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Friday, November 11, 2011

Who Pays Taxes and How Much?

Tax Foundation Data shows who pays taxes and who doesn't.

The Tax Foundation (which does have a conservative bent) released its analysis of federal income taxes for 2009 a few weeks ago.  It is based on individual tax returns that have been filed which have a positive AGI (Adjusted Gross Income); that is, a positive gross income after adding wages, capital gains, dividends, rent, royalty, and income from businesses, but also subtracting small business losses and investment losses.

Federal income taxes collected from individuals have declined about 22% since 2007.

The total percentage of individual taxes paid as a percentage of Adjusted Gross Income (AGI) continued to decline, which is one of the reasons for our increasing budget deficit:  The effective tax rate for individual tax returns is  lower than it has been in decades.  In 2009, the average tax paid was 11.1% of AGI (Table 8, bottom left), in 2008, it was 12.24% of AGI.  In 1980 this number was 15.3%; in the Reagan years, 13 to 14%; in the Clinton years, 13 to 14%, with a peak of 15.26% in 2000.  This number was mostly in the 12% range in the Bush II years.  (again, Table 8, left column).  

The Adjusted Gross Incomes of Americans as a whole went down in 2009, the worst year of the recession, so the Federal government was collecting a lower percent of income from a smaller tax base.  2007 was the recent peak:  We collected 12.68% from a collective Adjusted Gross Income of $8,799,000,000 (That's almost 9 trillion dollars in Adjust Gross Income.)  That comes out to about $1.1 trillion in revenues from individual tax returns.   In 2009, we collected 11.06% from $7,825,000,000 (almost 8 trillion in Adjusted Gross Income.)  That comes out to about  $865 billion in revenues in 2009.  This is a decrease of about 251 billion (about 22%) from the revenue collected 2007.  

How much do the wealthiest among us really pay in income taxes?

Let's look at the various income groups in this report:  First of all, the top income earners among us will complain that they pay much more than their "fair share" in taxes:  The top 1% (family incomes over $343,000 in 2009) earn about 17% of the total income in Adjusted Gross Income in this country, while they pay about 37% of the federal income taxes in total.  Meanwhile, the bottom 50% earn 13.5% and pay only 2.25% of the federal income taxes in total.  It's a good talking point and it sounds as if those top earners are getting socked compared to those bottom-feeding 50%.     

If you take it up to the top 5% it sounds even worse:  The top 5% of filers (family incomes over $155,000 in 2009) earn 32% of the money, while they pay 59% of the taxes!  The bottom 95% of filers pay only 41% of the taxes!  I guess the whole bottom 95% are bottom feeders of some sort.

How much do families really have to live on?

But let's look at what those numbers really mean:  The top 1% of families, with incomes over $343,000, pay an average of 24% in federal income taxes.  That means a family right on the cutoff with an income of $350,000 pays about $84,000 in federal income taxes, leaving them $266,000 in after-federal tax income (not counting FICA, state and local taxes) on which to live.  

A family at the 50% mark, with an income of $33,000, pays somewhere about 6%, or about $2,000 in federal income taxes.  They are left with $31,000 with which to pay FICA, state and local taxes, shelter, food, transportation, utilities.  (A family with two earners working full-time making minimum wage would make just about $33,000.)  

Would you rather live on $31K a year after federal taxes or $266K a year after federal taxes?

Let's be honest, rich guys:  Would you really rather be that $33,000 family paying less than $2000 in federal taxes and trying to pay everything else with $31,000?  Or that top 1% who has a mere $266,000 with which to pay everything else?      

The wealthy do pay federal income taxes at a higher rate than "average earners".

Another important point:  The top income earners do pay federal income taxes, and they do pay a higher rate on average than most "average working" people.  Many people concerned with income inequality believe that the wealthiest among us pay no federal income taxes, which is generally not true.  But, even with an effective tax rate of 24% for the wealthiest compared to 2% for the poorest, the top wage earners have so, so much more income than most of the rest of us.   

Here's the link to the Tax Foundation data, which is based on IRS data.  Read through the report yourself.  Notice the tone of the report, and notice some of the things that aren't said:  1.  The bottom 50% of tax filers are trying to live on $32,000 a year or less.  2.  A family income of $66,000 puts you in the top 25% of families in the US in 2009!  3. Though the concern of the Tax Foundation is taxes and the idea that the wealthiest among us are paying more than their fair share, the most obvious thing about the data that is presented isn't tax inequity-- It's income inequality.  

A Historical Look at Income Inequality

Since 1980:

  • The Adjusted Gross Income of all tax returns increased 225%.  
  • For the top 1%, the AGI increased 549%.  
  • For the top 50%, 241%. 
  • For the bottom 50%, the AGI increased 147%. 

But 2009 was a bad year for the wealthiest among us.  According to the Tax Foundation:  "In 2009, the top 1 percent of tax returns paid 36.7 percent of all federal individual income taxes and earned 16.9 percent of adjusted gross income (AGI), compared to 2008 when those figures were 38.0 percent and 20.0 percent, respectively."  Let's see what a bad year looks like for the wealthy in the US:

In 2009, that "bad" year for the wealthy:

  • The AGI on the average tax return was about $56,710.  
  • The average AGI for those in the top one-tenth of one percent was $4,420,290.  
  • The average AGI for those in the top 1% was $960,869.  
  • The average AGI for those in the top 50% was $98,128.  
  • The average AGI for those in the bottom 50% was $15,291.  
Look at that last number again:  The top 50% of individual income tax returns, with thanks to the top 1%, averaged $98,128.  The bottom 50% of individual tax returns averaged $15,291.  And there are plenty of people out there who don't need to file because they don't have enough income. 

Other tax commentary here: 45% of Filers Pay No Taxes!

Tomorrow I will compare the average tax rates with the average AGI's at various income levels, and we will see if the wealthiest among us are indeed treated unfairly by our tax code.  (Yes, a bit of sarcasm there.) 

Thanks again to the conservative Tax Foundation for putting all of these numbers together and providing a spreadsheet to download.     
Notes:  This report is based on individual income tax forms.  It doesn't include people who don't need to file, who are among the oldest and the poorest in our country.  I believe, however, that it does include young people, still dependents on their parents' taxes who work part-time or summer jobs and need to file individual tax returns to get a refund of income taxes paid by their employers.  It also reflects family income in terms of people who are legally allowed to file together (husband and wife, for instance, and a single parent with children).  It doesn't include households who are not legally allowed to file together (unmarried couples living together who share household expenses). The "Adjusted Gross Income" excludes capital losses, carry overs, and other such techniques which allow usually wealthier people to offset or write off some income.  The Adjusted Gross Income does not include many government benefits which allow poorer people to survive.
Therefore, this is not a perfect collection of data, but nonetheless, very useful, particularly for comparative purposes.

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