The Rich Pay for the Federal Government

by on December 18, 2007 at 8:34 am in Economics | Permalink

Despite all the deductions, loopholes and clever accountants the federal income tax is strongly progressive.  Moreover the federal tax system remains progressive even if you include the payroll tax, corporate taxes and excise taxes.  The chart below with data from the Congressional Budget Office, shows the effective tax rate by income class from all federal taxes. Effective tax rates are considerably higher on the rich than the poor.

The effective tax rate is higher on the rich and the rich
have more money – put these two things together and we can calculate who pays
for the federal government. The final
column in the table shows the share of the 2.4 trillion in federal tax
revenues that is paid for by each income category. The remarkable finding is that the rich and
especially the very rich bear by far the largest share of the federal tax
liability.  The top 10% of households by
income, for example, pay more than half of all federal taxes and the top 1% alone pay over a quarter of all federal taxes.

(Click the table if it is not clear.)

Tax_3

1 Bill December 18, 2007 at 8:42 am

Can you explain to me how the top 10% can pay a higher percentage of the total than the top 20% do?
There must be a screwed up formula in there somewhere.

2 Steve R December 18, 2007 at 9:01 am

I’d be curious to see the same chart, but covering ALL government taxes & fees, federal, state, and local, such as sales taxes, property tax, social security, etc. I’m not sure if this would make the situation look more “progressive” or not, but I think it would be a much more interesting number. For me as a taxpayer, the distinction between “federal income tax” and all the other taxes and fees is pretty close to meaningless – because over time I’ve seen that when one set of taxes goes down another set seems to go up about an equivalent amount. Thanks.

3 Riemannian December 18, 2007 at 9:14 am

The “left” likes to criticize the progressivity of the tax system by pointing out how much income the rich keep. The “right” instead tries to focus on how much the rich pay into the tax system. It is this conflating of metrics that politicians will continue exploit in their arguments.

4 brainwarped December 18, 2007 at 9:24 am

I feel like there is a deeper meaning. Like, maybe politicians do what the rich tell them to because they pay the government more than anyone else?

5 Colin December 18, 2007 at 9:42 am

So the bottom 40% pay about 5% of all federal taxes paid. Of course this is in large part due to the fact that so many people have no tax liability at all. No wonder there isn’t an outcry for tax relief in this country.

“From those according to their ability to those according to their need.”

6 Stephen December 18, 2007 at 9:49 am

I find this assumption rather troubling:

Far less consensus exists about how to attribute corporate income taxes (and taxes on capital income generally). In this analysis, CBO assumes that corporate income taxes are borne by owners of capital in proportion to their income from interest, dividends, capital gains, and rents. (The shares of various tax liabilities borne by different income groups in 2004 and 2005 are shown in Summary Table 2.) Over the long term, however, some models suggest that at least part of the burden falls on labor income.

What is the net effect on the table of the imputation of corporate income tax to individual owners? To not attribute at least a portion of this to labor income strikes me as wildly unrealistic, frankly.

7 jp December 18, 2007 at 9:50 am

Student — As a taxpayer, I find the data *very* interesting. 😉 More importantly, one argument that politicians seem to trot out regularly is that taxes on the rich should not be cut because the middle class is being “squeezed.” But the data suggest that the middle class is, if anything, getting a good deal in terms of what they pay in relative to their share of total income.

8 MostlyAPragmatist December 18, 2007 at 10:04 am

The commie, egalitarian lefties hope nobody realizes this. Just a modicum of rational thought reveals that even a flat tax results in the rich filling a grossly unfair percentage of the government trough. If the so-called “fair-minded”, “egalitarians” really gave a “damn” about “equality”. They’d propose a tax system where the bottom quintile has an effective tax rate of 35% and the top quintile has an effective tax rate of 2.5%. That way they’d both be paying for equal shares of the government.

Of course, the lefties get apoplectic when this is pointed out, because total spending would decrease and the handouts to the lazy, unproductive “unfortunates” would have to disappear.

😉

–MostlyASatirist
Extrapolating to ridiculous conclusions so that you don’t have to!

9 Person December 18, 2007 at 10:15 am

About these numbers–so what?

10 Mark December 18, 2007 at 10:19 am

“The remarkable finding is that the rich and especially the very rich bear by far the largest share of the federal tax liability.†

Why is this remarkable? With gross income inequalities, it of course has to be the rich who pay for the bulk of govt spending. You cannot take much off those who have little in the first place. A table over at Mankiw’s shows that the share of taxes paid by the rich has been increasing over time – but so has their share of income†¦

http://gregmankiw.blogspot.com/2007/12/progressivity-of-income-tax.html

The pattern of tax revenues reflects income inequality rather than somehow correcting for it.

