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Tax rates don’t reveal tax equity

April 20, 2009
By Rob Lafferty

Take all the households in America and divide them into five groups of equal size, based on income, so that each group contains 20 percent of the total income-earning population. Next, calculate the actual tax payments in real dollars made by each group for the largest sources of federal revenues – individual income taxes, social insurance (payroll) taxes, corporate income taxes, and excise taxes. Then start making charts and graphs with all that data.

The Congressional Budget Office recently did exactly that, and their report offers a pretty clear look at how our tax system draws from each of those levels of society. The CBO likes to call each level a fifth, or a quintille, and numbers them in order. I prefer labels that are a bit less Roman in style, so we’ll use mine here...

At the bottom of the rankings are, simply, The Poor. In this group are more than 40 million people; the highest end of their income bracket is about $24,000 per year. Many of them pay no taxes at all, but as a whole, the Poor paid less than five percent of their income to the government in federal taxes in 2006.

The one-fifth of all Americans above the Poor in income are the Lower Class, another 40 million renters and hourly wage earners whose most prosperous members might own a modest home. On average, these folks pay about 10 percent of their income in taxes.

The Middle Class is, of course, the middle fifth, that 20 percent of Americans whose income is close to dead center average. Their tax burden is just under 15 percent, which is the lowest tax rate in many European countries.

The next highest group of income earners are the Upper Class, the well-to-do, the almost-rich whose incomes fall in the 60-80 percent range of average. They pay less than 18 percent as their share of taxes, but they probably out-complain the rest of society by 100 percent.

The highest level is occupied by the Elite Class whose members earn at least $71,200 per person. Over the past three decades this group has paid an effective tax rate that varied between 24 and 28 percent. Only the top one percent of those income earners have ever paid more than 30 percent in taxes; that top one percent now pays 31 percent in taxes.

But tax rates paid by individuals aren’t the most accurate indicator. The best measure of how our society shares its collective tax burden may be to look at total income in comparison to taxes paid.

The Poor earned four percent of the national income and paid barely one percent of the tax burden. That’s an unfair draw on the tax barrel but the Poor should be forgiven. When one-fifth of the people spread just one-twenty-fifth of the money among them in unequal portions, some will end up with nothing at all. Taxing anyone who can barely manage to earn a living seems more excessive than a 25 percent tax on a hundred-thousand-dollar income.

In 2006, Elites earned 55.7 percent of pretax income and paid 69.3 percent of the federal taxes. They took in a little more than half of the profits generated by the economy that year and paid a little more than two-thirds of the national tax bill. That’s not an equal share of the burden for one-fifth of the citizenry to bear, but it doesn’t seem unreasonable considering the vast amount of profit those Elites enjoy.

Atop the money chain, in the highest one percent of income, sits the Owner Class. Those folks took in about 19 percent of the total income earned throughout the country. By themselves they paid a 28 percent share of the taxes our government collected. Again, not an equal share but perhaps a fair balance.

Because the lower three classes don’t even have the same money they had just thirty years ago. 99 percent of the people in America have seen a steady, modest rise in income since 1979. Today their incomes, at best, have increased by half over the levels of 1979 while the cost of everything has increased much more than half.

That highest one percent, however, has seen their average income increase by 300 percent over the past three decades. As a result, the Owners are doing at least six times better than anyone else when compared to 30 years ago. So an argument can be made that they should be paying even more taxes than they do today, as they have in the past.

And that’s what counts, really. Forget about tax rates and tax breaks and deductions and all of that CPA stuff. What matters is that everyone pays a fair share of the cost of government. Under the current tax code, however, it isn’t possible for anyone to determine exactly what that fair share might be.

But even with a rigged system we don’t seem to be too far off from a fair balance across society when it comes to having to fork over our hard-earned cash to the Feds – everyone seems to be getting screwed just about as much as they can stand. The real difference between the various classes of our society is the ability to pay those taxes. Those who can pay will do so and complain, while those who can’t might end up in the streets, bankrupt and homeless.

Because the old sages were right when they linked death and taxes as the only two certain things in life. The tax man will get his money one way or another; your attorney might defeat the IRS but you’ll pay your attorney a ton of cash for that victory. And they’ll tax that money anyway, next year when they collect from your attorney, so why fight the inevitable?

Turns out there’s about a trillion reasons why people are willing to fight against taxation, but those are stories for another time...

Rob Lafferty is a former editor of the Haleakala Times. He can be reached via email at rob@moonvalleypress.com