoid taxes by giving it to a tax exempt organization. While some may believe this “charity” is a good thing not all tax exempts are charities. For example Al Gore gives millions to his own tax exempt and when he flies around the world his tax exempt picks up the bill. Since he avodied paying taxes on those “donations” that means all the other tax payers had to foot the bill. A more fair system would be to limit the amount any individual/organization could give as a tax exempt gift, lets say $1000 a year. If the person felt really charitable then they would be free to give more after they pay their taxes.

GoneWithTheWind,

Tax exempt money is money that has never been taxed. Corporations don’t pay taxes on the salaries; the donor deducts the gift before calculating income tax; and the recipient doesn’t pay taxes at all. Actually, basing share of government cost on income is a bit bizarre. What does earning ability have to do with services provided and their costs? But even more bizarre is the idea that every dollar that changes hands should be taxed. IOW: it loses value with every exchange. Good inflation engine in that. Tax Exempts (non-profits) presumable give back what they earn with some desirable service. Technically, they don’t earn an income. Not sure how that applies to Gore and Company. Maybe entertainment?

Tax the rich, feed the poor
Till there are no rich no more

I’d love to change the world
But I don’t know what to do
So I’ll leave it up to you

I’d Love to Change the World
— Ten Years After

Wonder what to do when the money runs out. Print more?

DAV,

Are you assuming that all my tax money goes to people who make/have no money? Including retirees? Isn’t it partly spent on the protection of my wealth?

I would be willing to pay more taxes if I were among the richest 1%, and I would be so thankful that I belong to that group. ^_^

DAV,
I don’t have any position except that, if I could get away with it, I would try to pay 0% of my income in taxes, and, I suppose, so would everyone else.
It seems to me that as you approach the top ranks of wealth, your income comes less and less from a payroll and more and more from other sources, which happen to be a lot easier to camouflage in the endless nooks and loopholes of a labyrinthine tax code, than your income from an employer.
When I was employed, I did my taxes myself because it was easy. Now that I am self-employed, I find it pays to pay a specialist to do them for me, so I pay less.

I’ve mentioned the topic under discussion to an economist, who summarized it well, I think. He said:

“As wealth becomes more concentrated [and there is no doubt about this], of course the rich pay more — but not enough to stem the concentration”

Right. The notion that the very rich are being “unfairly” overtaxed does not square very well the fact that wealth concentration keeps shifting towards them. If it had been shifting away from them, I might allow myself a microscopic modicum of sorrow for their plight during one of my frequent empathy attacks. But since the opposite is happening, I can’t manage even that much. I suspect my lack of sorrow for how much the rich pay in taxes is a rather widespread disease, about which the rich don’t loose any sleep at all.

When you compare the % of taxes paid versus wealth distribution you see the following for the 2008 figures from the IRS and Federal Reserve:

% of total income taxes paid vs % of national networth of households owned.

Top1%* (350k+): 36% of taxes paid vs 35% of national networth owned.

Next4% (150k+): 22% of taxes paid vs 27% of national networth owned.

Next5% (115k+): 11% of taxes paid vs 11% of national networth owned.

Next40% (35k+): 28% of taxes paid vs 26% of national networth owned.

Bottom50% (35k-): 3% of taxes paid vs 1% of national networth owned.

*I’d be curious to see the percentages attributable to the Top400 as well as the growth of their networth versus the remaining top1%.

The top 1% aren’t getting screwed.

The people getting screwed are the one’s with a fair bit of income, but who don’t benefit enough from tax breaks (perhaps due to AGI), but have too little income to afford to effectively shield themselves from their increased burden; and the bottom 50% (though likely those between 40-50% being the primary bearers of this burden).

Now considering the value of the influence of the top1% on how government and business is run I’d say that progressive taxes aren’t so progressive. Is it really a suprise that when comparing the distribution of assets that comprise networth that the assets with the greatest tax advantages are all those controlled almost entirely by the top 1%.

When you have the money, you can take advantage of all the loopholes and lobby for more.

I’m not advocating a policy of soak the rich, but this hand-wringing over their tax “burden” is laughable.

An interesting question does rich mean high-income or high-net-worth.

When I use the word, I mean the latter. When politicians use the term they ususally mean the former.

There are countries that tax wealth. And if you are a resident of one of those countries, it is very possible to have a tax bill that is greater than your income. The closest we get in the US to taxing wealth are property taxes.

