Do the rich pay their fair share?

Great Debates
1

I did a quick search and found very little specifically about this.

In association with the latest story about DJT’s tax returns, I heard a statistic that the wealthiest Americans pay an average of 24% in Federal Income Tax.

I presume they’re talking about Effective Tax Rate.

But Effective Tax Rate reminds me of an old joke in medicine: The surgery was a complete success, but the patient died.

Sometimes, our definitions differ from the definitions used by others.

According to Pew Research:

Effective tax rates – calculated as the total income tax owed divided by ADJUSTED [emphasis added] gross income – also rise with income. On average, taxpayers making less than $30,000 paid an effective rate of 4.9% in 2015, compared with 9.2% for those making between $50,000 and under $100,000 and 27.5% for those with incomes of $2 million or more."

But if I’m looking at this correctly, a very wealthy person could earn a billion dollars, and – after extensive deductions – have a taxable income of a million dollars.

Given a Federal Income Tax liability of, say, $100,000:

[taxes paid] / [adjusted gross income] = 10.000%
[taxes paid] / [TOTAL gross income] = 0.010%

Not for nothing … our principle definition of Effective Tax Rate – the one bandied about constantly to help us understand how much the wealthiest Americans pay relative to the rest of us – seems to be … er … misleading or obfuscatory at best.

It seems to obfuscate the infinite well of deductions that a wealthy person may be able to take advantage of to reduce their taxable income and tax liability.

  1. Does anybody else agree/disagree with my understanding of Effective Tax Rate and its common use ?

  2. Has anybody seen “true” Effective Tax Rate (as I’m defining it – total paid [divided by] total made) by income … anywhere ?

I think it would be difficult to have really sincere and honest discussions about tax rates if the basic metric that’s used to help define ‘fairness’ is, itself, inherently ‘unfair.’

2

Everyone who itemizes their taxes understands the basic concept here. What would you call this instead? It is the ‘Effective Tax Rate on Taxable Income’. People should realize that taxable income has effectively been defined through the tax code as the amount you live on and consume, not every dollar you earn or receive.

3

Do you think it’s unfair to deduct $70,000 for your comb-over?

4

The whole tax system is unfair. The Effective Tax Rate is based on that unfair system.

5

It depends what you mean by “earn” here. If my home business buys something for $1B and sells it for $1B + $1, my AGI increases by $1. If you want to consider the missing $1B as part of an “infinite well of deductions”, nobody’s stopping you, but Pew and I don’t consider it terribly relevant.

6

Thread title changed at the request of the OP.

7

Do wealthy people really have a lot of deductions that allow them to have significantly lower taxable income than what you might expect? I was always under the impression that a huge amount of their wealth increase (which some might see as “income”) was in the form of unrealized capital gains - I can’t think of a good way to tax that sort of wealth, especially since a lot of the “value” of companies is just potential future profits baked in to the current stock price.

8

Senator Elizabeth Warren suggested a wealth tax, as follows:

  • Zero additional tax on any household with a net worth of less than $50 million (99.9% of American households)
  • 2% annual tax on household net worth between $50 million and $1 billion
  • 4% annual Billionaire Surtax (6% tax overall) on household net worth above $1 billion
  • 10-Year revenue total of $3.75 trillion
9

The reason I raised this issue is … I don’t think we have any idea whatsoever.

Which I view as a problem.

What percent of gross income is represented by Adjusted Gross Income … relative to earnings ? In other words, just how much are people deducting as we go up the wealth ladder ?

We’re just told – by Pew and more than a few others – that people who make more money pay a significantly higher “overall” tax rate than people who – say – are middle class.

I doubt that’s a safe assumption. Actually, I suspect it’s outright bullshit.

Or they wouldn’t be leaning on Effective Tax Rate.

I doubt Donald Trump’s taxes are sui generis.

It’s a damned lie to tell us what rate they paid as a percent of adjusted gross income. I mean a damnable damned lie.

I’ve long been curious about the real number – the number which maybe 60+% of the country would actually care about.

Think about it: whenever issues of taxation and elected officials (eg, Presidents) come up, some version of the Effective Tax Rate trope is trotted out, usually as a justification for why the wealthy are taxed enough already.

But I doubt they are. I suspect that their “Real Tax Rate” (copyright needed) is a fraction of the Effective Tax Rate – as in my example in the OP.

Last I knew, the Tax Code was something like 55,000 pages. Very few items in that code were lobbied for by, or inure to the benefit of, the majority of Americans.

So I wonder what the rich are actually paying … by the only metric that I think has any meaning whatsoever.

