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A Parabolic Tax Curve

From Mark Perry at his AEI- Carpe Diem Blog, Top 400 taxpayers paid almost as much in federal income taxes in 2010 as the entire bottom 50%

Early last year Obama reiterated his belief that the wealthiest Americans still aren’t paying their “fair share” of taxes. Here’s an analysis using recent IRS data that suggests otherwise.

1. In 2010 (most recent year available), the top 400 taxpayers based on Adjusted Gross Income earned $106 billion collectively, and they paid $19.1 billion in federal income taxes at an average tax rate of 18% (see chart above).

2. In 2010, the bottom 50% of taxpayers, a group totaling 67.5 million Americans, earned collectively almost $1 trillion and paid $22.4 billion in federal income taxes at average tax rate of 2.4% (see chart above).

Bottom Line: A small group of 400 of America’s most successful earners in 2010, about the number of residents living in a typical apartment building in Washington, D.C., paid almost as much in federal income taxes as the entire bottom half of America’s 135 million tax filers, which is a population equivalent to the combined number of residents living in America’s 29 least populated states, plus the District of Columbia. What makes this disparity possible is the fact that 41% of individual income tax returns filed in 2010 had a zero or negative tax liability, according to The Tax Foundation. And a recent CBO study (featured on CD here) found that the entire bottom 60% of American households are “net recipient households” and received more in government transfers than they paid in federal taxes in 2011.

When you have only 400 Americans paying almost as much in federal income taxes as the entire bottom 50% of Americans filing income tax returns, I think we can dismiss any notion of the rich not paying their “fair share” of taxes. In fact, maybe the IRS should publish the names and addresses of the Top 400 taxpayers (or provide a forwarding service to protect anonymity), so that we can all send them “Thank You” letters to express our gratitude for shouldering such a disproportionately large share of our collective tax burden.

HKO

An amazing statistic.

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Inequality and The Tax Reform of 1986

In The Wall Street Journal Phil Gramm and Michael Solon write How to Distort Income Inequality- The Piketty-Saez data ignore changes in tax law and fail to count noncash compensation and Social Security benefits.

excerpt:

Messrs. Piketty and Saez also did not take into consideration the effect that tax policies have on how people report their incomes. This leads to major distortions. The bipartisan tax reform of 1986 lowered the highest personal tax rate to 28% from 50%, but the top corporate-tax rate was reduced only to 34%. There was, therefore, an incentive to restructure businesses from C-Corps to subchapter S corporations, limited-liability corporations, partnerships and proprietorships, where the same income would now be taxed only once at a lower, personal rate. As businesses restructured, what had been corporate income poured into personal income-tax receipts.

So Messrs. Piketty and Saez report a 44% increase in the income earned by the top 1% in 1987 and 1988—though this change reflected how income was taxed, not how income had grown. This change in the structure of American businesses alone accounts for roughly one-third of what they portray as the growth in the income share earned by the top 1% of earners over the entire 1979-2012 period.

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Inequality and The Missing Data

In The Wall Street Journal Phil Gramm and Michael Solon write How to Distort Income Inequality- The Piketty-Saez data ignore changes in tax law and fail to count noncash compensation and Social Security benefits.

excerpt:

The chosen starting point for the most-quoted part of the Piketty-Saez study is 1979. In that year the inflation rate was 13.3%, interest rates were 15.5% and the poverty rate was rising, but economic misery was distributed more equally than in any year since. That misery led to the election of Ronald Reagan, whose economic policies helped usher in 25 years of lower interest rates, lower inflation and high economic growth. But Messrs. Piketty and Saez tell us it was also a period where the rich got richer, the poor got poorer and only a relatively small number of Americans benefited from the economic booms of the Reagan and Clinton years.