11 MostlyAPragmatist December 18, 2007 at 10:39 am

To those who wonder what Alex’s point is: stop being so nice. Alex’s point is that his table refutes the claim that the tax rate isn’t progressive with respect to hedge-fund managers. I understand it’s hard to believe such a hare-brained thesis would appear on a blog that is frequently as insightful as this, but that’s what he’s saying.

12 Eric S. December 18, 2007 at 10:53 am

It is barely progressive. It used to be MUCH more progressive. Every time a Republican gets elected, the tax burden is shifted down towards the middle class. This has been happening since the New Deal. With each tax cut, the rich are paying less and less and guess who’s paying more? You and me. Read Paul Krugman.

The tax rate IS NOT progressive with respect to hedge fund managers! The table shows averages. Hedge fund managers probably pay a smaller fraction of their income in taxes than you do.

Why is WORK taxed higher than INVESTMENTS? The rich simply collect their dividends without working and pay less in taxes than folks working 50 hours per week.

13 A student of economics December 18, 2007 at 11:03 am

Jared writes: “I’d say we should take the difference of the area under the Gini curves of income and tax burden.”

An easy way to provide a general sense of this would be for Alex to include a column in his table labeled “share of income” adjacent to the column labeled “share of total Federal tax revenue”. Such a column is in original CBO report, but Alex omitted it. See my post above.

Alex: it’s still not too late for you to update the table so we can have the relevant facts as we discuss this issue.

14 Knox H. December 18, 2007 at 11:27 am

Eric, how does the table Mankiw posted (http://gregmankiw.blogspot.com/2007/12/progressivity-of-income-tax.html) jive with the idea that every Republican president shifts tax burden off of the upper income groups? It appears their burden grew in the first five years of the Bush administration. Now I know this is only income taxes, but that’s the data I’ve got to work with right now, and since income taxes are a dominant share of tax revenue, it’s going to have to do.

Furthermore, the tax system isn’t as progressive with respect to retirees either, since they’re living only off investments. It isn’t as progressive with respect to people who commute long distances in cars, since their gas-tax liability is increased. Effects like this are why it’s futile to discuss progressiveness with respect to a narrow subset of people. The system has to be considered as a whole.

And absent any data at all on the top .001% of income earners (a ballpark figure of how many hedge fund managers there are, and assuming they’re all at the very top of the pack), I’m going to disregard your bilious conjectures about fictitious rich people who sit around waiting for dividend checks.

15 Randy December 18, 2007 at 11:38 am

I disagree. There’s no question that the rich turn in bigger checks to the government, but that in no way means they are actually paying the taxes. The person who actually pays a tax is the person who’s standard of living is diminished by the tax. Thus there is no such thing as a progressive tax. There is only the propaganda of a progressive tax. And the purpose of the propaganda is to get the people who actually pay taxes to agree to pay more taxes than they otherwise would.

16 Jared December 18, 2007 at 11:47 am

Student, yes that what I’m looking for, and actually thought it was there. I guess I was flipping back and forth between here and Mankiw too quickly and thought that column was on both tables. But what I’d really like to see is that same data for every five years going back to, let’s say, WWI?

Eric writes: “Why is WORK taxed higher than INVESTMENTS? The rich simply collect their dividends without working and pay less in taxes than folks working 50 hours per week.”

I could just as easily ask, and with no less pique, why investments are being taxed in the first place. Here I am, havig earned some money, and having had a nice chunk taken out by the taxman. And I save a little money, allowing others to use it in the meantime to better their lives, or improve productivity, or grow a business, and generally make lending possible, and as a consequence allow our economy as we know it to prosper, and furthermore to grow. And what do I get for my efforts? Another slice gets taken away. Now if I threw in some words in ALL CAPITALS I could seem as outraged as YOU.

I’m not advocating ending capital gains taxes. I’m just trying to make a point that a tax rate on investments that is lower than that on income is not ipso facto immoral, nor would it be immoral to have a capital gains rate higher than that on income. All you’ve got is a subjective, personal opinion that the tax code ought to look different in a way that would make you happier. The fact that it would also give Krugman the warm and fuzzies is not an argument in any sense.

17 John Thacker December 18, 2007 at 11:53 am

The tax rate IS NOT progressive with respect to hedge fund managers!…The rich simply collect their dividends without working and pay less in taxes than folks working 50 hours per week.

Interestingly, the entire argument on why hedge fund managers should be taxed more is predicated on the idea that they’re being paid for work, not investments. They do work extremely long hours.

Capital is taxed less because capital responds so much more quickly and to a greater degree to taxes and incentives. It is much easier for someone to go invest his money somewhere else; the effect of someone moving to work somewhere else is smaller and slower. The Laffer curve actually becomes significant on taxes on capital at a rate much lower than taxes on labor. Taxes on capital have greater deadweight loss as well, by discouraging the movement of capital from one area to another, they reduce efficiency in the economy.