10

Reflexively, I’d like to drool over something like that, but I can’t/won’t.

Because I don’t have any idea what they’re really paying.

Why don’t we have a Flat Tax in this country (with a handful of carefully considered deductions and a minimum income before you owe a penny ) ?

I have a feeling I know why.

11

Flat taxes generally are much worse for low-income households.

12

Even if I take for granted that you’re right (and I’m not sure you are), you may just be making my point for me.

What % of Americans itemize ? What about the others – the standard deduction folks – who also vote, and who are almost certainly being misled about the “real” rate that people are paying ?

Okay. I can’t argue with that.

But my point stands on its own in spite of that. There isn’t a hue and cry about taxation in this country – I would argue – precisely because we’re being … well … lied to about who pays what.

It’s enough to mollify the masses … apparently.

13

I’m aware of that argument, but I’m not sure it holds up to close scrutiny. As I say, there can be a modicum of deductions and a floor beneath which you just don’t have to pay.

I doubt the barrier between us and the Flat Tax is The Poor People – strong, vital, vigorous, vociferous, formidable, and well funded though their lobby is :wink:

14

It’s a bad idea to start this discussion with income tax rates. Nobody is writing a paycheck for Warren Buffet. Really wealthy people don’t have incomes; they have returns from their investments.

The maximum capital gains tax rate is 20%. That kicks in at $496,601. At $496,600 and below, you’re taxed at 15%. Unless you’re below $80,000 in which case your tax rate is zero.

Now if you had an income of $80,000, it would be taxed at 22% - a higher rate than if you received capital gains of $800,000. There’s no zero income tax rate; the lowest rate is 10%. The highest rate is 37%, which is almost twice as high as the maximum capital gains rate.

In my opinion, fair would be throwing out the capital gains tax rates and taxing capital gains at the same percentages as the equivalent amount of income.

15

Then you are right back where you started.
Which is: what are “reasonable” deductions?

Also, it’s easy to show that the “rich” pay the majority of the taxes in the US. Now, you may want them to pay even more, or pay confiscatory rates, but to saying that they aren’t paying most of the taxes is incorrect.

16

The rich have the majority of money in the US. The proverbial one percent pay 25% of federal taxes. But they own 38.5% of the wealth.

17

I get that, but … even using Pew’s numbers (from the OP), how does the Effective Tax Rate for earners over $2M become 27.5% ?

I think we’d have to look at the distribution and figure out where it really does just become low rates on passive income.

Meanwhile, I don’t think it answers my question.

Much respect. I’ve seen a few of your posts on money.

But I couldn’t take a position on even this seemingly simple piece of the puzzle until I understood what they’re really paying (as a percent of total income) in the first place.

Which is my basic premise: we’re missing a HUGE piece of the puzzle. No matter how we shuffle the rest of the puzzle pieces … the largest winners remain the largest winners.

I’d like a peek at that one critical piece.

18

Those are good points.

But I will repeat myself.

This – call it Real Tax Rate or whatever you want – is, IMHO, a gaping hole in nearly any discussion about taxation in this country.

I’m not sure it’s all that relevant to say what % of total federal income tax is paid by the wealthiest 1%.

I think it’s a phenomenal talking point, though.

To bring up just one issue: if the Real Tax Rate paid by the top – pick a percentage – is shockingly lower than the Effective Tax Rate, then …

Given public priorities – what our government spends each year – who IS subsidizing the shortfall that arises from what I believe are probably deductions taken to a rather ludicrous degree.

If the numbers I cited as a f’rinstance in my OP are even remotely close to reality (again: we have zero idea), then … aren’t the vast majority of us actually propping them up – a high price to pay for fealty to The Wealth Creators.

But it’s a large and important black box … IMHO.

19

I remember my econ prof making some arguments on why capital gains taxes should be lower than normal income taxes - this site pretty much explains them. Of these, I find the “indexed to inflation” option the most compelling (eg. if your asset appreciates at the rate of inflation, you will still end up paying capital gains taxes on it even though it hasn’t really appreciated in value), but there are potential fixes to that. I am skeptical that “double taxation” is actually a problem, though the point about incentivizing companies to over-leverage is a bit of a concern. This site seems to illustrate that there doesn’t seem to be much link between capital gains tax and overall economic growth, so I think there’s definitely a case to be made for increasing capital gains taxes.

20

It must really suck to sell off $500,000 worth of stocks and find that inflation has reduced the buying power of that sum.

I guess a person making the median national income of $33,706 who doesn’t experience inflation and the loss of buying power can’t appreciate how hard that other guy’s life is.