If that dark picture doesn’t sound like the country you lived in, that’s because it isn’t. The Piketty-Saez study looked only at pretax cash market income. It did not take into account taxes. It left out noncash compensation such as employer-provided health insurance and pension contributions. It left out Social Security payments, Medicare and Medicaid benefits, and more than 100 other means-tested government programs. Realized capital gains were included, but not the first $500,000 from the sale of one’s home, which is tax-exempt. IRAs and 401(k)s were counted only when the money is taken out in retirement. Finally, the Piketty-Saez data are based on individual tax returns, which ignore, for any given household, the presence of multiple earners.

And now, thanks to a new study in the Southern Economic Journal, we know what the picture looks like when the missing data are filled in. Economists Philip Armour and Richard V. Burkhauser of Cornell University and Jeff Larrimore of Congress’s Joint Committee on Taxation expanded the Piketty-Saez income measure using census data to account for all public and private in-kind benefits, taxes, Social Security payments and household size.

The result is dramatic. The bottom quintile of Americans experienced a 31% increase in income from 1979 to 2007 instead of a 33% decline that is found using a Piketty-Saez market-income measure alone. The income of the second quintile, often referred to as the working class, rose by 32%, not 0.7%. The income of the middle quintile, America’s middle class, increased by 37%, not 2.2%.

By omitting Social Security, Medicare and Medicaid, the Piketty-Saez study renders most older Americans poor when in reality most have above-average incomes. The exclusion of benefits like employer-provided health insurance, retirement benefits (except when actually paid out in retirement) and capital gains on homes misses much of the income and wealth of middle- and upper-middle income families.

HKO

Far too often progressive policies are based on very distorted data; sometimes from ignorance and sometimes from malice.  The media does a piss poor job of objectively analyzing such data because it fits the story they want to tell; truth be damned.

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Are The Rich Paying Their Fair Share?

superrich

Scott Grannis posts in his blog,  Calafia Beach PunditTax Shares Update:

In 2011, it took $389K or more of adjusted gross income to make it into the top 1% of income earners, and they paid 35% of all federal income taxes. The top 5% of income earners made at least $168K and paid almost 57% of all federal income taxes. The top 10% paid made at least $120K and paid 68%. The top 25% included all those making $70.5K or more, and they paid 86% of all federal income taxes. Meanwhile, the bottom 50% of income earners (those making $35K or less) paid only 3% of all federal income taxes, and the vast majority of them either paid no income tax or received money on net from the IRS.

The Laffer Curve at work: Although the share of total income taxes paid by the top 10% of income earners today has fallen a bit in recent years, it has nevertheless risen by over 40% since the early 1980s, despite the fact that the top income tax rate has been cut in half. Slashing the top marginal rate by half resulted in a huge increase in the share of total income taxes paid by the rich.

Let’s talk “fairness:” In 2011, the top 10% of income earners in this country paid two-thirds of federal income taxes, and the top 1% (the rich) paid over one-third. Is that not enough? Almost half of those who work paid no federal income taxes. Is that fair? Is it healthy for so few to pay so much, and for so many to pay nothing? When almost half the population has no skin in the game, and another quarter pay only a very small share of total taxes, it is easy to demonize or exploit the rich—it’s called the “tyranny of the majority.”

Not surprisingly, top income earners make a large share of total income. However, if you compare the two charts, you see that the share of total taxes they pay is much larger than the share of income they earn. Our tax code is very progressive no matter you look at it. In 2011, for example, the top 1% of income earners made 19% of the country’s total adjusted gross income and paid 35% of total income taxes. The top 5% earned 34% of total income and paid 57% of total taxes. The top 10% earned 45% of total income and paid 68% of total taxes. The top 25% earned 68% of total income and paid 86% of total taxes.

HKO

At what point does one acknowledge that the wealthy are in fact paying more than their fair share?  The increase in income taxes does not redistribute wealth from the wealthy to the poor; it simply impedes the opportunity for others to get wealthy.  By focusing more on inequality than economic growth we retard the opportunities for the non-wealthy to improve their lot in life.