In any case, one of the trends to go along with rising inequality is that being rich is associated with working much more than it used to be. For most of human history, the rich have indeed worked less than the poor, and hours worked have declined up the income scale. This is much less true than it used to be; the inequality increase has been associated with a growth in industries such as finance and consulting where the well-compensated also work incredibly long hours.

18 John Thacker December 18, 2007 at 11:58 am

Every time a Republican gets elected, the tax burden is shifted down towards the middle class. This has been happening since the New Deal. With each tax cut, the rich are paying less and less and guess who’s paying more? You and me.

The people who really paid more are those in the “top 20% but not top 5% of households” category, since a great portion of those household face the AMT, which was not cut. The vast majority of the top 5% pays enough in regular income taxes that the AMT wouldn’t make them pay any more. It’s the group right below whom the deductions brings their tax burden down to a small enough percentage of income that the AMT kicks in. The mortgage deduction is capped, rich people don’t have a proportionately larger number of children, etc.

The “tax burden” has not shifted down towards the middle class; that’s separate from inequality. Inequality can growth without the marginal rates shifting, and the result is that the rich pay a greater percentage of taxes, as one would expect. (And one can still be annoyed at the inequality growth, certainly.)

19 alkali December 18, 2007 at 12:13 pm

MostlyAPragmatist: Alex’s point is that his table refutes the claim that the tax rate isn’t progressive with respect to hedge-fund managers.

It doesn’t quite. Remember that the top 1% is more than a million households — there’s a lot of variation hidden in that number.

Paul: It takes $340K to make it to the top 10%.

No — the $340K figure is an average for the top 10%. If you back out the top 1%, 5% and 10% you get these averages:

Top 11%-20%: $123,500
Top 6%-10%: $158,000
Top 2%-5%: $260,625

20 John Thacker December 18, 2007 at 12:17 pm

I believe polls have shown that most people in the upper 20% believe that income taxes are too low for us, myself included.

I’m pretty shocked at that considering how big of an issue the AMT is, but perhaps this is true.

I as well as most people I know in the same income category (definitely in the 20% group or maybe slightly in the 10%) have spent their increased wealth on moving to neighborhoods with better schools rather than a bigger house.

Yes, this certainly happens. The linkage of the quality of “public” schools to being able to afford an extremely expensive house really makes a mockery of the idea that they’re public.

21 j-l December 18, 2007 at 12:26 pm

It’s interesting to note from the original CBO report that the bottom three quintiles together account for a whopping 0.6% of ’05 personal income tax liability. In part, this is because the bottom two quintiles have a negative liability. Never having paid attention to those numbers before, I found this pretty startling. The same 60% of households account for 25.8% of income.

22 Barkley Rosser December 18, 2007 at 12:44 pm

The largest tax at the state and local levels is the sales
tax, which is regressive, although state income taxes tend to
be modestly progressive. The net effect of state and local taxes
is likely to be pretty close to neutral.

Progressivity of the federal income tax system has been mostly
declining since 1964, with a blip upwards under Clinton. The top
marginal income tax rate between 1940 and 1960 in the US was well
over 90%, a fact rarely mentioned by those who trumpet the importance
of low marginal income tax rates for high income earners as a factor
in economic growth, given the embarrassing fact that the US economy
grew more rapidly during that period than it has since 1982, when the
top marginal rate was lowered to 50%, and which it has not exceeded
since.

23 Fly Fisher December 18, 2007 at 1:00 pm

Several have asked to compare share of tax with share of income. Here are the ratios of tax share to income share by income quintile:

lowest 0.20
second 0.48
middle 0.70
fourth 0.85
highest 1.25

This means that the only quintile that pays more than the average tax rate for all income is the top quintile, and those people pay 125% of the average tax rate. The middle quintile pays only 70% of the average tax rate. (I’m defining the average tax rate as the ratio of total tax revenue to total pre-tax income.)

Some questions:
1. If you think the tax code favors the rich, then what numbers would you prefer to see in this table?

2. When the top 40% of the income earners pay roughly 85% of the taxes, should we be surprised that this is the group that benefits from tax cuts? Isn’t it hard to benefit from a tax cut when you don’t pay taxes?

The people who benefit from tax cuts are the people who pay taxes. Shocking!

24 rluser December 18, 2007 at 1:08 pm

“I believe polls have shown that most people in the upper 20% believe that income taxes are too low for us, myself included.”

Feel free to write a larger check to the government.

