This site has been host to a lot of discussion in recent months about the changing distribution of wealth in America, the relative tax burden we all bear and how that burden ought to be allocated among income groups. But a lot of that debate has gotten bogged down by citations of slanted or incomplete statistics, or statistics that make it hard to compare apples to apples, oranges to oranges.
So I thought I’d try to set some parameters for the debate by laying out the fairest, most definitive statistics I could find on those topics and offering them as a common ground for discussion. Think of this as an effort to establish a common factual basis for debate, something that has become more and more rare.
As a starting point, let’s look at how much household income is paid in total federal taxes. Again, that’s total taxes paid to the federal government — income taxes, payroll taxes, gasoline taxes, excise taxes, capital gains and corporate taxes, estate taxes, etc. That seems the fairest way to measure things.
And to further keep things straight, we’ll use numbers compiled by the nonpartisan Congressional Budget Office, available at the link above. (Those numbers, the most up-to-date I could find, begin in 1979 and run through 2006, so that’s the time frame we’ll analyze.)
According to the CBO, the poorest 20 percent of households in 1979 paid 8 percent of their income in federal taxes. By 2006, that same group — defined as those making $18,900 or less — were paying 4.3 percent of their income to the federal government. So as a percentage of income their tax burden has fallen.
However, that experience wasn’t unusual. In fact, ALL income categories paid considerably less of their income in federal taxes in 2006 than they did in 1979. The most affluent 1 percent, for example, paid 37 percent of its income in federal taxes in 1979, but only 31.2 percent in 2006. (The top 1 percent of households in ‘06 were defined as those making a minimum of $332,300).
So, the takeaway so far is that the federal government takes significantly less of each dollar now than it did in 1979, a statement that is true across income levels.
Now let’s look at the share of federal taxes actually paid by each income group, again as reported by the CBO.
In 1979, the poorest 20 percent of households accounted for 2.1 percent of total federal taxes paid. By 2006, they paid just 0.8 percent of total taxes. In stark contrast, the richest 1 percent of households paid 15.3 percent of all federal taxes in 1979; by 2006, they were paying 28.3 percent of all federal taxes, almost doubling their share of the burden.
In fact, the share of federal taxes paid by the top 20 percent (2006 household income of at least $71,200) rose from 56.4 percent in 1979 to 69.3 percent in 2006. For every other income group. it fell.
So the takeway here? The highest-income Americans are paying a heavier part of the tax load than they did in 1979. That has generated a lot of complaints that the “producers” are being penalized, a claim that I personally find repulsive because it suggests that the teachers, police officers, auto mechanics and small business people who make up the American middle class aren’t themselves “producers.”
Now for the final question: The richest of Americans — like all Americans — pay significantly less of each dollar of income than they did in 1979, yet somehow their share of the total tax burden has grown significantly. How could that happen? Is government unfairly targeting upper earners?
Hardly. The explanation has nothing to do with government policy. In blunt terms, the rich pay more of the tax burden today because they collect a lot more of the money than they have in most of American history. Over the past 30 years, the income of the lower and middle classes has stayed relatively flat, while it has soared for more affluent Americans.
One way to illustrate that is to look at what it takes to qualify at the various income levels. (The following discussion uses Census Bureau numbers, which differ slightly from those of the CBO).
For example, in 1979 it took a household income of $19,348 to stand at the 20 percent threshhold: At that point, you were making more than 20 percent of total U.S. households, but less than the remaining 80 percent. By 2006, a household that reached the 20 percent threshhold was earning $21,395. (All income is in 2006 dollars.) So households at that 20 percent economic level saw their real income rise by 10.5 percent in that 27-year period.
The income level needed to reach the 40 percent level — what you might call the entry point to the middle class — rose by 12.3 percent over that time frame. To reach the 60 percent level, the necessary income level rose from $55,282 in 1979 to $64,073 in 2006, an increase of 16 percent.
From there, though, things really took off. By 2006, a household making more than 80 percent of its peers was making 29.3 percent more than its counterpart did in 1979. And to qualify among the top 5 percent, your household had to be making 43.5 percent more than a top-5-percent household in 1979.
In other words, upper-income households haven’t been “penalized” for their success by higher tax rates, as some rhetoric claims; they’re paying more taxes because they’re reaping a much greater share of the income. The economy changed, and they benefited.