The Financial Samurai wrote a post this past Friday that led to a pretty good discussion. He was wondering why a flat tax is not fair.
I left a few comments raising a few questions regarding some basic assumptions people make when they think of taxes and the wealthy.
This post is political in nature, but try to keep an open mind as you read it. I will be utilizing data that is open for anyone to analyze, so I encourage you to give your feedback!
Are the Uber-Rich Taxed Into Oblivion?
This is the first issue that I wanted to address. If you asked random people on the street, it seems like they would just assume that the uber-rich pay more than 40% in taxes. And for good reason: The uber-rich are the most able to voice their opinions. I am constantly being told that the richest Americans are getting crushed under an incredible tax burden.
“I want to be rich one day! That is completely unfair!” That thought process crosses every middle-class American and causes them to fight back FOR the rich!
However, are the richest Americans really being crushed by taxes? The Citizens for Tax Justice give us a resounding “No!” According to this document released in April 09, the 400 highest income Americans paid an effective rate of 17.2%.
Warren Buffet caused waves when he alluded to the same point:
“The 400 of us [here] pay a lower part of our income in taxes than our receptionists do, or our cleaning ladies, for that matter. If you’re in the luckiest 1 per cent of humanity, you owe it to the rest of humanity to think about the other 99 per cent.”
The third richest man in the world was taxed at 17.7% while not trying to avoid paying higher taxes (self-admission, not verified if he used loopholes). I know for a fact that I pay a lot more then that in federal income taxes, so I could only hope to be taxed at a rate around 17%.
But, the Tax System is Progressive!
Another assumption people make is that the tax system is actually very progressive. In fact, the politicians and economists reference this as a fact all of the time. And they are right if you are talking about just federal income tax brackets.
However, when you take into account federal income tax, payroll tax, state income tax, property tax, and various other local taxes, the progressiveness of the system collapses. Payroll taxes are obviously regressive since they only tax up to a certain level of income, sales taxes affect the people who have to spend a larger portion of their income on tangible goods (the less well-off), and state and local taxes often favor the well-off as well.
The Citizens for Tax Justice posted another document in April 09 with the below chart:
If you look at each group of people, once you get above the $40,000 in income threshold, the shared tax burden is virtually flat. Everyone pays between 27% and 32.2% in taxes. Surprisingly, the group that pays the largest percentage in taxes is the 90-95% percentile.
Another thing that most people don’t realize is the regressiveness of the state and local taxes. You can see that the federal taxes are progressive. They go up between each income percentile. But the state and local taxes go down as a percentage of income from each group to the next.
What happens when you take a progressive tax and combine it with a regressive tax? As the total taxes column shows, you get a tax rate that is virtually flat when you don’t account for the two bottom income groups.
So, What’s the Complaint?
It seems people get stuck on the absolute dollar value of taxes. If I make $500,000 per year and pay 30% in taxes that means I pay $150,000. If I make $50,000 per year and pay 30% in taxes that means I pay $15,000 in taxes. Same percentage but one of those numbers just sounds a lot more outstanding. I think that’s the first issue.
Another issue may be that when people are in the lower income groups, the tax burden is composed of a a lot of items like property taxes and sales taxes that wind up being a large percentage of their total income. But they aren’t tracked by people nearly as well as what they pay in federal income tax and payroll tax. Heck, every paycheck reminds you what you are paying in federal income and payroll taxes. But do you save every single receipt for things that you buy so that you can add up how much you spent on sales tax?
I think when it all comes down to it: The grass is always greener on the other side.
Does anyone have any evidence that shows how our system is progressive overall? I don’t really care about the progressiveness of the federal income tax. That doesn’t matter as much as total tax burden.