1.29.2012

Tax Rhetoric: Convenient Diversion or Social Inequality Exposed?

Clearly the ‘wealthy’ are not ‘paying their fair share,’ as the President and the Occupy Movement (aided by CNN, NPR, and even Fox News) attests. The president also implied that Warren Buffet (Forbes 3rd richest individual) pays less than his secretary. They must do more.

Really? So who does pay taxes in the US, and how much? What if I were to tell you that of the 1% of highest income earners in the US paid 36.72% of all taxes in 2009 (the last year for which statistics have been published). In other words more than 1/3 of all taxes collected from individuals came from just 1% of ALL income earners. The source? Your Internal Revenue Service. 

For the impatient or busy among you, the bottom line is this: The pressing political issue in this election year is not about inequality, or fairness, - its about whether we believe that granting increasing economic power to the Federal Government, at the cost of the actual engines of economic growth, non-governmental enterprise, will create the kind of society we each want. If we don’t arrest federal spending, the result must be higher taxes on individuals and businesses across all incomes, and increased interest payments on Federal debt. All of which is is then unavailable to create productive jobs - jobs that expand the economy.
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Ok for those of you still hanging in there: Who really pays taxes?

Using the IRS data above, the Tax Foundation breaks down the average tax rate that applied to all individual tax payers as follows:
Top Percentile (% of top taxpayers by income level)Share of Total Adjusted Gross IncomeShare of Total Individual Taxes PaidTaxes as Percentage of Earnings (Effective Average Tax Rate)Income Above
1%16.90%36.70%24%$343,927
5%31.70%58.70%20%154,643
10%43.20%70.50%18%112,124
25%65.80%87.30%15%66,193
50%86.50%97.70%12.50%$32,923

According to the IRS, the top 1% on average pay the highest effective tax rate of 24% on their earnings, Mitt Romney and Warren Buffet notwithstanding. They also pay over 36% of ALL taxes. The next highest group, above $154,000/yr (top 5%), excluding the top 1%, pay an additional 22% of all taxes collected.

The top 5% of income earners in total pay almost 60% of all of the total individual taxes collected.

Think about this. 5% of all income earners pay 58.7% of all individual federal taxes collected. This means that of all tax payers (the 50% of us who actually pay federal tax) - the top 5% pay at least 1.5 times as much as a percentage of their income as do the rest of us (or any of us) already. And let's not overlook the fact that almost 50% of income earners now pay no federal income tax whatsoever.

The chart above tells us that the top 1% ($343K+) earn almost 17% of the total income, but pay 37% of all taxes. The top 5% ($154K) earn almost 32% of the total, but pay close to 60% of all taxes. The top 25% ($66K/yr and up) earn about 66% of all individual income, and pay about 88% of all taxes collected. This means that 75% of all taxpayers, earning less than that $66K/yr, pay less than 12% of all taxes. And the tax system is not progressive enough?

The populist and underlying assumption about taxing higher income earners is simple: their income is the fruit of ill-gotten gain, and therefore those ‘earning’ it don’t deserve it. It should be therefore surrendered to the government, or at least as much as the state can get away with taking. If this unspoken assumption isn’t class warfare - I don’t know what is.

If you consider the exponential increase in federal spending and the deficits it represents - if you think confiscatory taxation will stop with the top 1%, or %5%, or 10% - think again. Out of control Federal spending, as illustrated by the St. Louis Federal Reserve chart below tells us only one thing: we either arrest and cut federal spending, or divert more and more from the wealth and job producing economy, to one that exists only on the backs of the productive. In the end, it will ultimately affect all taxpayers.


We can discuss and argue about the roles of republican and democrat regimes in the current situation. But it is clear that Federal spending was on a steady and accelerating course before Obama took office. Since then, both parties have joined hands to enact both the largest federal bail-outs and the most wide sweeping entitlement (Obamacare) in US history. Each have created huge liabilities from which there are only one of two courses: radically spending cuts and then allowing we the people to rebuild and clean up the mess; or rely on an increasingly powerful federal government to mold and shape our economic and personal lives.

This is an election year. The situation is not hopeless. We either support candidates who are committed to arresting uncontrolled spending, or we give up and accept an inevitable Grecian winter. The choice is ours. The time is now. Study your candidates, local, statewide, and national. Make a decision, vote. It won't be perfect, it probably won't be popular. But at least you will have stood up to be counted as one who has said, 'Enough!'

Cheers!

~r

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