The Rich and Their Taxes

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One of the most persistent themes in this presidential campaign is that the rich are not only getting richer, but that they are also not paying their fair share of taxes, mostly because of tax cuts that favor the wealthy. We hear this not only from the Democratic candidates, but from the media, and even from some of the rich themselves.

Last week, for instance, the Economic Scene column in The New York Times informed us that our tax code has become more favorable to high income workers--the big winners in the last boom, the column added--and asked rhetorically, “That doesn’t make sense, does it?” Meanwhile, Sen. Hillary Clinton has decried “reckless tax cuts for the rich,” which she says are adding to the middle class tax burden. Then of course there’s high financier Warren Buffett, who declared last year that taxes were too low on the wealthy. To prove it he’d done a survey in his own office and found that his tax rate was below that of many of his employees.

Reading all of this after having filed your taxes, you probably imagine that the rich are doing a nifty job of avoiding theirs, and that it’s an overburdened middle class that is mostly supporting America’s government—from the war in Iraq to our many domestic programs. And you’d be wrong. As Internal Revenue Service data demonstrate, the rich are getting wealthier, but they are also paying a steadily increasing share of the federal tax burden. Over 25 years, in fact, the percentage of the federal income tax bill paid by the wealthiest Americans has doubled, even as it has shrunk for all others. We are rapidly becoming a society in which a very few pay the greatest part of the cost of government, and everyone else enjoys the benefits. And many people, from our Democratic presidential candidates to members of Congress, want to make it even more so.

To consider how the landscape has changed, it’s worth looking at taxes paid by various income groups over time, via data crunched by the IRS. In 1980, with Jimmy Carter still as president, the top 1 percent of filers, those who reported an adjusted growth income of $80,580 or more, paid 19 percent of all federal income taxes. That was actually less than the total tax share of people collectively in the 11th to 25th percentiles, that is, middle income taxpayers making roughly between $24,000 and $35,000 (in 1980 dollars), and also less than the total share of those earning between $13,000 and $24,000, who represented the 26th to 50th percentiles.

A decade later, despite tax cuts in the 1980s that many critics claimed benefited the rich, our top 1 percent of filers were paying more of the total--25 percent of the country’s tax bill—than anyone else. The portion of taxes paid by the top filers continue to grow throughout the 1990s and into the new century, pausing only for recessions, which are generally periods in which the share of taxes paid by the rich falls because their incomes tend to decline the most. By 2005, the most recent year data are available, our top 1 percent of filers were paying nearly 40 percent of the federal income tax bill, while those in the 2nd to 5th percentile paid another 20 percent. Every other group saw its share of the tax bill decline, sometimes substantially. Those taxpayers in the 26th to 50th percentile (that is, with an adjusted gross income roughly between $31,000 and $62,000) paid 11 percent of all federal income taxes, down from 20 percent back in 1980, while those in the 11th to 25th percentiles (earning between $62,000 and $104,000 today), paid 16 percent of the federal tax bill, down from 24 percent in 1980.

How can all of this be true if, to hear Warren Buffett tell his story, it’s so easy for the rich to minimize their taxes? Buffett’s claim, based on comparing his tax rate to those of people who worked for him, got plenty of publicity, and probably invoked in many people the memory of Leona Helmsley’s infamous line, “only the little people pay taxes.” Buffett’s low tax rate, some people conjectured, was a result of the fact that he earned mostly dividend and capital gains income, and those are now taxed largely at a 15 percent rate.

But Buffett is an exception—one of the super rich. By contrast, most of the wealthy in America today garner their income principally from wages, and thus not only pay more in taxes, but pay taxes at a higher real rate than everyone else—Warren Buffett aside. While taxpayers in every bracket do what they can to minimize their taxes, in 2005, the top 1 percent of filers paid 23 percent of their adjusted gross income in income taxes. Those earning between $62,000 and $104,000--certainly part of the middle class that Hillary Clinton says is bearing a bigger burden because of tax cuts for the wealthy--paid an average tax rate of 9 percent. The tax rate of those with incomes between $31,000 and $62,000 was under 7 percent, or less than one third of the tax rate of the rich.

Of course, this is only the federal income tax. We have other taxes in America, including payroll taxes and even corporate taxes—which individuals pay indirectly through taxes on businesses in which we own shares. The Congressional Budget Office, a nonpartisan entity like the IRS, figures all of those into its calculations of tax rates that Americans pay and concludes that the richest 1 percent pay an even higher real tax rate than the IRS figures—31 percent of income.

Yes, these stats do tell us that some people are doing very well in America, including presumably many people who were middle or low-income workers sometime during the past 25 years and have now vaulted into the top 1 percent of earners. But the data also tell us that much of the hyperventilating in our public discussions about the rich not paying a fair share of taxes is disconnected from reality.

Still, given how skewed the discussion has become, it seems almost certain that with a Democratic victory in the presidential race come November, we will see taxes—and the overall share of taxes paid--rise for the wealthy. Are there any dangers in a society where a fleetingly few earners pay such a big share of taxes, and where some folks’ notion of fairness means taxing these few ever more? We might consider that question by looking at states with their own progressive state income taxes.

Last week, for instance, a labor union-supported policy group released a study noting that Connecticut now has the largest gap between the rich and the poor in the nation. The local pages of the New York Times dutifully reported on this study and asked, what could be done as a remedy? Raise taxes, the advocates urged, heedless of the fact that in Connecticut the top 5 percent of the state’s taxpayers already bear the bulk of the state’s income tax burden. The situation is much the same in neighboring New Jersey and in New York where, for instance, the top income bracket represents just 0.4 percent of taxpayers, but they pay one-third of the state’s income tax.

Is there a consequence to this? Well, for one thing, it’s practically compulsory when talking about the state government in each of these three places to use the adjective “dysfunctional.” All three states have seen governors resign in disgrace within the past several years. All three states are rife with corruption, pork barrel spending and government inefficiencies. Hardly a day goes by that the newspapers don’t reveal yet another outrage of waste, or mismanagement or thievery.

Yet little changes in the government of these states, much to the amazement of outsiders, who often wonder why voters continue to stand for it. The answer, I tell them, is that a very small percentage of voters are paying for this waste, mismanagement and bloat. The rest pay so little that they don’t really care, or they benefit from bloated government, either through jobs in the oversized public sectors, or as users of services.

This is what you get when the few support the many--the direction the federal government is now heading. You get Connecticut, New York or (God help us) New Jersey.

Steven Malanga is an editor for RealClearMarkets and a senior fellow at the Manhattan Institute

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