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Tuesday, March 2, 2010

Tax season special

Here's some fodder for continuing tax policy discussion, courtesy of the friendly folks at the IRS statistics branch, who just published the latest edition of their nerdly research:

Taxpayers filed 142.4 million individual income tax returns for 2008, which was 0.5 percent fewer than the 143.0 million returns filed for 2007. Adjusted gross income (AGI) also declined between 2007 and 2008, falling by 3.7 percent to $8.2 trillion. This was the first time since 2002 that AGI decreased from the previous year. Also between 2007 and 2008, taxable income decreased 5.1 percent to $5.6 trillion, total income tax decreased by 6.2 percent to $1.0 trillion, and total tax liability fell by 6.0 percent to just under $1.1 trillion.

Individual income tax returns reporting a tax liability in 2007 faced an average tax rate of 13.8 percent, the same as in 2006. Taxpayers with AGI of at least $410,096, the top 1 percent of taxpayers, accounted for 22.8 percent of AGI in 2007, an increase of 0.8 percentage points. These taxpayers accounted for 40.4 percent of total income tax reported in 2007, an increase from 39.9 percent in the previous year.

Oh, that top 1%...

Comments (17)

But are the top 1% paying "their fair share?" That is the question. :-)

It might be useful, in answering mp's question, to factor in the FICA and medicare tax as part of the over all federal tax burden. And not just the employee part.

I experience this sudden neurological problem, temporary illiteracy, while trying to read the first sentence of the document. The eyes suddenly glaze over, become very heavy in their sockets, the print blurs into gibberish...

Remarkable. How many people suffer from this disorder, I wonder. It's probably a very widespread phenomenon not generally admitted to. Denial of its existence has made it easier for the US tax-code to become virtually incomprehensible to the common man.

But are the top 1% paying "their fair share?"

Nope, they're not. What's their "fair share", you ask?

Top marginal rates comparable to the 50s and 60s sounds okay, no preferential treatment for capital gains and eliminate the social security cap.

I've solved two problems. I can't get health insurance so I figure if I dodge my taxes long enough I'll get sent to prison. Not only will I have spent my money on myself, but I will also finally get a government sponsored health plan.

Timme

Raising the marginal rate to 91% would surely stimulate the econ. Think of how much work accountants and CFPs would have.

Popping the cap on SS taxes means popping the cap on SS payouts or you can expect SS to become the #1 target for termination.

How would you stimulate investments if you raised the capital gains tax rate?

It might be useful, in answering mp's question, to factor in the FICA and medicare tax as part of the over all federal tax burden. And not just the employee part.

It might be useful if your purpose is to skew the numbers.

This article was about income taxes. FICA taxes are not income taxes (any more than unemployment taxes are). Regardless, half of FICA taxes (and all of the unemployment taxes) are paid by employers directly.

It would be more relevant to consider the percentage of AGI attributable to the bottom 50% of taxpayers - 12.26% or one eighth.

Disturbing number, but it pales in comparison to the amount of income taxes actually paid by the bottom half - 2.89%.

http://www.taxfoundation.org/news/show/250.html

Those numbers are pretty staggering. One percent pays over 40% of the income taxes while half of taxpayers account for less than 3%!

It is discomforting to see so much wealth concentrating into so few hands, but I'm much more worried about having so much of the gov't revenues coming from such a small percentage of people.

We are running record deficits and, at the same time, trying to expand gov't spending to cover new entitlements - (mostly) on the backs of those 1%.

The bottom half can keep voting for people who promise them "free stuff" (paid for by others) but there are consequences.

The majority of jobs created by high taxes are gov't jobs.

What happens if/when the top 1% shrug off their "responsibility"?

It may not be an academic exercise anymore (just watch Oregon over the next two years).

Go ahead and accuse me of recycling oversimplified Randian rhetoric or engaging in knee-jerk Glenn Beck suppositions. Signs of an economic unraveling have been obvious for almost two years now.

About a year ago, progressives started calling AGW skeptics "deniers".

I'm thinking that term will drop out of the progressive lexicon soon. It will be avoided the way "sustainability" is (now that it's more applicable to debt concerns than environmental issues).

Likewise, the "denier" label will come back to haunt progressives as it falls to the dwindling pool of people who steadfastly believe the US government can afford to continue financing its current level of "obligations" (much less the expanded levels under debate in Congress) if we just make the right corrections to the tax code.

We do need to correct the tax code (to a flat tax) but that's only half the problem. We can't continue borrowing money to pay for operating expenses.

We do need to correct the tax code (to a flat tax)

Gag me.

One percent pays over 40% of the income taxes while half of taxpayers account for less than 3%!

Yes, and that same 1% makes about 23% of all the income.

Isn't this just part of the picture? This is just individuals/couples as I read it. What about businesses? I'd like to see a similar report on all businesses from the smallest sole proprieterships to the multinational corporations.

"Adjusted gross income (AGI) also declined between 2007 and 2008, falling by 3.7 percent to $8.2 trillion."

Interesting - You realize the national debt is about $12 Trillion? We make Greece look thrifty.

"eliminate the social security cap"

OK, eliminate the top social security payment and tie it to your actual FICA contributions.

PanchoPDX:

I champion for everyone to pay into the system at a fair rate, and I probably agree with you more often than not regarding taxation; but if being the top 1% is so tough, why not just drop out and become a bottom 50% earner and *only pay* 2.89% of total taxes? Oh right, that might mean giving up the Malibu home and fancy cars. It must be smooth sailing being in the bottom 50%.

