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One of the most divisive issues in this country right now is taxes.And understandably so.
Everyone hates taxes.
And everyone wants someone else to pay all the taxes.
Also, we have a massive budget deficit right now, and most reasonable people agree that the only way to balance the budget will be to cut spending growth and pay more taxes.
And no one likes the sound of more taxes.
But who pays those taxes, anyway?
How much is too much?
Who should pay more?
We can’t really have an intelligent discussion of taxes without knowing who pays them.
And, politically, it’s “silly season” right now, with each side saying whatever it thinks it has to to win, so we can’t rely on politicians to tell us about taxes.
So, let’s put aside politics for a few minutes and look at some facts…
For the purposes of these slides, we will be talking about FEDERAL taxes. If there's one government that everyone hates paying taxes to more than any other government, it's the federal government. So we're going to focus on that one. 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.
The good news is... the solution to our budget deficit is obvious. 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 who have to agree, we're going to have to compromise: A little of both.
First, let's get a sense of FEDERAL taxes as a per cent of TOTAL taxes. Here's TOTAL government tax revenue...
And then here's TOTAL tax revenue (green) broken down into FEDERAL tax revenue (red) and STATE+LOCAL tax revenue (blue). We're going to be talking about FEDERAL tax revenue.
And here are the components of federal tax revenue. The TOTAL (red) is composed mainly of PERSONAL taxes (blue), SOCIAL PROGRAM taxes (green) and CORPORATE taxes (orange). We're looking at the first two: INCOME taxes..
And now let's move up the income stack... The top 25% of income-earners pay about 80% of the income taxes in the country.
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.
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 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.
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.
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