Inconvenient Facts

A week ago, I promised (threatened?) to share a few inconvenient facts.  Here they are, and they’re all about taxes.  They were sent to me by my friend, wealth manager Kris Garlewicz.  (Note – this data is from 2009, which I guess is the most recent available.)

Taxpayer             Share of                Share of                  Effective Income

Segment              Income              Income Tax                     Tax Rate

Top 0.1%                7.8%                   17.0%                           24.8%

Top 1.0%              16.9%                   37.0%                          24.0%

Top 5.0%              31.7%                  59.0%                           20.5%

I’m sure you can look at those numbers and find any story you like.  Here are a couple of stories they told me.

First, the argument that high income taxpayers aren’t paying their fair share is utterly disingenuous and flatly wrong.   Imagine that a comfortably upper middle class family in your neighborhood – a family making about $150,000 a year– announced that in addition to paying for their household, they were going to pick up the tax bill for 15 other families.  Now imagine the family next door to that one.  Earning $350,000 a year, they are distinctly wealthier, although not ostentatious about it.  They announce that in addition to paying for their household, they will pick up the tab for 40 other families.  And now think of the house at the end of the block.  These folks are truly affluent, bringing in $1.4 million a year.  They announce that they are going to pick up the tab for 325 other families.

If they did this voluntarily, we would lionize them for their generosity.  Yet, a little arithmetic shows that, in reverse order, this is exactly what the top 0.1%, the next 0.9%, and the remainder of the top 5% do.  I would respectfully ask my Democratic friends, in what world does this not constitute doing their fair share?  Said differently, how many households would each of these taxpayers have to support in order for you to feel that fairness had been achieved?

The sword of disingenuousness cuts both ways, however.

As you can see above, the actual tax rate paid by these households averages only 20.5%, and is below 25% for the very highest earners.  These figures are based on Adjusted Gross Income, not Gross Income, so the actual effective tax rates these households pay are even lower than what’s shown here.

So I would respectfully ask my Republican friends, in what world is a 20%, or even 25%, tax rate offensively and employment-crushingly high?  There is plenty of theory that raising 20% to, say, 23% would have a dampening impact, but not a shred of actual evidence, at least that I’ve seen, to prove it.  Neither is there anything to prove that reducing it to 17% would unleash a flurry of investment and job creation.

The biggest problem with those tax rates is how little resemblance they bear to the rates everyone is talking about.  The top stated rate is 35%.  An enormous amount of energy, as well as an entire industry of tax lawyers and tax accountants (and, God help us, a few who are both) is devoted solely to the task of converting 35% to 24%.  I count a few of those tax lawyers and accountants as friends (at least I did – they will disown me now), but this activity adds no value.  They collude with a tax code that meets my favorite definition of a Russian novel – thick enough that the author could commit suicide by jumping off of it.

My guess, and that’s all it is, is that if those tax rates were transparent and the top 1% were asked to simply pay 27% instead of 24%, they would shrug and write the check.  The corollary, of course, is that we could tax the daylights out of these people and it would make only a small dent in the deficit.

We have hard choices to make.  We should be talking about them, but that would be much less fun than railing about imagined unfairness or championing attractive but unproven theory.

I’m glad the election is near.  I’ve been writing more about politics than I ever intended but it seems important.  I have one more left in me.  Later this week, I will share a perspective on the question of “Who Dealt this Mess.”

5 thoughts on “Inconvenient Facts

  1. Excellent post. I too am tired of all of the politicking, especially any discussion of the revenue side of the government’s budget. I can only imagine that that issue is meant to be a distraction from the real issue of government spending and the real federal deficit which is far beyond what the government is reporting.

  2. You write better than you shoot. But as of Friday, that means you’re an awesome writer! Love the perspective.

  3. I think the problem with this analysis is that it is limited to Federal Income Tax only. In order to truly understand the tax burden you have to account for social security and medicare taxes which are a fixed percentage irrespective of income and such taxes as Federal excise taxes on gasoline and cigarettes which fall disproportionately on lower income earners. There are probably other taxes as well that need to be accounted for.

    1. You are correct, Michael. Payroll taxes would flatten the curve somewhat, as would excise taxes, although I suspect not enough to change the conclusions. I left them out in part for simplicity, and also because I was trying to keep it down to 600 words.

      For what it’s worth, I think payroll taxes are a problem for Democrats. They are hugely regressive, but giving them up would require admitting that this whole notion that they are specific taxes paid into specific funds for specific benefits is a fiction. My thought.

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