Behind the Income Tax Numbers: Top 1% Paid 40% of Total

Professor Greg Mankiw points out that the the top 1% of taxpayers paid 40.4% of the total income taxes collected by the federal government. See here.

I don't think we should have a "free lunch" system where millions of Americans have no financial stake in their government. At the same time, with sales taxes increasing, it's hard to argue the middle class and poor are getting a "free lunch."

It would be more fair to see what percentage of all taxes--state, local, and federal--are paid by the top 10% rather than just income taxes. According to the WSJ, the top 1% of earners pay 26% of all federal taxes. See here. Given the income and wealth disparity in this country, the 26% figure does not shock my conscience.

Mankiw's cited statistics show that our income taxation system is inefficient and non-diversified. Any entity that relies on such a small percentage of its "customer" base for 40% of its "profits" will soon have problems.

Rather than feel sorry for the super-rich, we should realize that income taxes are volatile and inconsistent sources of revenue. By relying on such a volatile source of revenue, the government isn't doing us any favors.

Mankiw's post indicates that the rich have never had it worse--their 40% contribution is "the highest percentage in modern history."

This increased burden could mean two things: one, the rich are getting bilked; and/or two, the recession has hit the middle class and poor harder than the rich, so they are getting smaller slices of the income pie and paying less taxes as a result of receiving less income.

I'm going with Door #2. I am disappointed that Professor Mankiw--normally a very thorough writer--cited the Tax Foundation's statistics without properly explaining the numbers.

Overall, we should figure out how to get more paying stakeholders into the system so we diversify revenue sources and rely on more recession-resistant revenue streams.

Update: Professor Mankiw points out that "the [tax] data predate the recession." Although the recession is not factored into the tax data, the disparity in tax burden between the rich and others may still be a result of a declining middle class.

Comments

[Tom E.:]

Another thing to consider with income tax is the "burden". Burden in my opinion would be the amount of tax that you pay out of non-discretionary income. This means you have to cut back on something vital to pay your tax, versus someone who pays their tax out of discretionary income (play money).

Aug 02 09:35 AM

[cash:]

And when our tax money is wasted by the government bailing out bad banks and their ultra-rich cronies, vote-bank communist unions, and distributed to house flipping spendthrifts - every dollar that they collect as taxes is a dollar that is better left in private hands. The yields are far greater.

Aug 02 09:59 AM

[herbert hoover:]

They may have paid 40% of the taxes but they made 70 percent of the income! Not a bad tradeoff in my book.

Aug 02 10:29 AM

[whidbey:]

You said:
"Overall, we should figure out how to get more paying stakeholders into the system so we diversify revenue sources and rely on more recession-resistant revenue streams." What do you have in mind?

The need for new more stable tax base has been obvious for some time has it not?

But - we have a liberal bias in Congress that will not tax illegals (no idea who they are, besides they are a base), those below the Federally determined poverty level (which is arbitrary as hell and not adjusted by regional economics or life styles), and the desire to set incomes policy by both controlling earnings levels directly and by taxes.Congress sets taxes on assets transfers or sales( a real clog on growth and management of wealth that distorts the hell out of decision making and misallocates billions yearly). Have you notice the anger at a national sales tax ("regressive" on the poor even with a large exclusion)? What other alternatives have you got in mind? Would do away with the Earned IncomeTtax Credit (a "refund" on no or low tax payments by the recipient) A pure subsidy just because Congress feels like it.

Your Conclusion is obvious, but hardly worth writing.

We live in a land of social idealism where failure to work or strive is considered bad luck and discrimination. When we are too poor to pay, or our money is no good will that be another injustice??

Aug 02 12:08 PM

[untrusting ...:]

Tuesday, October 7, 2008
Who Pays Taxes?

The WSJ (A25, October 7, 2008) had more statistics on the tax debate:

The top 20% pay 67% of all federal taxes--including not just income taxes, but payroll taxes, corporate taxes, and death/estate taxes. The top 1% of earners pay 26% of all federal taxes.
//////////////////////...
However, the stats I have seen show that the top 20% control about 85% of the household weath and 85% of the stock market wealth. Thus if they are only paying 67% of all federal taxes they are not paying anywhere near the proportion of the income and wealth that they control. If the top 1% only pay 26% of all federal taxes then again they are paying nowhere near the percentage of the household wealth and stock market wealth that they control. Don't remember the exact numbers, but think it was in excess of 50% that the top 1% control. As Bob Shiller, Case-Shiller, points out the income distribution in the US is a hugh and growing problem in the US and has been for decades. If a small minority of Americans control the vast majority of the income and the wealth, then there is nowhere else to get taxes from but them? Ultimately they will also have to pay-off the massive borrowing/deficit of the US government as well as there is no other place to get the money from for that either other than the top 20%.

Aug 02 02:49 PM

[untrusting ...:]

And as for fairness, Real Weekly Earnings peaked over 35 years ago in September 1972! Using the CPI to adjust wages to today's dollars, the average worker made $738.48 per week in September 1972. In January 2008, that figure was $598.18.

(Note: these figures are expressed in Jan 2008 dollars. I use the CPI Index to calculate real dollars, which is based on 1982-1984 dollars. But, I then multiply this figure by 2.1108, which represents the BLS's index factor for Jan 2008).

