How We Pay Taxes: 11 Charts

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I'll come right out and say it: Taxes are awesome.

Yes, awesome. If you care about national values, or the relationship of citizens to their government, or the way we choose to award and discourage behavior, there is nowhere better to start than the gnarled and fascinating world of levies and tax breaks. Tax week gives American families a reason to consider moving to Bermunda, but it also gives me an excuse to spend the day finding my favorite, most controversial, and most illuminating graphs about taxes. Here they are. If you've think I've picked the wrong ones, or if you've got a better chart yourself, leave it in the comment section. I'm rounding up your favorite tax graphs tomorrow.

Off we go.

WHERE DO OUR TAXES COME FROM?

Washington has two main sources of revenue, which together account for 80 percent of all federal income: (1) payroll taxes, which are split between employers and employees to fund programs like Social Security, and (2) income taxes, which you're all too familiar with now that it's the middle of April. The media tends to focus on income taxes, because they are the main arena of battle between Republicans and Democrats fighting over deficits, and Buffett Rules, and millionaires. But, surprise!, payroll taxes make up a nearly equivalent share of government revenue, especially since corporate income taxes have shriveled in the last 60 years as a share of the total pie. [Source: Tax Policy Center]

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WHERE DO OUR TAXES GO?

The federal government was once elegantly described by Ezra Klein as a big fat insurance company surrounded by a standing army. It's a useful quip, because our government is basically in the business of security. Social Security, income security, health care security for the elderly, poor and veterans, and guns-and-helmets security account for about 80% of government spending. That's what we pay for when we pay taxes. [CBPP]

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WHO PAYS TAXES?

Here's something you've probably read: Half of Americans don't pay taxes. There's just one problem with this maxim: It's totally wrong. While it's true that around 50% of families don't pay a positive federal income tax, remember than an equal share of government revenue comes from payroll taxes. Practically all earners in their prime working years pay a total federal tax. [Hamilton Project]

DO THE RICH PAY FOR EVERYTHING?

The U.S. tax code is very complicated, but it follows one general rule (Buffett, notwithstanding): Richer people pay more. In fact, the top 1% pays more federal taxes than the bottom 60% combined. Is that outrageous? You might think so. But consider also that the top 1% also makes more than the bottom 40% combined. That's the thing about being rich in America: You make lots and lots of money and you get taxed at a progressive rate on it.

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Here's another way to look at tax burden by quintile. The top 20% makes a little more than half the money and pays about two-thirds of the federal taxes. That's progressive taxation at work. Whether it's too progressive or not progressive enough is a debate for another post. [Tax Policy Center]

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WHO PAYS NO INCOME TAXES?

Every April comes with a slew of stories about that horrible half of the U.S. population that pays no federal income taxes thanks to exemptions and tax credits. Who are these people? They are the poor. About 80 percent of the households not owing federal income tax earn less than $30,000 a year. Since 2000, the poorest 40% of households have averaged a federal income tax rate below zero.  [The Atlantic]

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DO AMERICANS PAY A LOT OF TAXES?

This is an impossible question to answer definitively. As Michael Linden of the Center for American Progress pointed out to me, the U.S. ranks in the bottom five among OECD countries in total government revenue as a share of GDP. We're just above South Korea and Turkey. We tax less than Australia, Canada, and just about every country in Europe. A fun way to look at this issue is to compare total tax rates on $100,000 of gross income across the developed world. Once again, we're behind most advanced countries when it comes to taxing even middle-class income. As for upper-class income ... keep scrolling. [The Economist]

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ARE WE PAYING MORE THAN WE USED TO?

David Leonhardt and the graphics team from the Times put together this fascinating chart of effective tax rates -- that includes income, payroll, and everything else you pay to the feds -- across households, dating back to 1960. What they found is that tax rates have declined dramatically in the last 50 years for the very rich. The U.S. tax code is still progressive, but it's not nearly as progressive as it used to be. One reason that center-liberal softies like me argue that the rich can bear a heavier tax burden is that, for each of the last four decades, they've paid more and the economy has grown healthily. It's equally true that effective tax rates have declined for the poorest Americans, as well. [NYT]

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HOW HAS TAX REVENUE CHANGED OVER TIME?

It hasn't, really. U.S. tax revenue is remarkably thermostatic, hovering around 18 or 19 percent for most of the second half of the 20th century. That upward tick in the 1990s was not the result of higher taxes, but rather the incidence of rising income in the productivity boom of the decade.  [Heritage]

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WHY IS THAT NUMBER SO STEADY?

The graph above is sometimes used as evidence that there's no point in raising taxes because the U.S. is somehow destined to regress to the 18 percent mean. I must point out that this is a a clinical case of historical amnesia. The reason federal revenue keeps falling back down to 18 percent is that we (a) occasionally suffer recessions, (b) cut taxes, and (c) experience both together. In the last 40 years, every time tax revenue approached 20 percent of the economy, we either cut taxes, suffered a recession, or both. Is it the case that tax revenue around 20 percent of GDP causes recessions? Possible, but not likely. It's more likely that U.S. tax revenue appears thermostatic because our politicians keep tinkering with the thermostat by cutting taxes, especially on the rich, every decade. [The Atlantic]

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WHAT'S THIS I HEAR ABOUT A 'FISCAL CLIFF'?

Congress is famous for doing nothing and getting away with it. But at the end of 2012, it will have to do something. The U.S. is facing a mammoth tax hike at the end of the year, when the following is scheduled to happen: the Bush tax cuts expire, the Obama tax credits expire, and payroll tax break ends. The result would be a massive tax increase on everyone, from the Buffett's of America to part-time janitors. For the typical middle class household, it would amount to a $2,000 tax hike. [James Pethokoukis]


BONUS: WHERE DO OUR TAX BREAKS GO?

So far, we've talked a lot about how the government uses taxes to take money. But we haven't talked about how the government uses the tax code to spend money, or leave money in the hands of families who behave in a certain way. Leonhardt's piece in the Times included this magnificent picture of who benefits from the $1 trillion in tax breaks hidden within our law. The upshot is that, just as the rich pay the most taxes, they benefit the most from tax breaks. Refundable credits, which offer lower income families the opportunity to earn money from the federal income tax law, include child credits, college credits, and the earned income tax credit. The majority of capital gains benefits accrue not to the 1%, but to the 0.1%. That's one reason why our largely progressive tax code actually becomes slightly regressive at the very top, as more and more money comes from via tax-preferred investments. [NYT]

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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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