Q: How much taxes do "the rich" pay?
It's election season, which means it's also "fact check political discussions between my liberal Mom and conservative Dad" season. Today Dad sent me a simple question with a complicated answer:
What's the accuracy in Mom's blanket statement:
"The rich (defined as having income over 2 million) only pay 16% income tax and should pay more."
On one hand the marginal Federal tax rate for US taxpayer income over $372,950 is 35%, and the Alternative Minimum Tax is 28%, so we might be tempted to say that she is wrong.
On the other hand, as phrased, Mom isn't talking about the rate of tax which is levied. Mom is talking about the amount of tax which is paid. Mortgage interest, deductions and other complications make it possible for someone with a levied tax burden of 35% to only pay 16%. This is how, in 1953, the top marginal tax rate was 92% even though "the rich" didn't pay anywhere close to 92% of their income in taxes. There are ways to shield your income from taxation, and "the rich" are very good at paying much less than the amount levied.
What Mom means about "income" is also important. She could mean "adjusted gross income" (the amount you earned) or "taxable income" (the amount which is taxed). I've got a mortgage and I claimed a lot of deductions, so last year my "taxable income" was only 62% of my "gross income". I earned 38% of my income tax-free. The 62% of my income that I paid taxes on was taxed *cumulatively* at 19%. "Income" also doesn't include months of extra paid vacation, company cars, personal assistants, health care, and other benefits that "the rich" often accept without paying taxes.
What she means about "tax" is also important. She's probably talking about just Federal income tax, but there's also state taxes (usually pegged to Federal), property taxes (which the rich pay disproportionately), and sales taxes (which the poor pay disproportionately). Plus "taxes on stupidity" like the lottery and legalized gambling.
American taxpayers, particularly those with tea party sympathies, might be surprised to divide "Total Tax" (line 60) by "Adjusted Gross Income" (line 38) and determine the actual tax they paid. Mine was 12.48%. It seems plausible that the average rich person's tax payment is around 16% of their gross income.
Caveat: I am not an economist or even a particularly sharp tax person. I'd appreciate someone reviewing my numbers and/or speculating where Mom might have heard the 16% figure.
Aside: Hauser's Law says that "No matter what the tax rates have been, in postwar America tax revenues have remained at about 19.5% of GDP." which jibes more or less with what I mentioned earlier. If "the rich" are paying 16% of their income in taxes they're arguably paying 4% too little.
What's the accuracy in Mom's blanket statement:
"The rich (defined as having income over 2 million) only pay 16% income tax and should pay more."
On one hand the marginal Federal tax rate for US taxpayer income over $372,950 is 35%, and the Alternative Minimum Tax is 28%, so we might be tempted to say that she is wrong.
On the other hand, as phrased, Mom isn't talking about the rate of tax which is levied. Mom is talking about the amount of tax which is paid. Mortgage interest, deductions and other complications make it possible for someone with a levied tax burden of 35% to only pay 16%. This is how, in 1953, the top marginal tax rate was 92% even though "the rich" didn't pay anywhere close to 92% of their income in taxes. There are ways to shield your income from taxation, and "the rich" are very good at paying much less than the amount levied.
What Mom means about "income" is also important. She could mean "adjusted gross income" (the amount you earned) or "taxable income" (the amount which is taxed). I've got a mortgage and I claimed a lot of deductions, so last year my "taxable income" was only 62% of my "gross income". I earned 38% of my income tax-free. The 62% of my income that I paid taxes on was taxed *cumulatively* at 19%. "Income" also doesn't include months of extra paid vacation, company cars, personal assistants, health care, and other benefits that "the rich" often accept without paying taxes.
What she means about "tax" is also important. She's probably talking about just Federal income tax, but there's also state taxes (usually pegged to Federal), property taxes (which the rich pay disproportionately), and sales taxes (which the poor pay disproportionately). Plus "taxes on stupidity" like the lottery and legalized gambling.
American taxpayers, particularly those with tea party sympathies, might be surprised to divide "Total Tax" (line 60) by "Adjusted Gross Income" (line 38) and determine the actual tax they paid. Mine was 12.48%. It seems plausible that the average rich person's tax payment is around 16% of their gross income.
Caveat: I am not an economist or even a particularly sharp tax person. I'd appreciate someone reviewing my numbers and/or speculating where Mom might have heard the 16% figure.
Aside: Hauser's Law says that "No matter what the tax rates have been, in postwar America tax revenues have remained at about 19.5% of GDP." which jibes more or less with what I mentioned earlier. If "the rich" are paying 16% of their income in taxes they're arguably paying 4% too little.