Personal Income Tax
Who really pays it, and how much of it?
Not too long ago
I had a conversation with my son about President Obama and the United States Income Tax system. In our conversation he firmly declared:
"The rich don't pay their fair share!"
Believing that I was somewhat familiar with the income tax structure, his statement vexed me. Yet, he is an educated lad. Could he actually be right? Had I lost touch with reality? Were the rich really skating by, on the backs of the middle class and the poor? Or was he simply spewing party-line rhetoric without substance?
I was determined to find out the truth. So, off to the IRS website I went, where I downloaded their statistics for the tax year 2008.
What I discovered was even more startling and revealing than I expected.
Here is the letter I sent him, along with a Spreadsheet. Feel free to download the spreadsheet and see for yourself!
After our conversation, and another conversation with someone else, about taxes and the "Liberal" / "Democrat" platform of: "The Rich don't pay their fair share", I did some research.
I went to the Internal Revenue Service website and I downloaded the 2008 income tax return revenue numbers.
I then loaded those into an EXCEL spreadsheet and ran out some calculations.
The numbers reveal the following:
90,659,909 total Personal tax returns were filed.
$1,030,580,710,000 in revenue was collected from Personal returns..
That's 1 TRILLION dollars!!
In an imaginary ideal world, where everyone paid EXACTLY the same amount, each return would have paid $11,368.00
Note 1: I'm sufficiently realistic to realize that someone earning $20,000 (for example) cannot be expected to pay over 50% of their AGI in income tax. And, therefore, it would be 'unfair?' to expect them to pay their "equal" share of $11,368.00
However, $11,368.00 does represent the EQUAL (fair?) share for each person in order to cover the revenue required by the IRS for 2008.
Note 2: The income tax collected does not necessarily represent the amount of tax 'needed' or 'wanted' by the politicians who spent the money in advance of knowing how much would be collected. However, for the purposes of a 'fair share' discussion, we will have to be satisfied with the 'income' received rather than the 'budget requirements'.
Note 3: The maximum bracket is $10M+, which includes income to infinity. Therefore we have no way to know exactly what the 'average' income is for that bracket. Nor can we accurately declare that someone reporting AGI $10M paid $6.2M in tax. However, again for the purposes of this discussion I think we can agree that $6M is a big ass number whether the person made $10M or $10B
Note 4: This discussion, and these figures, do not account for cheaters. Some people at all income levels cheat. However, imposing higher tax rates on any income bracket would only encourage more cheating, not less. Therefore, the people that cheated in 2008 do not adversely impact the calculations in this discussion.
Note 5: There is an insignificant anomaly in the $0 reported bracket of 3,495 returns and $69,278,000 which does not impact our calculations but should be noted lest it become a red herring.
With that said.. we move on to what the numbers actually show:
Of the over 1-Trillion dollars collected from 90.6 Million personal returns:
A) 0.0148% of the returns (13,374) reported an AGI over $10 Million
Those 0.0148% of the returns paid 8% ($83 Million) of the tax.
Each of those 13,374 returns paid an average of $6,247,810.00 .. that's $6.2 Million each
In other words, 13,374 people paid over $6M each and accounted for 8% of the total tax collected.
If those numbers alone don't blow your mind, then I suspect nothing will. But let's continue..
B) Returns reporting AGI of $500,000+ represented a cumulative total of 893,000 returns (1% of the population)
That 1% of the population paid $342,918,843,000.00 in income tax ($384,221 each) or 33% of the total collected for personal returns.
Note: The average return in the $500,000-$1M bracket paid $163,513.00)
In other words, the top 1% of the population paid 1/3 of the total tax.
C) Returns reporting AGI of $200,000+ represented a cumulative total of 4,353,402 returns (5% of the population)
Or 5% of the population reporting AGI over $200,000 per year.
That 5% paid a total tax of $536,618,011 or 52% of the total collected tax.
Again, the top 5% of the population paid 52% of the income tax.
