Raising Income Taxes

I recently wrote about income distribution. Today I turn to income taxes. As the Biden administration unfolds plans to greatly enlarge the scope of government spending, our minds turn to how we will pay for the extra trillions spent on infrastructure, childcare, green subsidies, and so on.

It might remind you of one of those finger-pointing exercises when everyone points at someone else who should bear the burden.  Who is going to pay for those extra trillions of dollars of government spending?

Point no further – of course, it is the rich folks who should pay. One storyline reads that Trump reduced the taxes of those folks and now it is time to collect.

So, I decided to look at some data. As usual, the data can be pretty illuminating. It doesn’t really provide any final answers to whether or not we should squeeze the rich. Some of you won’t be satisfied until everyone nets $15 per hour. But let’s play this game anyway.

The data comes the Internal Revenue Service and it relates to shares of taxes paid by income category.

The data I used starts in 2001 and goes through 2018. I wish I could have gotten more years but apparently there have been changes to the methodology and the pre-2001 data can’t be compared to years after 2001. Data for 2019 has not been published yet.  We are stuck with 18 years of data.

2001 was the beginning of George Bush. He served until 2009 when Obama took over. In 2001, the top 1% of all taxpayers paid 28% of all income taxes. Note that if we had an equal distribution, the top 1% would pay 1% of the taxes. So clearly, we have a progressive tax system. 

Let's move ahead to 2018. 1% of the tax returns was about 1.4 million tax returns. That means that of the 143 million tax returns filed in 2018, that 1.4 million of those returns accounted for 25% of taxes collected. The top 1%'s share of taxes was smaller in 2018 than in 2001, but 25% is still a full quarter of all income taxes paid. 

You might say, that’s cool. Maybe that 1% of taxpayers should have paid 30% of all income taxes. Or maybe you want them to pay even more. I can’t answer those questions. I can just point out that 1% of us paid 25% of the taxes.

Let’s go to the other side of the income scale. In 2018, the bottom 50% of all tax returns paid 3.4% of all taxes. Half of the all the returns paid 3.4% of the taxes. That isn’t zero but you could say that half the folks in the US basically paid almost none of the income taxes. Think of that. Of those 143 million returns, there were 71 million returns that paid almost nothing.

Put some of this above together. Of 143 million returns, 1.4 million of them paid 25% of all taxes and 71 million returns accounted for 3.4%. Subtracting, that means the remaining 70 million tax returns or 49% of all tax returns – people who were not super rich and people who were not among the bottom half, paid about 72% of all the taxes. Having average but not high income puts you in a group that is floating the US economy. Those 70 million taxpayers represented a little less than half of all taxpayers and paid approximately 72% of all income taxes paid.

Clearly, we already have a tax system wherein the bottom 50% of the population by income pay almost nothing in income taxes and receive a goodly share of the benefits of government. The remaining 50% of the population pay more than their share so that the bottom 50% get to pay little.

As I said above, you may believe that the above is not enough. I can’t influence that. I can wonder out loud when enough is enough. Higher income people are smart and mobile. At some point, if Biden gets too aggressive in raising taxes even more on higher income and mobile folks, he may find himself without people to pay. Then who is going to shoulder the main tax burden?