 

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Small Man’s Sin

reich

Kevin Williamson writes in The National Review, The Age of Envy:

Excerpts:

Wrath and pride are the sins of great (but not good) men. Envy is the affliction of the insignificant. It is the small man’s sin.

Which brings us to Robert Reich, who, having practically made a cult of envy, has taken to abusing the well-off for their acts of charity. Professor Reich, a ward of the taxpayers of California (at $246,199.84 per annum) and a federal ward before that, is persistently unhappy about how other people use their money, and he scoffs that America’s rich philanthropists are phony and self-serving, investing too much in opera and ballet and fancy colleges, and too little in feeding the hungry and housing the homeless. He particularly resents the fact that our tax code encourages such giving, with deductions that reduced federal revenue by some $39 billion last year — federal revenue that could have gone toward employing men such as Robert Reich.

Beyond stealing altar offerings from the almighty god of revenue, our philanthropists offend Professor Reich’s sensibilities in another way: They don’t give to the sort of enterprises he wants them to give to. “A large portion of the charitable deductions now claimed by America’s wealthy are for donations to culture palaces — operas, art museums, symphonies, and theaters — where they spend their leisure time hobnobbing with other wealthy benefactors. . . . These aren’t really charities as most people understand the term. They’re often investments in the life-styles the wealthy already enjoy and want their children to have as well. Increasingly, being rich in America means not having to come across anyone who’s not.” Unsurprisingly, Progressive America’s favorite non-economist-who-plays-an-economist-on-TV does not bother to document what he means by “a large share.” Giving to art-and-culture organizations amounted to just over $14 billion in 2012, or about 4.5 percent of charitable contributions, far less than was given to health, human-services, or public-benefit organizations. There are a fair number of single organizations that run into the billions per year, including YMCA ($6.24 billion), Goodwill Industries ($5 billion), Catholic Charities ($4.4 billion), and the Red Cross ($3.12 billion).

A question, though: If spending on art, music, and culture is self-serving when private citizens do it, what is it when government does it? Essential, necessary, crucial — of course. The New York City Department of Cultural Affairs by itself spends some $150 million a year on precisely that sort of thing. The state spends dozens of millions more. A good deal of that money goes to subsidizing theater, including big-ticket theater. In my role as a theater critic, I am constantly surprised by how many shows selling tickets for north of $100 are publicly subsidized. It isn’t huge money — without public support for the Manhattan Theater Club, that $120 ticket to see Laurie Metcalf in The Other Place (excellent, be sorry if you missed it) might have been $125 instead. But it adds up: a few dozen millions from the state, a hundred million from the city, a billion and a half from Washington.

But envy poisons whatever good intentions they have, which is how men such as Professor Reich come to write resentful indictments of people who are, remember, giving away billions of dollars of their own money. He’d prefer their money be given away by him, or by bureaucracies under the tutelage of men such as himself.

Megan McArdle once observed that in our public discourse, “very rich” is defined as “just above the level a top-notch journalist in a two-earner couple could be expected to pull down.” There is no envy like the envy of a $250,000 man in a world of $250 million men, as Robert Duvall’s crusty newspaper editor explains to a financially frustrated employee in The Paper: “The people we cover — we move in their world, but it is their world. We don’t get the money — never have, never will.” But being in that world, they learn to covet, which helps explain why Professor Reich’s old boss, Bill Clinton, ended up with $50-odd million in the bank after a lifetime of public service.

Americans gave away $316 billion in 2012, and will give away as much or more this year, and Professor Reich composed 731 words to explain the problems related to that. He should have composed two words, especially relevant to this season:

“Thank you.”

HKO

A true liberal should be embarrassed about such moral supremacist posturing.  In the world where private  income are capped by the fairness fascists, there would be no money for the rich to give to charities nor revenues to fund the government’s chosen elites…. such as Robert Reich