In the recent fights over how to balance the budget and lower the deficit, one of the most common themes I’ve heard is the huge tax burden that we are imposing on the rich. I heard Rand Paul say it in his interview on the Daily Show, and in the cable news discussion of the President’s budget today I’ve heard it from no fewer than three Republican talking heads. “It’s an outrage to talk about increasing taxes on the rich. The top 10% are already paying 70% of the taxes!” It’s a great talking point – just look at the difference between those two numbers!
But it’s thrown around without much context. What do those numbers mean in practice? I dug in to some data on tax receipts compiled by the Tax Foundation to learn a little bit more. The first thing to note is that the talking point is absolutely right. In 2008, the last year for which the IRS has released data, the contributions to the total tax receipts by income percentile looked like this:
So yes, the rich do pay a larger share of taxes. But that would be true even if we had a completely flat tax rate, because the rich have a lot more money. Even under a completely flat tax rate that collected the same amount of revenue as the current structure, the top 10% would be paying 45% of all taxes (shown by the red line below):
So it’s less of a burden on the rich, and more of the burden on the poor. But how much of a burden on the rich is it? Turns out, though the marginal tax rate on the wealthiest bracket is up at 35% (down from 39.6% during the Clinton era and as high as 92% during the 1950s), the average tax rate is much lower, only 22.7% on the top 0.1% in 2008 (anyone making more than $1,803,585). Meanwhile, while the tax burden on the bottom 50% of tax earners might seem low at 2.6%, that category includes everyone making below $33,048. I would argue that these are people who can’t afford to pay higher taxes, rather than those at the top (for example, the poorest of the top 0.1% would still have $1.4 million post-taxes with that average tax rate . . . not really struggling to get by).
When you combine that average tax rate with the current distribution of wealth in the U.S., it turns out that the tax code isn’t as wildly redistributive as that statistic might imply. The graph below charts the distribution of income (according to the Adjusted Gross Income and Total Income Tax metrics reported by the IRS) before and after taxes. We’re not dealing with a modern-day Robin Hood state here.
I don’t think that taxing the rich is going to solve all of our long-term deficit problems. But I do think that the argument that people will stop working and creating jobs if we increase the top tax rates is a little overstated. Are there really that many people who would give up an extra million dollars of income because after taxes they would only get $770,000 of it?