No More Class Warfare Please!
In a capitalist system where the economy is primarily driven by supply and demand, it is inevitable that individuals
will earn different incomes. Some will spend a large portion of their life seeking education in an attempt to improve their earning power.
Others will take risks and start new businesses. While still others will choose to enter the workforce with secondary or sometimes less education.
The key word here is that they "choose" their own path of potential opportunity. These choices, combined with prevailing
economic forces, will primarily drive an individual's income. This is a primary mechanism
of capitalism, and provides virtually everyone with the possibility, but not the guarantee of the "American Dream".
This possibility is one of the major factors that drives individuals to work harder, and ensures maximum efficiency.
A popular topic discussed by politicians is the disparity in economic condition between the "Rich", the "Middle Class" and the "Poor".
Most recently, a story has been popularized indicating that there have been significant tax cuts for the "Rich" in the recent past that have somehow deprived
the government of its capability to implement or maintain its social programs.
The politicians indicate that the "Rich" are benefiting excessively from the system, and that these tax cuts for the "Rich" need to
expire. In addition to the expiration of the most recent tax cuts for the "Rich", it has been proposed that new levels of taxation
need to be implemented on the "Rich" in order to fund a whole host of government sponsored social programs.
Since by definition, the majority of people are not in the upper level of wage earners, it is easy to conjure images
of extremely wealthy individuals skipping out on their duty to support the country.
Many also support the idea of a government provided social safety net for those who the politicians indicate
are somehow disadvantaged. These concepts are very polarizing and have fueled a type of "Class Warfare" in the media.
Virtually every public political discussion on the topic of government spending and revenue results in inevitable comments
about massive tax cuts that have been implemented for the "Rich". These comments are often thrown out to end the
rational debate on the topic in order to evoke emotional responses and put any opponents immediately on the defensive.
It is unfortunate that those in the media, which provide the platform for the politicians to present their agendas,
do not challenge the statements of politicians with plain fact and clear language. It is also unfortunate that the
majority of people seemingly accept the unsubstantiated claims of politicians without challenging their statements
with basic critical thought.
Most people in a rational discussion will agree that taxes are a necessity, but what is often not agreed upon is how that burden is distributed.
Most people would also not mind paying a "fair" level of taxes where everyone has the opportunity to benefit from government programs
in an equitable but not necessarily equal way. The question that needs to be answered through all the Class Warfare rhetoric
What is an equitable level of taxation for the upper level of wage earners compared to the middle to lower wage earners?
In order to provide information for the discussion and to dispel some of the misinformation indicated in much of the rhetoric,
this article provides an analysis of the disparity in U.S. individual income tax revenues.
The majority of the information provided represents the year 2005 due to limited availability of more recent data.
All the data is derived directly from the IRS Tax Statistics website.
To provide some context, individual income taxes comprise approximately 44% of U.S. Tax revenues.
The sources of U.S. Tax revenues are as follows:
Individual Income Tax payments are examined below.
The majority of the charts on this page display taxation by percentage of tax filers in specific income categories as follows:
The first question one might ask when thinking about fairness in the tax system might be:
What percentages of the total individual income taxes are paid by each portion of the population?
The distribution of individual income taxes paid are as follows:
It is obvious from the above chart that the vast majority of tax filers are paying a very small proportion of total individual income taxes,
and a very small proportion of tax payers are paying a very high proportion of total individual income taxes. Since there has been so much
political discussion about massive tax cuts for the "Rich", then the current disproportionate level of individual income tax payment by the most wealthy
individuals must have been significantly higher in the past, right?
Wrong! In fact, the percentage of total individual income taxes paid by the
highest wage earners have increased by approximately 14 percentage points (or 1.53x) in the last 20 years. While the lowest
wage earners dropped by more than 3 percentage points (or 0.47x) in the same time period:
One might be able to justify the total level of individual income taxes paid by the highest 1% of wage earners if the disparity is only due
to their disproportionately large incomes. In fact, the incomes of the top tiers of income are much larger than the lowest 50%.
This chart displays the maximum level of income for each income level (the top 1% has no maximum):
However, the next chart shows that the lowest 50% of wage earners on average pay only 3% of their Adjusted Gross Incomes
in federal individual income taxes while the top 1% on average pay 23.1% of their incomes.
Effective tax rate by income level:
In fact, 41 million (or 45%) of the tax returns with Adjusted Gross Income under $50,000 did not pay any income taxes at all.
Only approximately 1 million (or 2%) of the tax returns with Adjusted Gross Income greater than $50,000 did not pay any income taxes.
Perhaps if the percentages and counts are not telling the whole story, plotting the total dollars paid may appear more equitable.
Or perhaps not:
Another way to look at the tax burden is to plot the average tax paid per filed tax return in each income level:
This shows that the highest income earners are paying a vast majority of the taxes. In fact, on average, the top 1% of income earners are
paying 642 times the taxes of the lowest 50% of income earners. The top 5% to 1% of income earners are paying 83 times the
taxes of the lowest 50% of income earners on average. Those in the top 5% to 1% of income earners are not "Rich". In fact, the
cost of living calculator at Salary.com indicates that one would require a salary of $152,446 (in the top 5% to 1%) in New York City
in order to have a similar cost of living as an individual earning $80,000 (in the top 25% to 10%) in Des Moines, Iowa.
In order to definitively prove that the highest wage earners are doing their share, a comparison of the top 400 income tax filers
can be made to the lowest 50% (or 66.3 million) of tax filers. The top 400 filers paid a total of $15.6 billion of individual income tax in 2005.
The lowest 66.3 million filers paid a total of $28.7 billion of individual income tax. That means the top 400 filers paid more than half
(54% to be exact) as much in individual income taxes as the lowest 66.3 million filers combined.
There is no doubt that the higher end of wage earners have a better economic condition than those in the lowest 50%.
But that is the heart of capitalism. Those who work hard, have specific talents or were in the right place at the right time
earn the largest rewards. If capitalism is the system, then the lifestyles of the upper earners is not the question
that needs to be examined. The question that needs to be answered is the equity of the income tax system, and whether the "Rich"
need more tax hikes. In fact, the data presented here shows quite clearly that the federal individual income tax system is very progressive, and a disproportionate
majority of the tax burden already lies on the shoulders of the highest earners. No matter how the actual tax data is
analyzed, the "Rich" are not the recipients of massive "tax breaks" by the U.S. federal government, and this situation isn't likely to
change any time soon.
The 2008 presidential election resulted in a total popular vote of 125 million between both of the major parties. Barack Obama
won the election in what was considered a sweeping victory with only 66.9 million votes.
Since 41 million tax returns pay no taxes at all, and a full 66.3 million (or 50%) of the tax filers only pay 3% of the taxes, it doesn't seem
likely that there would ever be a massive popular push to change the disproportionately large tax burden of the higher income earners.
The total count of filed tax returns by income level:
In closing, just because the current income tax system in massively unequal, does not necessarily mean it is inequitable.
Whether it is or isn't all depends on your point of view on the role government, and the resulting size of government
that your point of view implies. However, it is time for an end to the Class Warfare rhetoric.
Thank the high wage earners for their current overly burdensome contribution. Because without it, the government would have to
make many many more hard choices about its sustainable level of activity. In order to maintain the current level of
government activity without the high end earners, the level of taxation on the lowest 50% would be crushing.
So, the next time a politician starts with the Class Warfare rhetoric, please put an end to the misinformation and say:
No More Class Warfare Please!