In most election years, you often see and hear Democrats discussing the concept of who pays what in income taxes. It's (very) often declared by people on the Left that billionaires ought to pay their fair share of taxes (!!) Vice president Harris has recently started trumpeting this slogan as well. In her interview with MSNBC's Stephanie Ruhle, Harris also goes a step further and touts what I like to call the Warren Buffett claim, which is that wealthy people, and especially the richest people, pay lower tax rates than working class Americans. That is, if rich people make $100 of income, they pay less of that income to taxes than middle-class or lower income people do.
Below is data from the Tax Foundation (that itself comes straight from the IRS) that shows two things:
First, who pays what "share" of federal income taxes
Second, what each of the notable tax brackets pay in tax rates (meaning what percentage of their incomes are paid in taxes)
Note that the data from the IRS has been released up to 2021, so keep that in mind (the 2021 data came out this past March). But while tax policy did not notably change under the Biden Administration, the charts show there's no reason to think this will have changed significantly in 2022 or 2023. If anything, the trends will probably continue as they have been.
First, let's look at who pays what.
As the chart above shows, despite only claiming about 26% of the country's income, the top 1% of individual income earners paid 45.8% of ALL federal income taxes. Additionally, Mitt Romney was famously lampooned in the 2012 election for being recorded saying that 47% of Americans pay no income tax at all. While this was probably bad political optics, the data show that this is (and was) basically true.
But was 2021 an aberration? The answer is definitively no. Below is a chart showing that the share of taxes paid by the 1% is actually increasing. Said differently, in 1980, the top 1% paid about 33% of all federal income taxes. As recently as 2019, that number was just below 40%. In 2021 that number was, as noted, was almost 46%.
Since the graphic above only goes back to 2001, and since it also doesn't include the richest of the rich (which we'll identify as the top 0.1%), here's what the charts look like if you incorporate the richest Americans and you go back to 1980. Here we'll break down the graph above into two to make it less busy and easier to digest. We'll do the top 0.1% and 1% first, and then the other groups separately.
What the above charts show is that the country's highest earners: the 0.1%, the 1%, and the top 5%, are all seeing their share of income tax contributions go up over time, while the remaining 95% of the country is seeing theirs go down.
Let's now take the top 0.1% and compare their share of taxes paid to their share of income generated. In 2021, to be in the top 0.1% meant you earned $3,775,593 in income or more. Here, the data become even more skewed (again, note that data for the top 0.1% only goes back to 2001).
As conservatives have pointed out over time (George Will does so the most articulately), when someone typically asks a Democrat what billionaires' fair share of taxes is, no one ever seems to give an answer. The most likely reason for this of course is simply because there isn't an easy one to give. Instead, the answer has simply become "more."
We take it for granted that we ought to have a progressive income tax code, simply because even most wealthy people have grown to believe in it at best and tolerate it at worst. But maybe we should actually think about this for a second. If 6 of us all go to dinner, some of us are very likely to eat a bit more or a bit less than the others. Everyone isn't going to eat the exact same amount. If someone is ordering a lot of wine, or someone clearly isn't drinking or had a smaller dish to themselves, most of the time (especially thanks to technology like Venmo), we can split up the bill to account for that. 9 times out of 10 though, we're all splitting the bill pretty evenly, despite all of us not eating exactly the same amount of food. What we're certainly not doing, however, is dividing up the bill based on how much income each person at the table earns. Yet this is exactly how we think about this question of "fairness" when it comes to taxation and government.
Let's translate this analogy from the restaurant table to government then. Do the top 1%, who pay 46% of all the income tax dollars going into the federal government's coffers, actually use 46% of all the value of government services? Do the top 0.1% use 25%? Let's look at some examples.
On the federal side of the ledger, let's deal with some of the biggest spending buckets. Are these 1% of folks accounting for 46% of Medicare's expenditures? Almost assuredly, no. The rich may be able to go to the doctor more than many of us, but they also tend to eat healthier and exercise at higher rates. Net net, they probably use less of the healthcare system than everyone else on a per capita basis.
Now let's take defense. Does the federal government spend 46% of defense money to protect the top 1% of people only, and then spend the other 54% of defense spending on the other 99%? No, it doesn't. Defense spending is likely pretty proportional in terms of its benefits.
Local government examples might be easier to use in this thought experiment, since they hit a little closer to home (we should note that most cities don't have income taxes, but some, like New York, certainly do, but that's besides the point). Are rich people taking the subway or the buses more than lower income people? Almost certainly no. If anything, the opposite is true here. So then you might ask, are they driving on city streets more, thereby wearing them out more than a typical person? In this case, the answer is almost certainly, yes. But then you have to ask yourself, are the 1% driving 46% of the miles that society in general drives? Absolutely not. Are the top 0.1% accounting for 25% of the miles driven? The answer is again, no, not even close. Go through any local, state, or federal budget, and you'll be hard pressed to find very many government programs or services where the top 0.1% or 1% are meaningfully benefitting disproportionally at all, let alone programs where they're receiving 25-50% of the resources (which again, is what they're paying in terms of their share of taxes).
