Who pays taxes anyway? Part 1

A recent article in the New York Times by Patricia Cohen asked what could raising taxes on the top 1% do and found that it could do a lot.

Cohen:

If the tax increase were limited to just the 115,000 households in the top 0.1 percent, with an average income of $9.4 million, a 40 percent tax rate would produce $55 billion in extra revenue in its first year.

That would more than cover, for example, the estimated $47 billion cost of eliminating undergraduate tuition at all the country’s four-year public colleges and universities, as Senator Bernie Sanders has proposed, or Mrs. Clinton’s cheaper plan for a debt-free college degree, with money left over to help fund universal prekindergarten.

There is no doubt that there is rampant income inequality in the US. Income gains since the 70s have largely flowed to the top, while everyone else is stuck in place (see chart below).  Even since the Great Recession, income inequality has increased, with most of the gains flowing to the top 1%.

Income Gains Widely Shared in Early Postwar Decades - But Not Since Then

So what’s going on here to cause this growth in inequality? And what is the solution? Is it as simple as many on the left claim, that the rich just aren’t paying their fair share of taxes? Well maybe, but it depends on how you define fair. Many would be surprised to learn that the rich pay the vast majority of income taxes in this country. The top decile of families earn 44% of the income and pay 60% of federal taxes.

Percent Distribution of Income and Federal Taxes, by Income Decile
Adjusted Family Cash Income Decile Percent of Families Share of Income Share of Federal Tax Burden
bottom decile 9.6% 1.0% -0.4%
2nd decile 10.0% 2.1% -0.4%
3rd decile 10.0% 2.9% 0.2%
4th decile 10.0% 3.8% 1.1%
5th decile 10.0% 5.0% 2.5%
6th decile 10.0% 6.5% 4.2%
7th decile 10.0% 8.4% 6.3%
8th decile 10.0% 11.0% 9.8%
9th decile 10.0% 15.2% 15.9%
top decile 10.0% 44.1% 60.0%
Source: Data from Office of Tax Analysis, U.S. Department of the Treasury. Sept 23 2014

Shown another way, in a beautiful exploded donut chart:

Source Data: U.S. Department of Treasury Office of Tax Analysis

Source Data: U.S. Department of Treasury Office of Tax Analysis

So, it’s not surprising that even though, according to Cohen: “an overwhelming proportion of Americans complain that many wealthy people don’t pay their fair share in taxes…Most of [the top 1% of taxpayers] insist they are already paying more than enough.”

It’s worth noting that lopsided tax receipts from top earners is itself a product of income inequality. Nobel Laureate Joseph Stiglitz said it well, “The only upside of the concentration of the wealth at the top is that they have more money to pay in taxes.”

In next week’s blog post I’ll take additional steps to quantify just how unequal we are as a society by calculating a simple metric that is well-known in international development circles, the GINI coefficient. Then I’ll suggest that reframing income inequality from a fairness issue to an issue of investment and competitiveness may be a better way to go.

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