Say what you want about progressives and their "class warfare", the very trite "1% of income earners" comments that I hear get thrown around everywhere tries to insinuate and spread the same message just in a different package.

What do you propose...the least wealthy people pay more in taxes?

Probably not, so don't bring down the least represented class of people to try and prove a point. Comparing the highest earners with the lowest earners is just downright insulting.

@PanchoPDX

"What happens if/when the top 1% shrug off their "responsibility"?"

I read "Atlas Shrugged" in 6th grade. Even as an 11 year old, it was obvious that Rand was a sociopath. And rather stupid in regards to human nature. I recognized her as the 5 year old in the sandbox that didn't want anyone else to play with her toys BECAUSE THEY WERE HER TOYS. Unlike most 5 year olds, she constructed a philosophy to justify her selfishness and lack of empathy. Amazingly, some people mistook it for a work of intellect, probably because they, too, didn't want to share their toys in the sandbox.

Back to the question of shrugging off "responsibility": If the top marginal income tax rate were 90%, would Steve Jobs quit Apple and do nothing? No, he'd continue on his quest to create "insanely great" products. Would Lebron James stop playing basketball? No. Nor would he play fewer games because he was disincentivized by the high tax burden, as some economists would predict. The rich are going to keep trying to get richer, no matter what.


"FICA taxes are not income taxes (any more than unemployment taxes are)."

Nevertheless, they have the effect of regressively reducing lower incomes. Not only does FICA come off the top of my employees' paychecks, but it also figures into how much I am willing to pay them.


"One percent pays over 40% of the income taxes while half of taxpayers account for less than 3%!"

That same one percent controls 50.3% of the wealth, according to Wikipedia ( http://en.wikipedia.org/wiki/Wealth_in_the_United_States ). I'd say they're not paying their fair share. :P


"We do need to correct the tax code (to a flat tax) but that's only half the problem. We can't continue borrowing money to pay for operating expenses."

At least we can agree on something, though I suspect we disagree violently on the details.

Here's what I think is a fair flat tax: allow deductions for food, clothing, healthcare, and shelter (primary residence only). Maybe even education. But keep it to the necessities. Tax any income (from any source) above and beyond that at a flat rate.

You can only spend so much on the necessities. Bill Gates' house is one of the more expensive ones out there, and it cost a fraction his yearly income. In contrast, my house cost several multiples of my income. The percentage of income spent on necessities varies inversely with income.

Under this system, the poor would pay little to no taxes. Certainly less than they pay now, when you throw in hidden taxes such as property tax rolled into rent. The middle class would pay a modest % of their gross income in taxes. The rich, even after paying for mink coats and mansions, would pay the lion's share, because they have more income left to tax.

Everyone would have incentive to do better, and no one would go hungry because the gummint skimmed a large chunk off the top of their paycheck before they paid for rent and groceries. If Paul Allen can only afford to put one helicopter on his yacht instead of two, so be it.

But that's just one side of the equation. No matter how equitably taxes are collected, politicians will spend more. As you said, we can't continue borrowing money to pay for operating expenses. But the pols haven't figured that out yet.

How are we going to get the pols to quit making promises that our children will have to pay for? That one I haven't figured out yet. :(

PS It'll be interesting to see if Christie makes any headway in NJ. At least one pol in this country is talking some sense: http://globaleconomicanalysis.blogspot.com/2010/03/governor-christie-time-to-hold-hands.html . Let's hope it's not just talk.

Don't expect people to be accepting of tax increases when the system is so convoluted and complicated that you need to be a CPA, an H&R Bloch Associate or tax professor to comprehend its basic structure and operation.

On the merits, I don't care much what the top 1 percent pay so long they aren't getting hit with income taxes of greater than 50 percent or so. It may just be that I've always liked it when I've been hired by rich men or women (comes to think of it poor men don't hire too many people) and take great joy selling to them.

I think it problematic that so many people pay no income tax at all, or receive net credits. Clearly, the system should be progressive (mathematically) but for balance, responsibility and perspective its important that as many people as possible have a stake in the game, though it may be small.

By the way, how is it that there is an approximate $100 billion difference in the total income tax and the tax liability? I hope the explanation isn't underpayments.

FICA taxes are not income taxes (any more than unemployment taxes are).

This statement is hopelessly misleading. FICA taxes are collected from wage payments, which are income, as a percentage of the gross wage amount (subject to a cap). They are a tax on income. And any employer will tell you that these taxes affect the determination of how much an employee should be paid. So, where does the money go? Almost straight into the federal government's general fund. FICA tax receipts are being used to finance the operations of the US government. These circumstances make their effect on how the federal tax burden is distributed directly relevant.

If the top marginal income tax rate were 90%, would Steve Jobs quit Apple and do nothing?

Given that his annual salary is $1, I suspect you are correct.

That same one percent controls 50.3% of the wealth

Wealth and income are not the same thing. The top 1% pays 40% of all income taxes and they get 23% of all income. I call that fair

Alan, that "I" in FICA stands for insurance, not income. The resulting funds are dedicated by the letter of the law to specific purposes -- to wit Medicare and Social Security. God help us all (and our children in particular) when we have to come to grips with the fact that we've been using these funds for other purposes.


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