So, we are getting poorer. And we have been for over 35 years. Only during the end of the Clinton Administration was there an appreciable upswing in real weekly wages over this time period. Don't believe me? See the raw data yourself, here and run the numbers.

In the meantime, CEOs are earning hundreds of millions of dollars, even when they are forced to leave because of poor management which cost their firms billions. In 2005, the average CEO earned 262 times what an average worker gets. In 1965, that figure was 24 times (see story).

======================... the Naked Capitalism-Free Markets and their Discontents for the above statistics and an interesting article discussing the massive transfer of wealth in the US over the past decades to the tiny minority of US elites
======================...
It should be pretty obvious from the above statistics that the top 1%/elites have increased their incomes in the order of 1,000 % (10x) relative to the average worker over the past decades. Whereas the average worker has suffered about a 19% decline in real incomes. Is it any wonder the average US worker is massively in debt today? I suppose one could argue that the average US elite individual is 10x (1,000%) smarter, more productive, etc than before. However the facts are directly opposed to that. If one looks at the evidence of just the last decade, the US elites/public company executives/Wall Street have returned a negative return for the decade. The only obvious conclusion is that the US does not have real free markets or real capitalism. What the US really has is croony capitalism, oligarchies, incompetent politicans managed by lobbysits and the connected elites, significant amounts of fraud and misrepresentation leading to unearned wealth, etc. A great game if you can somehow figure out how to run with the elites and not get caught in misdeeds ... but not so great for the other 99%.



On Aug 02 10:29 AM herbert hoover wrote:

> They may have paid 40% of the taxes but they made 70 percent of the
> income! Not a bad tradeoff in my book.

Aug 02 04:33 PM

[Chris Cook:]

Taxing earned income is pretty inefficient.

Taxing the unearned rents that arise from privileges like limited liability and exclusive property rights over land/location and knowledge would be a simpler, fairer, and pretty unavoidable alternative or complement to a much reduced tax on earned income.

Aug 03 10:55 AM

[DownOnMyLuck:]

What percentage of government spending goes to the benefit of the top 1%? Probably a lot more than 40%.

Aug 03 11:01 AM

[Rayden:]

Chris: excellent point. Taxing anything discourages it; therefore taxing earned income discourages labor. If anything should be taxed, it should be income that comes from government-granted priviledges like (to pick one at random) mining claims. Limited liability is also a good one, but much harder to quantify - how would you put a price on the value of LL to, say, Exxon?

On Aug 03 10:55 AM Chris Cook wrote:

> Taxing earned income is pretty inefficient.
>
> Taxing the unearned rents that arise from privileges like limited
> liability and exclusive property rights over land/location and knowledge
> would be a simpler, fairer, and pretty unavoidable alternative or
> complement to a much reduced tax on earned income.

Aug 03 12:58 PM

[drolls:]

"herbert hoover: They may have paid 40% of the taxes but they made 70 percent of the income! Not a bad tradeoff in my book."

It's not given to them. They've worked (and usually hard) for it. Why should they be penalized for putting so much effort in?

Aug 03 09:26 PM

[Glen L.:]

Man, this is one time where I gave almost every commenter a thumbs down - and am giving the author a thumbs down with my comment.

The ignorance concerning taxation is mind-numbing. Where to start? First and foremost, there is no such thing as "fair" taxation. Taxation is the forcible extraction of money from the private, productive sector to benefit the State, and nothing else. After it takes its own exhorbitant cut of the stolen loot, it doles out the remains to special interest groups who gather like vultures and hyenas to fight over the spoils. In the social democracy the US has devolved into, the scavengers include both the rich and the poor, and quite a few of the middle class as well. But here we have almost universal rich-bashing, class warfare at its ugliest.

In a just society, every citizen would pay for only the services he uses, and nothing more or less. And every citizen would be free to do whatever he wants to do with whatever wealth he accumulates, as long as it doesn't violate the legitimate rights of anyone else. Theft of any kind would be outlawed, including the theft we call taxation. Then, and only then, will we have a civilization worth defending with our lives.

Aug 03 10:57 PM

[Chris Butler_:]

Come on. Please tell me you're not this shortsighted. The "rich" don't just pay 40% of total tax on 70% of total income (I'm taking your figure here to be accurate). They also take a bulk of the entrepreneurial risk in this country. The evil rich provide the funding for commerce in this country through equity and debt finance. Creating new economic value through the entrepreneurial process and financing of America's commerce, of course, leads to job creation. If you have a job, you may very well work for the evil rich, at their leisure.

It seems a little strange this has to be explained on a economics, finance and investment forum.

Having said all that, we will always disagree about who pays what in this country. Is 40% too low? Too high? I don't know, but taking capital from the productive class and giving it to the non-productive class - whatever the amount - seems like a waste of capital to me. I grew up middle class and can honestly say that I think having a healthy middle class is good for a country. However, I do not believe such a class ought to be artificially created at the expense of the rich simply for the sake of "evening things out a bit." That strategy has severe repurcussions.

On Aug 02 10:29 AM herbert hoover wrote:

> They may have paid 40% of the taxes but they made 70 percent of the
> income! Not a bad tradeoff in my book.

Aug 05 01:46 PM