Jon's Soapbox
Some Thoughts On Income Taxes
(Posted 2/27/2009) - There has been a lot of talk during this recession about how federal income taxes are fair (or unfair) in their burden on various income cohorts. I don't pretend to 'know' what is best. But like everyone I have some opinions. Before I share my opinion however I feel obligated to present some data provided by the fiscally conservative think-tank "The Tax Foundation." This non-profit organization has been around since 1937 and publishes an analysis of how current tax cohorts contribute to the federal income tax revenue stream.
Here is a link to the website I used as my source.
I also provide a link to the wiki page which, among other things, shows how individual income, corporate income, and other revenues add together to top $2 trillion in federal revenues each year.
In 2006 the top 1% of US taxpayers each made more than $389,000 in adjusted gross income. Though they accounted for only 1.35 million of the 135 million tax filings, their adjusted gross incomes added up to almost $1.8 trillion dollars! They paid on average 23% of that income (contributing $408 billion to the federal coffers). Since total collections for personal income taxes in 2006 were a little over $1 trillion, these folks contributed a whopping 40% of federal revenues. Way to go rich folks!
The top 10% of earners (13.5 million folks) each earned more than $109,000 in 2006. They paid on average 21% of their adjusted gross income (contributing 71% of all personal taxes collected).
The top 50% of earners (67.8 million folks) each earned more than $32,000. This cohort paid on average 14% of their adjusted gross income (contributing a whopping 97% of all personal taxes collected).
OK, here's my 2-cents. If we are in trouble and need to increase revenues the last place we look is the bottom 50% of our earners. These folks are on subsistence for the most part (or else they hide their income extremely well :-).
In a growing economy lower taxes have worked well (tax revenues as a percentage of GDP have remained fairly constant even as tax rates have been lowered by Congress over the last 3 decades). In recessions this strategy fails. Recent practice in such situations has been for the federal government to borrow (increase the deficit) and ride out the down-turn. The current recession is an order of magnitude more severe by all accounts (and focuses on the financial engine of our nation).
Given that stimulus projects cost money, a short term necessity may well be to tax personal income at a higher rate for those in the top 2% (> $250,000 AGI). These folks actually have the personal income to absorb a 10-15% increase in taxation that could be eliminated when (if) the economy moves out of recession. Remember, back in the 50's and early 60's these people were taxed in the 70-90% range; so is it really unreasonable to ask them to tighten their belts with the rest of us by paying, gasp, an average of say, 35%? That would generate at least $275 billion more dollars / year for stimulus projects (~ $2.3 trilion AGI x .35 > $800 billion, vs. $525 billion at .23 average rate). Think about it.
An unsupported assumption in the above logic is that our top 2% earners will continue to generate adjusted gross incomes near pre-recession levels on average. Researching this assumption is definitely worth while (and the data is probably out there). I will report any data I find -- that's one difference between ideology and science. The scientific mind follows facts to a conclusion, rather than finding facts that support a predetermined conclusion.
In the end though, we need perhaps a trillion or two in the 2009-2010 timeframe to clean out the rotten financial institutions and get enough lower income folks working that they move off the unemployed roles; so even with higher taxes for the top 2% earners the federal government cannot help but borrow massively. It could be a while before we see the light at the end of this tunnel.
Post-Script: 3/4/2009 - After posting (above) I searched for information about tax revenue impacts of recent recessions. I encountered some interesting data provided by republican leaning economists arguing for the efficacy of the 1981 Reagan tax cuts (ERTA). I include the link here. The key point I took away from their data was that the top 1% of earners are very adept at finding ways to avoid what they consider excessive federal income tax rates.
Historically, the really rich appear to move to tax-sheltered investments or use other methods to hide income (often quasi-legally), reducing their investments in taxable enterprise in direct proportion to increases in marginal income tax rates. The bottom 99% of earners are less able to take advantage of the top end services that hide income from the IRS.
In 1981 the top 1% contributed about 18% of personal income tax revenues collected. By the end of Reagan's tenure that rate had risen to about 25%. The authors attribute this increase to the lowered top marginal tax rates in effect.
Another source, the Center on Budget and Policy Priorities, a politically progressive leaning group, reports that wealth concentration has been increasing over the last two decades. They point out that the top 1% of earners received about 20% of all personal revenue earned as of 2004. This share hovered around 10% from 1945 through 1986, then began increasing. It is interesting to note that just before the Great Depression started the top 1% were also accounting for greater than 20% of personal income in the US. Is it simplistic to believe that there is a downside-weight to wealth concentration during recessions? If about 1.3 million earners' collective income accounts for 20% of all personal income in the US, then we can have major swings in revenue collection based on just this cohort's good (or ill) fortune. Now add their collective decisions to step up and pay taxes or to try and avoid them and we see how wealth concentration sets us all up for hard times during an economic downturn.