The American Flat Tax

Taxes are becoming a more popular subject. The last time I did this analysis, I had to troll the internet to find and gather information from a variety of sources. Now, the Citizens for Tax Justice has an easy to find, easy to comprehend set of articles, tables, and graphs on the subject, and Mark Trumbull at the Christian Science Monitor has written an excellent article which summarizes the data.

So I’ll just repeat the information.

Several individuals and organizations on the internet have made lots of hay over the fact that the wealthiest 1% pay more than their fair share of taxes, because they pay 37% of all income taxes. But their half-analyses are disingenuous at best, dishonest at worst. There are two reasons for this.

First, the percentage of income taxes the top 1% pay is only half of the story; the other half is the percentage of total income they make. In 1960, the top 1% of income earners made 10% of the nation’s total income and paid 21% of the income taxes; in 2009 they made 20% of the total income and paid 37% of income taxes. As their percentage of total income has doubled, the percentage of the total income taxes they pay has slightly less than doubled (see my previous post for more information and references). Their tax burden has remained roughly steady. And besides, they now make twice as much of the total income as they did 50 years ago. You can see that as a transfer of 10% of the nation’s income from the working and middle classes to the wealthy; or you can see it as most of the income gains of the last 50 years having gone to the wealthy, and little to the rest.

Second, federal income taxes are about half of all federal taxes, and an even smaller share of all taxes that Americans pay, including state and local taxes. While the wealthiest Americans in 2010 paid 36% of all federal income taxes, while earning 20% of the nation’s income (or 16%, see note below), they paid only 24% of all federal taxes, and 22% of total taxes, including state and local.

Total Federal Income Taxes 2010¹

(data from Citizens for Tax Justice and Tax Policy Center of the Urban Institute and Brookings Institute)

While the wealthiest 1% pay a large share of federal income taxes, they pay a smaller share of all federal taxes, and when state and local taxes are added to the mix, their share drops even further. The sixth column, % of Income, shows what percent of income an individual pays in total taxes. When taking into account all taxes, we essentially have a flat tax in America, certainly so among the top 40% of income earners, but even the bottom 60% pay at a substantial rate.

So when you hear commentators rant about how the wealthiest pay most of the taxes in America, remember they are talking only about federal income taxes (while ignoring how much of America’s total income they are making), and so are being either disingenuous, or dishonest. If you look at the larger picture, our tax rates look overly fair to the wealthiest Americans.

Key:
Percentile, so 95-99 means the wealthiest 95-99% of individuals, e.g. after the top 1%, they are the next 4%
AGI: Adjusted Gross Income; what percent of total national income does each group make
Income: Federal Income Taxes; what percent of total federal income taxes does each group make
All Federal: All Federal Taxes, including Payroll
All Taxes: all taxes, including state and local
% of Income: Percent of individual income each group paid in total taxes

NB: The Tax Policy Center shows that the wealthiest 1% make 16% of the national income and the poorest 20% make 26%; Citizens for Tax Justice show the top 1% making 20% of the income and the poorest 20% making 22%. I’m not sure the reason for this discrepancy.

¹ Share of Federal Taxes Under Current Law, By Cash Income Percentile 2010; Who Pays Taxes in America?

The Institute on Taxation and Economic Policy also has lots of interesting information for further study.