Though we almost never think about government services and taxation in this way, and even if most rich people do ultimately accept a progressive income tax system, the fundamental logic of "the people that use a service ought to pay for it" is pretty sound. When you do this thought experiment in conjunction with the data in income tax shares we discussed above, it makes it pretty hard to accept the argument that rich people, and specifically the rich-est people, aren't paying "their fair share" in taxes. When 0.1% of people are paying 25% of all income taxes, and when 1% of people are paying almost half, these people are actually paying something inordinately beyond their fair share. This claim that the rich don't pay their fair share is pretty demonstrably untrue then, and additionally, looking at the data going back to 1980, it hasn't been true for at least 40 years.
Now let's turn to the second part of the data, which is tax rates. As we noted above, in answering the question of what billionaires' "fair share" of income taxes is, liberals sometimes move beyond who pays for what portion of the pie in taxes and instead turn to the Buffett Rule, which is that rich people shouldn't pay lower tax rates than middle or lower income people. It's always assumed of course that this is actually true, but let's look at this a bit more closely to see if that's the case.
Below is a similar chart to what we showed earlier, broken down by income groups. Except in this case, we're looking at effective tax rates for each group. An effective tax rate ("ETR") is the percentage of each group's aggregate income that went to federal income taxes (so said differently, if an effective tax rate is 25%, that means that if a person made $100, $25 went to federal income taxes).
There's a few things to note here. First, notice how the effective tax rates of almost all groups today are lower than they were in 1980. This is because of multiple rounds of tax reform that have, on balance, brought rates down over time (unfortunately at the same time spending has gone up, this has produced huge budget deficits).
Second, notice how the tax rates for each of the top 0.1% and the top 1% are meaningfully higher than every other group below them. Not in 2021, or in at least the last 40 years, have the highest income earners in this country paid even remotely close to lower effective tax rates than middle or lower class people. How then, did this ever become a talking point?
In January 2012, Warren Buffett sat down with his secretary, Debbie Bosanek, to give an interview with ABC News to discuss how he paid a lower tax rate than Debbie did in 2011. President Obama had invited her to the State of the Union address to help make that point earlier that night too. Buffett stated:
"[Raising taxes] will not change my behavior. I have paid all different kinds of rates and I've always been interested in making money. I believe this should be a defining issue. Debbie works just as hard as I do and she pays twice the rate I do."
This got a lot of press when Buffett did this, and was compounded later in the year when the tape of Romney's comments at a fundraiser leaked out to the press. But what no one in the media seems to like to mention is how Warren Buffett is a very misleading example to use in this question, simply because a huge portion of his income comes from one source: long-term capital gains.
While it's true the tax code taxes capital gains at different rates than "ordinary" income (it does so to incentivize people to invest their money), Buffett's situation is not representative of that of most higher income people. For most wealthy people, it's not the case that they get even most, and especially not almost all, of their income from long-term capital gains. Instead, like the rest of us, they get their income from a variety of other sources, most of which is "ordinary" income like wages and salaries). Using Warren Buffett as an example of the typical high earner is therefore an extreme case of cherry picking, and the worst part of this is that Buffett likely knew this as well as anyone. It turns out that when you actually look at the data, the "Buffett Rule," as it's become known, is already very much in effect, and has been for over 40 years.
(One other interesting thing to note about Buffett's interview that no one seemed to address is that it's not clear how his secretary paid a 35.8% federal tax rate in 2011 when the highest marginal tax rate that year was 35%. Though Buffett conveniently never says what he paid her, she effectively would have had to earn millions of dollars to even approach a 35% effective tax rate when that is the highest marginal rate in the code. If in that interview he was simply saying Debbie only took home 64.2% of her pay (and therefore paid 35.8% in taxes), then that is a completely different question, and ignores the reality of local, state, Social Security, Medicare and other taxes taken out of our paychecks as well. The interviewer, nor anyone else in the press, never thought to ask this crucial follow up question.)
Lastly, it's sometimes brought up in this debate that the richest people have disproportionate shares of the country's wealth, and thus, they should pay more. The first thing to say in response to this is, as we've already shown repeatedly, they are in fact paying (considerably) more.
The second thing to say is that we don't have a wealth tax in this country: we have an income tax. It's perhaps not surprising then that Democrats are now proposing a kind of de facto wealth tax by attempting to tax non-realized gains on investment and real estate income. If we did want to look at shares of income taxes paid and compare it to wealth, however, it's not clear the outcome would be any different. According to the Federal Reserve's data, the top 0.1% have 13.5% of the country's wealth, and the top 1% (excluding the top 0.1%) have another 16.7%. This means in aggregate that the top 0.1% have 13.5% of the nation's wealth, and the top 1% have 30.3%. As we showed above, this compares to their shares of income tax contributions of 24.7% and 45.8%, respectively. Though looking at these two things in this manner doesn't make much intellectual sense, since for even most wealthy Americans, their income isn't derived from their wealth, even if you wanted to do this exercise, it again shows the wealthy are paying more than their fair share of taxes.
The bottom line is this: no matter how you make the argument, the claim that the most fortunate and highest earning Americans are not paying their fair share of taxes is simply not true. Next time you hear it, don't believe it.
Comentarios