25 99paa December 18, 2007 at 1:45 pm

Because this mistake has been made a few times:

The table shows AVERAGE income by quintile. Therefore, it does not mean that you need an income of 340k to make it into the top 10%. 340k is the AVERAGE income of the top 10%. Presumably with the top 1% pulling the average up, the required income to be in the top 10% would be significantly less. How much less, I’m not sure. Anyone have the data?

26 Tom December 18, 2007 at 2:02 pm

“given the embarrassing fact that the US economy
grew more rapidly during that period(1940-1960) than it has since 1982”

Not very fair comparison, Barkley. Do you advocate bombing 80% of manufacturing capacity outside of the US, as happened in WWII? I’m sure we could replicate that type of growth again. Oh, but first we’d have to have a hell of a depression to make those after numbers look good, too.

Most economists try to figure out what 1982- present would look like under different scenarios. Its harder, but a lot more honest.

27 polarized December 18, 2007 at 2:24 pm

Tom:

The real relevant year is 1973, when the Bretton-Woods system was abandoned. Growth was cut in half at that point, never to recover since. There’s a better explanation than solely post-war factors. Then again, if you want to make the argument then you should.

28 AlanM December 18, 2007 at 2:33 pm

“In the US, we too receive bundled services from the government. I would submit that the wealthiest of us receive the greatest number of services. Therefore, the wealthiest of us should pay the highest taxes.”

Allan – I completely disagree, but would appreciate citation of specific examples where the highest income brackets received more and/or different government services than the lower.

Thanks.

29 cactus December 18, 2007 at 2:44 pm

“I completely disagree, but would appreciate citation of specific examples where the highest income brackets received more and/or different government services than the lower.”

I’m not Allan, but I’ll answer. When I was in college, I was in the bottom 20%, and almost everything I owned fit inside my 20 year old Buick Skylark. I also had a few hundred bucks in a bank account. The money in my bank account belonged to me because the government guaranteed it. It is not fear of being fired that keeps a clerk at B of A from fraudulently moving people’s money out of their accounts, it is far of spending time in jail.

Now, I make a bit more money, and I have more money in the bank. I own a bit of stock, etc. Again, the stuff I own, I own because the government guarantees my ownership.

Get rid of government, and the guy at the bottom doesn’t lose very much. The guy at the top loses everything. Preventing that from happening is worth a lot more to those that have than to those who don’t have… but could have if the system broke down.

30 TGGP December 18, 2007 at 2:47 pm

It is argued that sales taxes are not regressive here.

Robert Higgs claims the Great Depression continued into the 40s and throughout WW2 here.

31 TGGP December 18, 2007 at 2:50 pm

I question assumptions people have made about what would happen when the government disappears. The only example we have to us is Somalia, which is discussed in Better Off Stateless.

32 Mike December 18, 2007 at 3:19 pm

In the spirit of rluser’s response and the repeated musings of Warren Buffett and Ben Stein about how the rich should be paying more in taxes, I would like to propose a more innovative experiment.

Our politicos could introduce legislation creating a series of projects devoted to various “worthy” causes. Each could be called “Fund for the elimination of progressive guilt #1” etc. The fund would receive from under taxed citizens commitments to sponsor the funding of each mission statement defined project. Each dollar of funds committed would also receive one vote toward the election of a board of directors to manage the project. When the project is fully funded it would be activated and would commence the pursuit of its mission statement.

So how does this differ from “The Bill and Melinda Gates Foundation”? It doesn’t, but it would give people a first hand experience with how government manages their “tax dollars hard at work” in comparison to private sector counterparts. Why doesn’t Buffett donate his fortune to government to fix societal problems rather than going to private sector solutions? Might it be that he doesn’t believe government would do as good a job?

If such a venture were created it would create converts to the conservative cause after the project fails due to the inefficiencies of government. Sweet revenge!!

33 Allan December 18, 2007 at 3:37 pm

Alan M,

I did not argue that the poor get nothing from the federal government. My argument is that the rich benefit much more than the poor do.

Yes, the poor use the roads. But the rich benefit more from the roads.
Yes, the poor benefit from customs. But the rich benefit more from the wervices.
The poor do not benefit from the home deduction. Arguably, the rich do not either.
The rich benefit more from our system of government than the poor do.

We could go on and on. The rich benefit more from the existence of the Federal Reserve. The rich benefit more from the SEC. The rich benefit more from the judicial system. The rich benefit more from government spending (non-entitlement programs).

The poor probably benefit more from other agencies, like OSHA and the NRLB.

Heck, the rich benefit by having the poor around. Capitalism cannot work without the ability to exploit labor (tongue firmly planted in cheek).

Our system benefits most, if not 100%, of the people who live in this country. However, it unarguably benefits the wealthy more than the poor. Consequently, the wealthy should pay, and be willing to pay, more for the government to run effectively. The only question is how much more.