D) Returns reporting AGI of $100,000+ represented a cumulative total of 18,094,688 returns (20% of the population; 1 in 5)
20% of the population reported AGI of $100,000 and above.
That 20% of the population paid 75% of the total income tax.
Again, the top earning 20% of the people were responsible for 75% of the income tax.
E) Looking from the other direction:
Returns reporting BELOW $100,000/year represented 80% of the total returns.
That 80% of the population accounted for $860,789,973 in income tax, or 25% of the total.
Again, the bottom 80% of the people accounted for only 25% of the income tax.
F) Returns reporting less than $75,000 accounted for 67% of the returns and 16% of the income tax revenue.
Again, the bottom 67% of the returns paid only 16% of the tax.
G) Returns reporting less than $50,000 accounted for 50% of the returns and 7% of the income tax collected.
Again, the bottom 50% of the people paid 7% of the income tax.
The current system we have is a 'graduated tax %'. This means, when you make more money, not only do you pay more $ but you pay at a higher and higher % taken with larger and larger reported AGI.
Now, for comparison:
I've already said in an EQUAL system, each return would have been responsible for $11K
And, I've already conceded that, in order to collect the same revenue, an 'equal' 'fair' system is impossible.
So, I pondered "what about a flat tax?"
Note 3: In order to make the calculations, I used the 'lowest' value in each bracket. In the real world, the actual income tax generated would be greater, because the "average" income for each bracket would be higher than the lowest income level (which I used for the calculations).
In order to generate the same 1.030 TRILLION dollars, a flat tax rate of 17.75% would be needed.
Based on a flat RATE (not a flat tax) of 17.75%, the numbers reveal:
A) The lowest earners ($1000-$5000) would each pay only $24 more in income tax (16.2% increase)
B) The highest earners would drop from $6.3M each down to 1.8M each.
C) The tax group $100k-$200k represents 13.7M returns or a 15% subset of the population
This tax bracket paid 22% of the total tax collected.
Each return in this bracket accounted for an average of $16,903 in tax revenue
Other than the 75K-100K, this bracket is the closest to the EQUAL SHARE $11,368
This bracket has the lowest percent change (5%) if we converted to a Flat Rate system.
The tax brackets below $100K/year are all paying BELOW their FAIR EQUAL SHARE.
The tax brackets below $100K/year are all paying BELOW their FAIR (flat rate) SHARE.
The tax brackets between $100K-$200K are paying almost exactly their FAIR EQUAL SHARE.
The tax brackets between $100K-$200K are paying almost exactly their FAIR (flat rate) SHARE.
The tax brackets above $200k/year are all paying WELL ABOVE their FAIR EQUAL SHARE.
The tax brackets above $200k/year are all paying WELL ABOVE their FAIR (flat rate) SHARE.
Hopefully you made it this far without skimming too much.
Now I invite you to review the spreadsheet.. and...
Then read this again slowly.. point by point and follow along in the chart.
And then, study the chart and figures again and reflect.
I go on record as saying: "In no sane reality can it be declared that the rich are not paying their fair share."
And, to anyone who makes a case about % of total income, or any other justification for bilking someone out of 6.4MILLION in income tax, I submit the following:
Anyone who believes that someone's ability to pay, or their earnings or their assets, is justification for 95% of the people to 'rob' them.... then it is equally true that their next door neighbor (who makes less, has less and lost his job) has the 'right' to come help themselves to whatever they want .. because they have decided that they 'need' it and the other person 'has it'.
In conclusion, to quote... "This country does not have an income problem .. this country has a Spending problem."
Mr Obama contributed nothing toward budget discussions in his recent re-election speech (1 year before the campaigns start). He offered nothing concrete. He offered no figures. He simply blasted his political opponents with nonsense and rhetoric. And, he did it in a very offensive way, by inviting his opponent to the speech and having him sit front-row-center to be roasted and belittled.
Your comments are welcome. Your response is welcome. But, please be sure you provide facts and not party line rhetoric.
All the best,