Is America’s tax code “unfair” to America’s rich? The rich — and our elected leaders who cater to them — desperately want us to believe that deep pockets pay far more in taxes than their “fair share.” And their evidence? One simple stat: The richest 1 percent of Americans currently pay about 40 percent of the income tax revenue the IRS collects.
This same 1 percent collects 20.6 percent of the nation’s income.
For the wealthy and their cheerleaders, case closed. The rich, they argue, are doing the rest of us a favor. They deserve a break. More specifically, they deserve the extravagantly generous break the GOP tax “reform” bills now pending in Congress would if enacted deliver.
But let’s not close this case just yet. Let’s take a moment to contemplate why we have these particular numbers and what they really mean.
Where to begin? Let’s start with a simple observation about income and tax distributions: If the top 1 percent share of total income exactly equaled the top 1 percent share of total income tax paid, no one could possibly say that top 1 percenters were paying more than their fair tax share.
In theory, the top 1 percent share of income will exactly equal the top 1 percent share of taxes paid at both what we might call the “equality extreme” (a situation where the top 1 percent has a 1 percent share of both total income and total tax) and the “inequality extreme” (a situation where the top 1 percent has a 100 percent share of both total income and total income tax liability).
Neither of these extremes, of course, defines our current social order. We wobble between these extremes, and, as we wobble, the 1-to-1 correspondence between income share and income tax share we see at the two extremes breaks down.
Why? Two factors. First, we have a progressive income tax system in the United States. That is, we believe in equal sacrifice at tax time. A person making $30,000 a year will really feel the bite a 10 percent tax rate exacts. A person making $300 million will not. So we tax progressively in the United States. We expect people who make more to pay taxes at a higher rate.
The second factor. In the United States today, we believe that the income tax shouldn’t be driving people with poverty-level incomes deeper into poverty. So we have a policy of not charging income tax to Americans with poverty-level incomes. American married couples, depending on the number of children, pay no income taxes on incomes that start at about $21,000, a figure that approximates the poverty line.
Now let’s engage in a little thought experiment. Suppose the bottom 99 percent all lived below the poverty line and the top 1 percent way above it, a situation that approaches the inequality extreme of the continuum. In this situation, the top 1 percent — a group that might have 10 or 20 or some higher percent of total income — would be paying 100 percent of the income tax because, under our current tax policy, those in poverty pay no income tax.
This little what-if leaves us with two possible explanations for why our current, real-life top 1 percent is today paying about 40 percent of the nation’s total income tax, a greater share than a generation ago. One explanation: We could be moving to a more extremely unequal distribution of the nation’s income. The other: Our distribution of income hasn’t changed, but our tax structure has become more progressive, with rich people paying taxes at a higher rate.
We can quickly toss this second explanation aside. Really rich people are today paying taxes on their incomes at considerably lower levels than they once did. In the 1950s, under the Republican President Dwight Eisenhower, America’s richest faced a 91 percent tax rate on income in the highest tax bracket. The top rate today: only 39.6 percent.
This top rate today also applies to a far greater swatch of taxpayers. Before 1980, we had many more tax brackets than we do today. We differentiated back then between taxpayers at the bottom of the top 1 percent and taxpayers at the top. Mega-millionaire bankers back then faced a much higher tax rate than doctors and lawyers with incomes close to the top 1 percent bottom. That has changed. The progressivity in today’s tax code disappears once we get into the top 1 percent. The richest of the rich pay taxes at the same top rate as the merely affluent.
These same richest of the rich have, at the same time, almost quadrupled their share of national income. The top 0.1 percent share has leaped from under 3 percent in the early 1970s to just about 11 percent
Another statistical take on that shift: Back in the early 1990s, America’s distribution of wealth had become so unequal that the top 1 percent held as much wealth as the entire bottom 90 percent. Today’s bottom 90 percent only holds as much wealth as the top one-tenth of 1 percent, for a 10-fold increase in wealth concentration.
Our nation’s income, in short, is concentrating ferociously at our economic tippy top. And our tax system is making matters worse — and much less fair — by taxing wealth much less dramatically than income from labor.
Consider a trauma surgeon today making $1 million per year. This surgeon remains available at all hours to save the lives of auto accident and gunshot victims. This surgeon also likely went deep into debt to finance medical school and, once in school, lost out on the opportunity to earn substantial income before age 30.
Our trauma surgeon, under the GOP tax plan, would pay $50,000 more in tax than the owner of a rental property with the same level of income. What does that say about our values? Nothing good.