34 Randy December 18, 2007 at 3:46 pm

John Pertz,

“…what is the point of taxing the poor and middle class.”

To maintain their belief that there really is such a thing as a progressive tax. They end up paying it all, of course – the rich don’t pay taxes, they collect taxes. But as long as the poor and middle classes believe that the rich are paying for a free lunch they will continue to support (and pay) higher taxes.

35 infopractical December 18, 2007 at 4:10 pm

It’s hard to believe that there are still economists naive enough to assume “taxation” means “just money”. Particularly when those same economists rail on such a fallacy in every other context.

I’ve been on both sides of the wealthy/poverty fence. When you’re on the poverty side, you spend countless hours filling out forms, worrying about a speeding ticket because you don’t know the lawyer who can fix it, paying more for the same car insurance, wasting time on the phone with government agencies — and to begin with you waste your time in government schools. THAT’S taxation.

Becoming wealthy has been my greatest form of self-defense against the federal government. Just judging by my hourly rate and my personal guess as to how much less of my time is robbed by endless government programs, I am certainly paying a smaller percent in taxation than ever before.

And I’m getting more for my money — the police actually show up when I call them!

36 Allan December 18, 2007 at 4:22 pm

Jeff S.

Come to think of it, part of what our government is “is a rich person’s insurance policy against the mob.”

Indeed, all governments work to protect the system. Sort of the reason for being. If the government does not provide protection for the masses, there is generally a revolution, e.g., France in the 1790s and Russia in the 1910s. Everything is class warfare, at its base. The governments that survive over time are the ones that provide for the masses (e.g. modern Europe and, yes, the US) or the ones that can effectively cower the masses (e.g., apartheid South Africa). Even communism is a protection system for the wealthy (although the communist leaders who were wealthy would not call themselves such).

Generally wealth leads to power and power leads to wealth in this country. And government is there to protect the powerful. I would conclude that the government is the way to protect the wealthy from the mob. Our government does this by ceding some of the power to the mob. The less power it cedes, the more susceptible it is to a revolution.

37 Stephen Downes December 18, 2007 at 5:41 pm

Every time I hear the rich complain about how much paying for govrnment costs them, I always want to remind them that it is only the instruments of government – laws, military, police – that allow them to keep their wealth.

And when they complain about the high cost of taxes, I am always happy to suggest that they move to a land without taxes: Somalia.

38 jp December 18, 2007 at 6:16 pm

“allow them to keep their wealth”

So far, at least two people have used that turn of phrase in this thread. Is the underlying thought that we own things on sufferance?

39 But who am I to have an idea December 18, 2007 at 6:36 pm

Corporations paying for the government. Interesting idea. But make it even more fair and say business pays for the government. The money comming out of the profits instead of the paychecks. And while we’re at it, how about if the only taxes paid are for defense. Everything else is taxed locally.

40 jp December 18, 2007 at 7:07 pm

“Corporations paying for the government. Interesting idea. But make it even more fair and say business pays for the government. The money comming out of the profits instead of the paychecks.”

And while we’re at it, let’s make every day a holiday!

41 Barkley Rosser December 18, 2007 at 7:51 pm

Bill Stepp,

Well, actually the Reagan tax law changes of 1981 increased the number of loopholes.
It was the tax simplification of 1986 that closed loopholes, and thus was able to
bring about a much more dramatic lowering of marginal rates while remaining revenue
neutral.

Well, I don’t the numbers, and lots of people did use loopholes of one sort or another
to avoid taxes back in the days of those very high marginal rates, but some people did
pay them. One who did by his own account was Ronald Reagan. It was the experience of
facing those rates when he was a Hollywood star that convinced him of the labor supply
part of the supply side economics story. He used to recount how he did not make extra
movies because the government would take over 90% of the pay, so he was convinced that
cutting rates would increase revenues and effort, which probably holds for cutting such
rates.

42 guy in the veal calf office December 18, 2007 at 8:29 pm

These arguments that the rich benefit more from security than the poor are ridiculous. In the worst places, the rich trample everything to poor own, steal their labor, their daughters, their food and leave them diseased, malnourished, fearing for their life, and without hope in the betterment of their children.

You honestly think that the poor here, with their subsidized education, health care, TVs, shelter and security are the same as Somalia or Medieval France? The rich have everything in those places without any obligations, but here they pay for most of the benefits afforded the poor and aren’t allowed to kill, maim, jail or rape them for the kind of whingeing going on here. Bummer.

43 joe blower December 19, 2007 at 2:13 am

Most of the income of a ‘rich person’ (in the millions of $) is channeled back into the economy. The typical rich guy spends a small sum relative to his total income. The rest goes invested back to the market. This is the part that gets taxed. The tax does not affect his lifestyle, but subtracts precious dollars from the market where they would provide the most efficient benefit. It leads to a tax on the market economy, which leads to everything costing more since it raises the cost of money. This is what it means ‘taxing the rich’.