Regarding income inequality, Pareto observed that 20% of the popluation controled 80% of the wealth in 1906. The ratio of 80/20 has changed little since. Also, for all of the handwringing about income inequality, there is little discussion about income mobility. Look at the Forbes rich list. Almost all on the list are self-made. If the wealth distribuiton was stagnant, that would be a greater cause of concern to me.

There seems to be little doubt that income inequality in the US has been steadily increasing for the last 30 years or so (and so have incarceration rates). Some inequality is probably healthy, but one wonders how long a trend like this can go on before a society becomes totally disfunctional. Does it happen when the top 1% hold 99% of the wealth? Or do things get very messy long before that? And how about incarceration rates? I once heard a wit argue in jest that the optimal incarceration rate is exctly 50%, since good and evil among members of a society should follow some kind of gaussian distribution, and those on the side of the curve where evil outweighs good, should be in jail, thus enhancing the freedom of the remaining 50%. Who knows what the answer to these questions is?

Below, some excerpts fromt he wikipedia article on US income inequality and its trends:

http://en.wikipedia.org/wiki/Income_inequality_in_the_United_States

Data from the United States Department of Commerce and Internal Revenue Service indicate that income inequality has been increasing since the 1970s,[10][11][12][13][14] whereas it had been declining during the mid 20th century.[15][16] As of 2006, the United States had one of the highest levels of income inequality, as measured through the Gini index, among high income countries, comparable to that of some middle income countries such as Russia or Turkey,[17] being one of only few developed countries where inequality has increased since 1980.[18]

[Even Alan Greenspan (of all people!!) expressed some concern about the trend]

Alan Greenspan stated before Congress in 2005 [19]:
“As I’ve often said, this is not the type of thing which a democratic society – a capitalist democratic society – can really accept without addressing.
”
[…]
Between 1979 and 2005, the mean after-tax income for the top 1% increased by 176%, compared to an increase of 69% for the top quintile overall, 20% for the fourth quintile, 21% for the middle quintile, 17% for the second quintile and 6% for the bottom quintile.[23] For the same time span the aggregate share of after-tax income held by the top percentile increased from 7.5% to 14%.[23]
[…]
Economist Timothy Smeeding summed up the current trend of rising inequality on the pages of the Social Science Quarterly:[24]

“Americans have the highest income inequality in the rich world and over the past 20–30 years Americans have also experienced the greatest increase in income inequality among rich nations. The more detailed the data we can use to observe this change, the more skewed the change appears to be… the majority of large gains are indeed at the top of the distribution.”

In view of this trand, it is perplexing that so many people should feel the rich are paying more than their fair share — unless we want the trend to accelerate so we can attain complete dispossession of the bottom 99% of society as soon as possible. The social neo-darwinists will no doubt argue that this is precisely the meaning of survival of the fittest. It’s all part of the natural order, wisely orchestrated by our selfish genes.

Francisco,

There would be less of a need for nooks and crannies if we stopped allowing deductions and just set the same x% for everybody. OK, maybe a single personal deduction as a threshold. There’d also be less exuberance in spending OPM (Congress’s naughty indulgence). But of course we can’t have any of that because a flat tax where everybody pays the same rate is so unfair.

JH,

Hurry up and strike it rich already. I’m pulling fer ya! I need your dough.

Let me tell you how it will be;
There’s one for you, nineteen for me.
‘Cause I’m the taxman,
Yeah, I’m the taxman.

Should five per cent appear too small,
Be thankful I don’t take it all.
…
And you’re working for no one but me.

— George Harrison

On the Japan tour in the 90’s he even added: “If you’re overweight, I’ll tax your fat.” Something not as far fetched as he likely imagined at the time.

Quick Summary
Total (Gross) Income $30,026
Adjusted Gross Income 30,026
Taxable Income 20,676
Total Federal Tax 2,238

Saying “the bottom 40%-45% of earners pay nothing” is an approximation, I guess. Or an exaggeration. I’m sure my dentist would agree that $2,238 is not the same as nothing.

If we look at this data as a collection of national taxation experiments, the slope of the line represented by these points seems interesting. The percent of tax contributed increases faster than percent of income. That is, as income increases, it seems easier to increase income tax on the higher income brackets. I guess that is the definition of progressive. Whether is it good public policy is another question. For that you would need to include some measure of GDP per capita, lagged probably.

Guess the topic of Taxes is like the weather, everyone seems to have opinions, uni-dimensional as they might be. Also no one seems to cringe at the thought of confiscating OPM. If the topic had been sexual orientation or any such, people would be more reticent.

