OK, Folks, Let's Put Aside Politics And Talk About Taxes... [CHARTS]

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Everyone’s fighting about taxes again, as the government tries to avoid the fiscal cliff.So, it’s a good time to review some tax facts.

Let’s start with these two:

  • Everyone hates taxes.
  • Everyone wants someone else to pay all the taxes.

Alas, we have a massive budget deficit, and most reasonable people agree that the only way to balance it will be to cut spending growth and pay more taxes.

So, who should pay them?

How much is too much?

What’s fair?

Those are all good questions.

So, let’s put aside politics for a few minutes and look at some facts…

A preliminary note: In these slides, we will be talking about FEDERAL taxes. Federal tax revenue, as you can see, is still going up.

As a per cent of the economy, though, federal tax revenue is actually well below average--only 17% of GDP.

Federal spending, meanwhile, is running at 24% of GDP.

So we have a massive budget deficit.

To fix our deficit, we have to raise taxes as a per cent of GDP (blue) and/or cut spending as a per cent of GDP (red). And given that there are 320 million of us, we're going to have to compromise: A little of both.

OK, enough about spending. Let's talk taxes.

TOTAL GOVERNMENT tax revenue (green) is broken down into FEDERAL tax revenue (red) and STATE+LOCAL tax revenue (blue).

TOTAL FEDERAL TAX REVENUE (red) is composed mainly of PERSONAL taxes (blue), SOCIAL PROGRAM taxes (green) and CORPORATE taxes (orange). We're going to talk about INCOME taxes.

The top income tax bracket is very low, historically speaking.

OK, so who pays the income taxes in this country?

The top 25% of income-earners pay about 80% of the income taxes in the country.

The top 10% pay about 70% of the income taxes.

The top 5% pay more than half of the income taxes.

And the top 1% pay more than 30% of the income taxes--a percentage that has been steadily growing over time. (You can see why the top 1% complains about having to shoulder too much much of the tax burden.)

Here are the income taxes paid by the respective income percentiles. Note how little the bottom half pay (blue). Note how much more as a percentage of the whole the top 5% are paying.

Of course, if you're in the top 1%, that means you have a lot of income to pay income taxes with. The top 1% in 2009, for example, made a minimum of $350,000 apiece. The top 5% made more than $150,000. The top 10% made more than $110,000. And so on. The bottom 50%, meanwhile, made less than $30,000.

When you put all those incomes together, American taxpayers made just under $8 trillion in 2009. Here's how the income bands broke down as a per cent of that total income.

So now let's look at how that income distribution breaks down. Not surprisingly, the top 50% make the vast majority of all the income in this country.

The top 25% make about three-quarters of all the income.

The top 10% make about half of all the income.

The top 5% make about a quarter.

The top 1% make a nice chunk (which has grown significantly over the years).

And the top 0.1% do startlingly well.

On a per cent-of-the-whole basis, here's how all that income breaks down. Looks pretty even--until you remember that the top 5 bands are all in the top half. The blue band is the bottom half.

OK, before we go back to taxes, let's spend a bit of time understanding the key economic trend of our age--why the top income earners are making more and more of the total national income (and, at the same time, paying more and more of the income taxes). Here's a chart of US income growth for the last 90-odd years through 2008. Over the whole period, the income growth was relatively widely distributed (pie chart).

Over the first ~60 years of that period, in fact, the income growth was very widely distributed. The bottom 90% of earners actually collectively captured most of it (blue in the pie chart).

But in the past 30 years, all that changed. In the past 30 years, the bottom 90% (blue) captured only a tiny percentage of the income gains. The top 10%--and especially the top 1% (pink)--captured most of it.

And then look at what happened in the decade through 2008: The top 10% captured ALL of the income gains in the country--and the incomes of the bottom 90% SHRANK.

And the explosion of senior executive pay, meanwhile, has sent the earnings of the richest Americans going through the roof.

So that's why the top 10% is capturing all of the income gains. Now let's look at those income and tax percentiles together. The bottom 50% of income earners in this country--those who make less than $30,000 a year--make about 13% of the total income and pay 2% of the income taxes.

The top 50%, meanwhile, make and pay pretty much everything.

The top 25% of income-earners, who make more than ~$60,000 per year, make two-thirds of the national income and pay 87% of the income tax.

The top 10% of earners, who bring home a minimum of ~$110,000 per year, make 43% of the income and pay 70% of the income tax.

The top 5% of earners, who make a minimum of $150,000 a year, make a third of the income and pay almost 60% of the income tax.

And the top 1%, who all make more than $350,000 a year, make about ~17% of the income and pay 37% of the tax.

And how about the top 0.1%? They make 8% of the income and pay 17% of the tax.

The 0.1%, by the way, make more than $1.5 million apiece.

The bottom 50% collectively make only slightly more than the top 0.1% (how's that for income inequality!?). But the top 0.1% do pay more taxes...

Lastly, how about income tax rates? You guessed it: They're higher (though not high) on the 1% and 0.1%.

So, what's the answer? How can we fix our country? Who should pay more? The answer is actually more on the income side than the tax side. To fix this country, we have to increase the incomes of the lower-middle class and middle class--not by taking away income from the top half, but by getting more income to the bottom half.

Wages, meanwhile, are at an all-time low. So it's no wonder we have such an inequality problem.

So that's your crash course in income taxes. Now let's talk about the economy...

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