Politicians, when campaigning, routinely promise to make the wealthy pay their "fair share" when it comes to taxes. This assumes at least two things, 1) that the wealthy do not already pay their "fair share", and 2) someone else is paying more than their justified burden. This concept is politically charged, re-affirming to people who believe they pay too much in taxes. Unfortunately, it fails considerably by asking a few simple questions. With the tax cuts implemented by former President George W. Bush set to expire this year, this rhetoric is all the more powerful. Is the middle class and poor picking up the slack in the tax burden the wealthy in this country are skirting?
The first question, "who are the rich?", is often not directly asked of the one making the claim, and when asked, is often evaded. Since there is no official definition, the "rich" is defined by the audience to whom the politician is speaking. Who exactly are the rich? $100,000 per year, $200,000?
The next question I have never heard asked, "what is their fair share?". If it is so obvious that the "rich" are not paying their "fair share" there should be an amount that is considered fair. What is the amount? Apparently, whatever the rich are paying, it is not their fair share according to those making the claim.
So who actually pays taxes? According to the IRS, its the wealthy. Those tax payers earning $113k and more a year pay 71% of all taxes paid. For the tax year 2007:
- Top 1%, $410,096+ paid 40.42% of all taxes
- Top 5%, $160,041+ paid 60.63% of all taxes
- Top 10%, $113,018+ paid 71.22% of all taxes
- Top 25%, $66,532+ paid 86.59% of all taxes
- Top 50%, $32,879+ paid 97.11% of all taxes
- Bottom 50% < $32,879 paid 2.89% of all taxes(1)
Ten percent of the people who earn money pay 71% of the burden. Sure they pay the bulk, but the Bush tax cuts favored the rich, didn't they? While the average family in America whose income was $10 million or more received a half-million-dollar tax cut, the middle class received less than $100 off their tax bill. On its face it looks like most tax cuts went to the super wealthy.
However there was more investing, hiring by businesses rose, and a much stronger stock market. When compared with the amount of taxes paid under the old system to those paid after the Bush tax cuts were implemented, the wealthy are now actually paying a higher proportion of taxes. IRS data showed an increase of more than $100 billion in taxes paid by the wealthy by 2005 alone. The number of tax filers who claimed income of more than $1 million rose from about 180,000 in 2003 to more than 300,000 in 2005. The total taxes paid by millionaire households increased by approximately 80 percent in two years, from $132 billion to $236 billion.
Image credit: chart illustrations by MacNeill & MacIntosh
The dirty secret is lower taxes produces more revenue to the government in the form of taxes collected. Lower capital gains tax means more people invest more money more often. For example, if it cost $15 per $100 earned in the stock market, as opposed to $30 per $100, which scenario is likely to encourage investing? There is more money to be made at a lower tax cost which encourages more investing, which equates to more taxes by volume received by the government.
While the taxes paid by the middle class might be felt more heavily on their budget, they are not the primary tax payers. The fact remains the wealthiest Americans pay the most taxes, certainly more than what I would consider their "fair share". Not because I am among the wealthy, but because of the massive disproportion of burden between the wealthy and middle class, which make up really all the tax payers, the least wealthy Americans pay virtually no federal income tax at all. Now you may think the rich ought to pay more, which is an opinion many hold, but by no means are they not paying their "fair share".
Another misconception is further developed by this "fair share" rhetoric, when politicians claim to make plans to tax corporations at a higher rate. Unfortunately this idea is very deceptive. Corporations do not pay income taxes, the consumer does. It is a hidden tax on the people. Income taxes are an expense to corporations. Much like the electric bill, property taxes and income taxes are built into the product or service consumer price. If the tax rate goes up, the cost for the product or service goes up. For example, if I own a large profitable company producing one million widgets per year, and factoring in all expenses: utilities, labor, insurance, and taxes etc. those costs are built into the product. Say the actual cost of producing a widget is $12.65. The cost the consumer will pay will might be $22.95. If my company's taxes rise by a half million dollars per year, that amounts to a 50 cent increase in cost per widget. Do you think my company will simply absorb the half million dollar loss in revenue caused by the tax increase, or will the cost of the widget to the consumer rise? The consumer will see an increase in the cost of the product which in effect pays the corporation's tax increase.
Do not be drawn in by silver tongued politicians who promise to stick it to the other guy, the other guy is usually you, it's just not immediately obvious. I will end this commentary with a popularly circulated analogous short article about taxes, and has circulated the Internet for years, it has been attributed to various professors and economists. Although its original authorship remains a matter of speculation, Snopes.com says it was first printed in a letter to the editor in The Chicago Tribune.
Suppose that every day, 10 men go out for beer and the bill for all 10 comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:
The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.
So, that's what they decided to do. The 10 men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve. "Since you are all such good customers," he said, "I'm going to reduce the cost of your daily beer by $20." Drinks for the ten now cost just $80.
The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still drink for free. But what about the other six men - the paying customers? How could they divide the $20 windfall so that everyone would get his "fair share?"
They realized that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being paid to drink his beer. So, the bar owner suggested that it would be fair to reduce each man's bill by roughly the same amount, and he proceeded to work out the amounts each should pay.
And so:
The fifth man, like the first four, now paid nothing (100 percent savings).
The sixth now paid $2 instead of $3 (33 percent savings).
The seventh now pay $5 instead of $7 (28 percent savings).
The eighth now paid $9 instead of $12 (25 percent savings).
The ninth now paid $14 instead of $18 (22 percent savings).
The tenth now paid $49 instead of $59 (16 percent savings).
Each of the six was better off than before. And the first four continued to drink for free. But once outside the restaurant, the men began to compare their savings.
"I only got a dollar out of the $20," declared the sixth man. He pointed to the tenth man, "but he got $10!"
"'Yeah, that's right," exclaimed the fifth man. "I only saved a dollar, too. It's unfair that he got 10 times more than I!"
"That's true!" shouted the seventh man. "Why should he get $10 back when I got only two? The wealthy get all the breaks!".
"Wait a minute," yelled the first four men in unison. "We didn't get anything at all. The system exploits the poor!"
The nine men surrounded the tenth and beat him up. The next night the tenth man didn't show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn't have enough money between all of them for even half of the bill!
And that, ladies and gentlemen, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.
For those who understand, no explanation is needed. For those who do not understand, no explanation is possible.
1) ntu.org/tax-basics/who-pays-income-taxes.html
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