44 John Dewey December 19, 2007 at 4:37 am

Elliot Reed: “they can pay for over a quarter of the U.S. federal government—the most expensive entity in the world—and pay only a 31.2% average tax rate. Why isn’t their tax rate higher?”

What arrogance! Is that your only justification for taking from the most productive? That you have decided they do not need it?

FYI, money is not a purely positional good for most in the top 1%. It is a means by which they provide life to our economy through their wise investments. Our nation is far stronger when the Fred Smith’s and Steven Job’s decide how to invest their earnings than when the Tom Delay’s and Nancy Pelosi’s and Trent Lott’s and Harry Reid’s waste it on inefficient government programs.

45 Tom December 19, 2007 at 8:11 am

“If anything, I am pointing out that way too much of the discussion of tax rates way overstates how important they are for growth performance.”

Point taken, Barkely.

The point of the depression and the war is that it did fuel the 1940-1960 growth directly. Pent up demand from consumer from 1929 to the end of wwII, along with that we were the only major manufacturer in the world caused this growth. We were coming from a very low number (depression) to a very high number (huge consumer & exporter). By 1960 the rest of the world was able to manufacure most of their own goods.

This unusual situation masked the bad effects of high tax rates, and is not an effective way to point out that “tax rates way overstates how important they are for growth performance.”

I know that none of this is new to you as you have made this argument in the past and have been called on it (better than anything I have written). Yet you make the same arguement.

46 GreatZamfir December 19, 2007 at 9:46 am

Rich berger: you are basically saying, if we keep all parts of the state that benefit the rich, and abolish all other parts, then the rich would be better off than they are now. Sure.

But why would the rest of the people support a state that only serves the richest few percent? Besides, this is not a thought experiment. Nightwatch states were pretty common before the 20th century, and they weren’t pretty for the most of the people.

47 Rich Berger December 19, 2007 at 10:19 am

Well GZ, I suppose if you believe that the state is the source of all our blessings there is no reason to support one that benefits the rich. I believe that the source of our blessings is largely the private activity of free individuals, with the state living off the fat of the land and actually impeding productivity.

The real trickle down effect is the vast array of good and services that are available to us for the rather small price of profits.

48 Steve Burton December 19, 2007 at 11:26 am

Mr. Milburn:

Why is being “part of the governed” a good reason to “expect something from government?”

49 Jarick December 19, 2007 at 11:43 am

I think the rich could argue that they have insufficient representation for their taxation.

50 Barkley Rosser December 19, 2007 at 1:01 pm

Tom,

That I have been “called on this before” does not
mean that I think it was a very successful calling.
I would say the “pent-up” demand argument pretty much
was burned out by 1950. Then you get other boosters
like the Korean War and the super growth of the recovering
and unifying economies in Europe. And, growth was actually
higher after 1960 than in the 1950s, a point I made to which
you did not respond, with those tax cuts not snapping in
until mid-decade (and the top marginal rate was still a
whopping 70% or so after them).

51 Mike Moffatt December 19, 2007 at 2:03 pm

I’m quite late to the party, but I discuss this topic on the About site.

The short version: The data doesn’t show what you think it shows, because of the difference between ‘legal incidence’ and ‘economic incidence’ of taxation. In particular, corporate income taxes are not wholly paid for by shareholders. You remove that assumption, recognize that these taxes are borne somewhat by labor, and the system turns out to be a lot less ‘progressive’ than it appears at first glance.

52 yoyo December 19, 2007 at 3:18 pm

“What arrogance! Is that your only justification for taking from the most productive? That you have decided they do not need it?

FYI, money is not a purely positional good for most in the top 1%. It is a means by which they provide life to our economy through their wise investments. Our nation is far stronger when the Fred Smith’s and Steven Job’s decide how to invest their earnings than when the Tom Delay’s and Nancy Pelosi’s and Trent Lott’s and Harry Reid’s waste it on inefficient government programs.

Posted by: John Dewey

one of the best examples of lickspittle i’ve ever seen.

53 cactus December 19, 2007 at 3:44 pm

M D Fatwa,

“There are numerous countries in the world without the rule of law, and in almost every case the very wealthy can figure out a way to protect themselves, even if that means moving abroad or hiring their own armies. Admittedly inefficient, but the people who have the most to fear from mob rule or expropriation are almost always the poor.”

Of course you always end up with haves and have nots. But when a country degenerates into an Afghanistan in 2000 or does what the old USSR did, many (not all) of those who were at the top of the old food chain fall quite a few rungs, and many of those who didn’t have a seat at the table originally get one.