Dear DAV,
God forbid I should ever see you begging on a street corner, in a temple or McDonald’s. It would break my heart.

Deebee

As Libertarian, it’s seems pretty straightforward to me, each bracket pays an equal share of the cost of government relative to the ownership percentage of assets held.

That the price tag and manner in which it is derived is absurd is another issue entirely.

From a November 2010 New York Times Op-Ed piece titled: Who Will Stand Up to the Superrich?
http://www.nytimes.com/2010/11/14/opinion/14rich.html?pagewanted=1&_r=1

Excerpt:
[…]
The top 1 percent of American earners took in 23.5 percent of the nation’s pretax income in 2007 — up from less than 9 percent in 1976. During the boom years of 2002 to 2007, that top 1 percent’s pretax income increased an extraordinary 10 percent every year. But the boom proved an exclusive affair: in that same period, the median income for non-elderly American households went down and the poverty rate rose.

It’s the very top earners, not your garden variety, entrepreneurial multimillionaires, who will be by far the biggest beneficiaries if there’s an extension of the expiring Bush-era tax cuts for income over $200,000 a year (for individuals) and $250,000 (for couples).
[…]

I notice several posters commenting on statistics showing that some small % of the population holds some large % of the wealth. Years ago I saw a model developed in England which (IIRC) demonstrated what would happen if each person began to earn the same income at age 20, and was allowed to save 10% thereof per annum until age 65. After iterating to a stable wealth distribution the result was that 20% of the population held 80% of the wealth. In other words: age and savings can explain most of the asymmetry of wealth distribution. Briggs, I think this model was published in the Economist and I probably have not remembered it exactly, but the above is a close description of the result.

JT, I like that phrase: “iterating to a stable wealth distribution”.

In any case, allowing this process of “stable wealth distribution” to continue in all its glory, it occurs to me that after the next 45 years you would have 20% of the initial top 20% holding 80% of the initial 80% of the wealth (plus 80% of the initially remaining 20%), and so on and on every 45 years. Where this would lead I don’t know, but it doesn’t look good. Sounds like a math problem of limits, tending to one person holding all the wealth though never quite getting all the way there, but almost. Or maybe it does look good: Jason on his way to the Global Golden Fleece. The last man standing.

JT wrote:

“I notice several posters commenting on statistics showing that some small % of the population holds some large % of the wealth. Years ago I saw a model developed in England which (IIRC) demonstrated what would happen if each person began to earn the same income at age 20, and was allowed to save 10% thereof per annum until age 65. After iterating to a stable wealth distribution the result was that 20% of the population held 80% of the wealth. In other words: age and savings can explain most of the asymmetry of wealth distribution. Briggs, I think this model was published in the Economist and I probably have not remembered it exactly, but the above is a close description of the result.”
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I’ve wondered the same thing. There is always a new crop of people entering the world with $0. Meanwhile, people already in the world are working, saving, and investing. If invested prudently, all of these members increase their wealth and through the miracle of compounding interest, have more wealth later in life. Those at the top likely have an even greater multiplier due to globalization and increased leverage. Looking at the Forbes List of top earners, many also enjoy unique social or market conditions–e.g., Bill Gates and the personal computer revolution.

I also believe that those that rely upon the government for their long-term livelihood will also stagnate or drop in net worth–which is why I and my family have always avoided depending on the government for much of anything except for fire protection, police protection, and roads.

1) The definition of fair used here is equivalent to a flat tax rate. While I understand not all laypeople agree, most economists have long ago concluded that a progressive tax rate (i.e., higher marginal rates as your income increases) is better. That would mean that the “fair” line on the first graph should not be straight, it should be an arc.

2) The bottom two graphs are completely the result of income-inequality. The top 1% income-earning-families have seen their incomes increase at a rate nearly 200% faster than the bottom income earning families, and 1.5x faster than the median. It’s obvious that this would shift tax-share as you’ve plotted.

So, unless you plan to solve income-inequality, the only way to “fix” the “problem” you’re showing here would be to make the tax-system REGRESSIVE and tax the poor at a higher rate than the rich. As the overall share of income for the rich continues to increase, the tax rate for the poor would have to increase as well, until the tax rate on the poor is 100%. I doubt this will achieve good long term results.

Mr. Briggs, I’m actually pretty disappointed in your analysis here and would have expected better. Inflation alone contributes to the trend shown in the bottom two graphs.

I respectfully suggest you read up on your economics.