February 14, 2012
Updated: February 21, 2012
Here's a chart of total taxes paid as a percentage of income for people at various income levels in the United States:
Source: Citizens for Tax Justice
Total taxes include all federal income, payroll (FICA) and other taxes, plus all state and local income, property, sales and other taxes. When we talk about taxes, it's important to include all of them, and express them as a percentage of income.
As you can see, our tax system is not as progressive as most people think. For the bottom 80%, it is mildly progressive. For the top 20%, it is essentially flat.
I'll use myself as an example. My household income puts me well into the top 20%, but not the top 10%. This puts me in the bar labeled "next 10%" in the chart. For 2011, I paid a total effective tax rate of 30.3% of my income, which is very close to the average for people in my income group.
What if my gross income were double what it is today? This would launch me into the top 5%, moving me over two bars on the chart into the one labeled "next 4%", which by any reasonable definition would be "rich". I wouldn't be up there in the last bar with the rock stars and the Wall Street executives, but I'd be up there with the other rich assorted doctors, lawyers, merchants and chiefs.
According to the chart, the average total effective tax rate in my new category is 31.3%, barely more than the 30.3% I'm paying today. Could I afford to pay a higher rate? Yes, I could. Would this be fair? Yes, I think it would. At this rarified level, the extra I would be paying is much less important to me than it is to those below me, especially at or below the median level, where people are struggling to make ends meet and are paying total effective tax rates not that much lower than I do today.
I also feel that I have a moral obligation to pay a higher rate, and a rate that increases as my income increases. Elizabeth Warren recently gave an eloquent political expression of this obligation:
There is nobody in this country who got rich on his own. Nobody. You built a factory out there - good for you!
But I want to be clear. You moved your goods to market on the roads the rest of us paid for. You hired workers the rest of us paid to educate. You were safe in your factory because of police forces and fire forces that the rest of us paid for. You didn't have to worry that marauding bands would come and seize everything at your factory, and hire someone to protect against this, because of the work the rest of us did. Now look, you built a factory and it turned into something terrific, or a great idea - God bless. Keep a big hunk of it.
But part of the underlying social contract is you take a hunk of that and pay forward for the next kid who comes along.
Sure, this is a value judgement. You could have a different opinion and I couldn't prove that you were wrong about a matter of fact. But I think it's a good and righteous value judgement.
Look at the chart again. Middle class people in the fourth 20%, with an average income of $66,300 per year, pay an average of 28.5% of their income in taxes. Very rich people in the top 1%, with an average income of $1,2540,000 per year, pay an average of 30.0% of their income in taxes. Is it possible for any reasonable person to call this "fair"?
Is there a limit to how much taxes even very rich people should pay? Of course. A 100% tax rate would be absurd, counter-productive, and immoral. Where's the limit? 70%, 80%, or even 90% like in the 1950s? Probably rather less than that punitive range. For the sake of argument, let's say that people making multiple millions or even billions of dollars per year should pay no more than 50% in taxes. That's half to keep, still a very large amount of money, and half to contribute to paying for the public goods that helped them get where they are today. As an example, let's say 30% at $100,000 per year, 40% at $1,000,000 per year, and 50% at $10,000,000 per year and above.
I'd also prefer to see a steeper (more progressive) slope for the poor and middle class in the bottom 80%. This would lower their total tax burden, which would be easily paid for by the steeper (more progressive) slope for the upper class and rich in the top 20%.
For an example of one way this could be done with specific numbers, see the Appendix below.
Would such a change to the tax code be unfair because it "soaks the rich"? Consider an example. Family A makes $100,000 per year and pays total taxes at a rate of 30%, leaving $70,000 for the family to spend. Family B makes $1,000,000 per year, 10 times as much as family A, and pays total taxes at a rate of 40%, leaving $600,000 to spend. Family B still has 8.6 times as much money to spend as does family A. Is this unfair? Again, this is a value judgement, but in my opinion this is not at all exorbitant or punitive.
Do people in the upper income levels deserve their success? Sure they do, on average anyway. I'm there, and I deserve it. I'm smarter and more talented than most. I contributed more than most. As a result, the supply and demand forces in the labor market worked in such a way that I ended up being compensated for my labor more than most. I was also in many important ways luckier than most. Do I also deserve to have a significantly higher after-tax income than those below me? Yes, I most certainly do. At the same time, I also have a moral obligation to pay more than they do for the public goods we all enjoy and rely on.
This is my "progressive manifesto," in the context of a "more progressive" tax code.
There are many ways that we could adjust the current tax code to make it more progressive. In this appendix I present just one example that adjusts average total effective tax rates down for the bottom 80%, leaves them alone for the 80-90% category, increases them progressively for the top 10%, and ends up actually increasing total tax revenue (from 28.4% of total income to 29.5%).
This is not a detailed specific policy proposal, just an example to show what's possible.
Here's a chart comparing the old and new tax rates for this example:
The new system in this example is clearly much more progressive than the old one. Which one is more fair? You be the judge.
The calculations in this example were done using data presented in the CTJ report linked to above, in particular the percentages for share of total income for each category. For any wonks who might care about the details, the last two percentages in columns 4 and 5 of the last row labelled "All" are computed by taking the inner products of columns 3 and 4 and columns 3 and 5 respectively.
Note that for the bottom 80%, the share of total income adds up to 41.2%. For the top 10%, the share of total income adds up to 44.7%, roughly the same. Thus, if we decrease the tax rates of the bottom 80%, and increase the tax rates of the top 10% by a comparable amount, we leave total tax revenues roughly unchanged. That's what we've done in this example.
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