If the US went the way of Somalia, hedge fund managers and trust fund kids would, at best, hold their position, but I wouldn’t bet on it. On the other hand, a Crip from Inglewood with a Tec-9 has a good chance of improving his lot in life. The only thing that keeps that Crip in Inglewood and out of Bel Air right now are the taxes paid by the folks who live in Bel Air. They may not want to pay taxes, and they may not want the Crip showing up at their doorstep, but the two desires are mutually exclusive.

54 jp December 19, 2007 at 3:55 pm

“one of the best examples of lickspittle i’ve ever seen”

I think it couldn’t be lickspittle if John Dewey has a very high income. There’s no way to know whether he does or not from what is posted here.

55 Jeff S. December 19, 2007 at 4:04 pm

Cactus

Resorting to the Somalia scenario in trying to prove your case for the U.S. just makes your argument look all the more pathetic. On the upside, you reveal your true opinion of “the poor”. Also, the next time you’re tempted to dribble something as meaningless as “Government is nothing more than a social construct”, as a test speak the sentence to yourself first, unless you’re really an eighth-grader trying to impress his mother after the first day of civics class.

56 Barkley Rosser December 19, 2007 at 4:52 pm

Juan,

Good lord, what nonsense. Reagan had two rounds of tax cuts.
The first, in 1981, cut the top marginal rate from 70 to 50%,
while increasing the number of loopholes. The second, in 1986,
cut the top rate from 50 to 28%, while eliminating a lot of loopholes.
Now, there were some high income folks who lost out in 1986 who had
made excessive use of such loopholes, especially some involving
commercial real estate. But the overall effect of both rounds of
tax cuts was to massively tilt the system in favor of higher income
earners, especially when combined with the massive FICA tax increase
he also oversaw, which is very regressive, in the name of making the
social security system solvent for the baby boomers.

57 John Dewey December 19, 2007 at 5:29 pm

YoYo,

The hundreds of FedEx employees I know also admire Fred Smith the way I do. Everyone at Southwest Airlines loves Herb Kelleher. I hope you are someday fortunate enough to work for an industry legend, as I have done three times in my long career. You may then understand that these guys have earned the respect they enjoy.

58 cactus December 19, 2007 at 7:12 pm

Jeff S,

“Resorting to the Somalia scenario in trying to prove your case for the U.S. just makes your argument look all the more pathetic. On the upside, you reveal your true opinion of “the poor”. Also, the next time you’re tempted to dribble something as meaningless as “Government is nothing more than a social construct”, as a test speak the sentence to yourself first, unless you’re really an eighth-grader trying to impress his mother after the first day of civics class.”

Well, that’s pretty cogent. I’m convinced.

59 dick December 19, 2007 at 10:33 pm

What I find interesting is that when you mention the top rate after WW II, how many actually would have been subject to that top rate as opposed to the number who would be subject to the top rate today. Also as has been mentioned before, the Marshall Plan and the redevelopment of all the manufacturing industries would force the economy to blossom since most of the world no longer had the manufacturing facilities they did before. Those who are trying to make a big deal out of the growth then seem to ignore those factors.

60 Jim December 20, 2007 at 11:01 am

This is an interesting point of comparison:

http://www.faculty.fairfield.edu/faculty/hodgson/Courses/so11/stratification/income&wealth.htm

As noted above, the top 1% of income earners pay 27.6% of taxes. But the top 1% based on net worth had 34.3% of the nation’s wealth.

Yes, income and net worth are different measures, but looking at just income may be a bit simplistic.

61 Anonymous December 21, 2007 at 5:00 pm

This is only the partial truth. Income taxes make up a small part of what a rich person “earns” in a year. A major part comes from capital gains and THOSE are taxed at a very much lower rates (check it out: longterm capital gains rates are in the 10’s and 20’s) than income from wages. So the working stiff really gets screwed here. Of course you could say that investment income has already been taxed once, when it was “earned”. But we are in a situation of such great disparities and there are rich heirs of no known earnings of their own work, that one might wonder if a rethinking isn’t in order.

62 Shane Milburn December 22, 2007 at 4:41 pm

Mr. Burton,

Let’s reverse the question: Why should a government exist at all if we don’t have expectations from it?

63 david December 23, 2007 at 8:24 pm

The average pre-tax income column may be heavily skewed by a few rich outliers. According to the US Census Bureau, only 4% of American households earn above $200k per year (http://pubdb3.census.gov/macro/032007/hhinc/new06_000.htm).

64 Steve Burton December 24, 2007 at 12:49 am

Mr. Milburn:

Why, indeed?

