Who Pays the Most Taxes?
Paul Caron cites a Tax Foundation study that finds “the top 1% of tax returns paid about the same amount of federal individual income taxes as the bottom 95% of tax returns.” Glenn Reynolds, reasonably enough, thinks “that degree of progressivity is actually bad.”
Kevin Drum, though weary from constantly having to point this out, notes that these calculations only include federal income tax and that, when one considers Social Security (aka “payroll”) taxes, things suddenly flatten out. Indeed, the tax burden becomes curvilinear, with “the 5,000 richest people in the country” paying less than those making $100,000. Further, if one includes excise taxes, state income taxes, sales taxes, or property taxes, the system is flatter yet, with those in the top and bottom quintile actually paying a slightly higher share of their incomes than those in the middle.
It’s reasonable enough to look at the overall tax burden. Still, doing so conflates a lot of issues and makes the debate harder to untangle.
First, it’s simply undeniable that the federal income tax is incredibly skewed. It’s not what it was before the Kennedy and Reagan tax cuts, by any stretch, but it’s hard to argue that those who earn 21.2% of the nation’s income should pay 39.4% of all federal income taxes when taken in isolation.
Second, while FICA is undeniably a tax, it’s of a different sort than income taxes. Social Security is, in theory anyway, a pension system rather than a means of collecting general revenue. The reason the very rich pay a smaller percentage of their income into Social Security is that the payout is capped and therefore so is the collection threshold.
Workers currently pay Social Security taxes on the first $90,000 of their wages. Some people have suggested that the cap be raised or even eliminated altogether. The result would be the largest tax increase in U.S. history, $541 billion in new taxes over the first five years alone. That tax increase would fall primarily, not on the superrich, but on many upper-middle-class families and small businesses. Many experts believe that such an enormous tax increase would hurt the U.S. economy and cost millions of jobs. Even worse, it would do relatively little to fix Social Security. Studies show that removing the tax cap altogether would extend the solvency of Social Security by only seven years.
Virtually everyone in the top 1% would gladly opt out of Social Security altogether. They stand to get a payout that amounts to a rounding error and they’re losing money that they would almost surely invest more fruitfully were they allowed to do so. The idea that they should nonetheless be taxed down to the last dollar of their earnings is just bizarre.
State and local taxes, meanwhile, are part of a different debate. Indeed, they’re thousands of different debates, with rates set by localities. The only taxation we can usefully debate as a society are those to which we collectively pay.
Further, they’re generally consumption based. They’re flatter than income-based taxes because spending patterns tend to be flatter. A rich person will likely buy a more expensive house and car than a poor one, and be taxed accordingly, but they’re probably using relatively similar amounts of gasoline, electricity, water, eggs, and milk. Surely, we shouldn’t charge rich people higher taxes at the grocery store simply because they can afford to pay more?