I suggested in an earlier blog that the recent healthcare reform is part of a bigger agenda to redistribute income and wealth in the USA. I just saw a television interview with Howard Dean, a Democrat and a former presidential candidate who confirmed the idea. The widely held belief is that under President George W. Bush (or perhaps longer) the distribution of income changed in such a way as to move income from the poor to the rich. Therefore, the argument goes, it is okay to tax the rich more so as to provide healthcare benefits to those in lower income brackets.
Data from the IRS do not confirm the widely held belief that the rich have somehow escaped an increasing tax burden. If anything, the tax burden on the rich has grown while the tax burden of the poor and those with middle incomes declined. Of course, there might still be an argument that these relative burdens should have changed even more.
Read on for the details of my analysis of the IRS data.
The above link will take you to a report summary and details presented in 10 tables. The tables contain relevant income and tax data for each year between 1980 and 2007. Given the limited room we have here, I decided to focus on comparisons over a 10-year time period from 1997 to 2007. Of course, results could differ depending on which years are compared and the reader is invited to use the data to further the discussion. Briefly, both 2007 and 1997 were years of strong economic growth. While 2007 was the end of a long expansion period, 1997 was not the terminal period of a similar long expansion.
All the data discussed here comes from income tax returns. Thus, it does not include any direct data on wealth. Since adjusted growth income (AGI) does include income from assets as well as labor, it is a fairly broad measure of income. The data reported includes tax return filed that reported a positive AGI – whether or not they paid anything in taxes. Some paid zero (meaning they received back anything that was withheld) in taxes. AGI does not include government transfer payments and other non-taxable income sources.
To facilitate the discussion, I compare three groups – those in the upper 10% of the incomes (Rich), those in the lower 50% (Poor), and everyone else (Middle). I recognize there are many ways to define the rich, poor and middle. To be in the upper 10% in 2007, you had to make more than $113,080. To be in the bottom 50% you could make no more than $32,879.
The details are below, but here are the three main points of the decade comparison -- 1997 to 2007:
1. While the Rich had large income increases, their share of income taxes rose proportionately more to where they accounted for 71% of all incomes taxes paid in 2007. Thus, 10% of the filers paid 71% of the income taxes. They accounted for 43% of AGI reported.
2. The Poor’s income rose during the decade, but the lower 50% of filers fell further behind the rest of the population. This 50% of the population accounted for only 12% of income reported in 2007. They contributed only about 3% of all taxes, however, down from more than 4% in 2007.
3. I constructed a measure of taxes paid relative to income reported and found that the share of taxes the Rich paid was 48% more than their equal share of taxes (if their tax share was equal to their income share). That was roughly constant over the decade. In contrast, the Poor paid about 25% less than their equal share of taxes (if their tax share was equal to their income share). This was down from about 31% in 1997. That is, in 2007 the Poor earned 12% of the income but only paid 2.9% of the taxes.
In 1997, the following was recorded:
· 121.5 million tax returns were filed, with AGI of about $5 trillion and paid income taxes of about $730 billion.
· The Rich (according to my definition) accounted for 10% of the filers, 43% of the income, and 63% of the income taxes.
· The Poor accounted for 50% of the filers, 14% of the income, and 4.3% of the taxes paid.
· Middle accounted for 40% of the filers, 43% of the income, and about 37% of the taxes.
Some metrics – The Poor compared to the Rich had 5 times the number of returns, one-third the income, about 7% of the taxes paid. Summary of metrics – there were many more returns filed by the poor, they accounted for a very small share of the income, and an even smaller share of taxes. If 100 signifies an equal share of taxes to income – then the score of the Poor was 30.7. The score for the Rich was 147. This is one way of measuring the progressivity of the income tax.
Next, let’s see how these metrics changed between 1997 and 2007
· The number of tax returns increased to 141.1 million – an increase of about 16%. The overall USA population increased by about 13% over those years. AGI rose by $3.8 trillion or by about 76%. Income taxes increased $390 billion or by about 53%. The average income tax rate for the USA went from about 14.6% in 1997 to about 12.7% in 2007.
· Rich (as defined by the upper 10%) received 48% of the income and paid 71% of the taxes. Comparing to 1997, the share of income going to the Rich increased by 5 points (from 43% to 48%) and their share of income taxes increased by 8 points (from 63% to 71%).
· Poor (as defined by the lower 50% of the filers) reported 12% of the income and paid 2.9% of the income taxes. The share of income of the Poor fell from 14% to 12% while their share of the taxes declined from 4.3% to 2.9%. Their share accounted for 2 points less of the income and 1.4 points less of the taxes paid.
· Middle’s share of income fell by 3 points from 43% to 40% while their share of taxes declined 6.6 points from 32.7% to 26.1%.
Over these 10 years the income share of the rich rose by 5% -- with the share of the Poor and Middle declined together by 5%. The tax share of the rich increased by 8% while the other 90% of the population saw their share of all taxes declining by a total of about 8%. If we compare income to taxes, the Rich’s score rose slightly to 148; the Poor’s score decreased to 24.2; Middle’s score fell from 76 to 65.