65 Poppa Kelly December 24, 2007 at 11:09 am

How were the numbers computer? You say the poorest only pay 4.3% effective tax rate.
It looks to me like you have excluded Social Security and Medicare taxes from your totals.
Please respond.
Thanks, God bless, Poppa Kelly

66 MachineGhost December 26, 2007 at 4:18 pm

> Progressivity of the federal income tax system has been
> mostly declining since 1964, with a blip upwards under
> Clinton. The top marginal income tax rate between 1940
> and 1960 in the US was well over 90%, a fact rarely
> mentioned by those who trumpet the importance
> of low marginal income tax rates for high income
> earners as a factor in economic growth, given the
> embarrassing fact that the US economy grew more rapidly
> during that period than it has since 1982, when the
> top marginal rate was lowered to 50%, and which it has
> not exceeded since.

Marginal tax rates are a red herring. Historically, the average effective tax rate that taxpayers have paid is 25% from all combined sources irregardless of how high top marginal rates are (even at 90% Federal). So again, its not really that high relative to increasing living standards to justify reform or revolution.

> As a mild libertarian I have to ask what is the point
> of taxing the poor and middle class. Why not just start
> taxing income over 80 K at a flat 15 percent rate and
> leave it be. Why do we need to tax people making below
> 80 K when obviously their tax contributions are
> meaningless to the federal government?

The reality of the systen is that the lower and middle classes are the prime customers, i.e. the voters. They vote to get back for themselves what is stolen from every taxpayer. It’s just a matter of degree. The rich are not going to be motivated to vote unless any expected rellocation of said stolen is large enough to offset their forced “contributions”.

MachineGhost

67 Nate Housley December 28, 2007 at 7:20 pm

Most of the arguments for lowering the taxes on the wealthy are premised on the idea that they earned it. But contemplating what it means to earn money in a capitalist system inevitably puts us in a logical circle; money is “earned” merely by having it. Working hard doesn’t not guarantee wealth, working smart does not guarantee wealth, education does not guarantee wealth, etc. People become wealthy, typically, through hard work, yes, but also thanks to other factors like cultural capital, education, and dumb luck. These things are rarely “earned” and are usually given.
Of course if we premise the argument for lower taxes on earning things, should we ramp up the inheritance tax? After all, someone who inherits money doesn’t earn any of it. Why don’t we let the government take it all and put the potential heir on a level playing field with everyone else? Because capitalism equates having wealth with earning it. It’s a very problematic assumption, and a good reason why a third party (government, preferably democratic, i.e. not completely ruled by the wealthy classes) should be involved to keep the state from devolving into a “might makes right” mode.
Of course, the state is very inefficient at creating wealth. So what good is the state? It decides, preferably based on the input of the general population, what manners of acquisition of wealth are lawful and what are not. It decides that Steve Jobs gets to keep what he “earned” and that Kenneth Lay goes to prison. To answer the ridiculous question as to why the wealthy don’t have more say in government because they pay higher taxes, I respond with a question of my own: Do you want Ken Lay making your laws?

68 Gary Vincent O'Malley March 3, 2008 at 12:58 pm

Why even attempt to figure out or defend a 64,000 page tax code?
We need to break our addiction to foreign oil.
With the current tax code that punishes success by taxing it, will we ever be able to re-tool our transportation industry fast enough?

http://www.fairtax.org has some answers and is signed of by 70 of our leading economists.

This has been studied for over 10 years at an expense of 22 million dollars..

http://fatheromalley.com/thefacts.aspx
http://fatheromalley.com/Retooling.aspx
http://fatheromalley.com/PrivateSectorVeh.aspx
http://fatheromalley.com/MoreHydOptions.aspx

And more… tell a friend.. we need citizen soldiers..

Try it, you might like it.. there are different ideas out there that need to be studied and implemented…

All of this debate about who pays the most is just what those that defend the status quo want..

In the meantime we forget the forest in our “study” of the trees..

Take your eyes for a moment off the microscope images of rich vs poor… there are larger stakes here..

But whatta I know?

Gary Vincent O’Malley

69 Alii April 3, 2008 at 10:40 pm
70 Jimmy May 20, 2008 at 5:40 am

I think the rich could argue that they have insufficient representation for their taxation.

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72 Harold Lockyear January 6, 2009 at 10:17 am

You People are a bunch of wiffs! I payed better than 30% in federal taxes most of my life and never had and income of more than 50,00 per year. That doesn’t count state, sales , excise, or real estate. I sent four kids to college and never received one dollar of aid or tax relief, for those expenses. Plus I paid corporate taxes every time i purchased something, through the manufacturer and middlemen passing it on through the price. Every dime we pay in this way is that much less the rich pay. Your muddying up the waters with your half truths and out right lies don’t make it so . Really 300,000 rich people pay more than 175,000,000 million people in total taxes get real. This is another fantasy by the right, like the press is liberal,Rupert Merdock, Willian Randolf Hearst, liberal, give me a break.

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