How to Think About Taxes and the Rich

It's easy to get sidetracked over the 47% of Americans who don't pay taxes. Don't lose sight of the bigger picture. When that 47% figure gets chucked into the dustbin of cable news statistics, we will be back to the old familiar debate about taxes. Conservatives will complain the wealthy pay an ever-higher share of taxes. Liberals will complain that the wealthy pay taxes at ever-lower rates.

Both sides are right. The top 10 percent of earners pay a higher percent of the government's taxes than any time in the last 30 years, but at historically low tax rates. This is possible for one, simple reason: rich people are making more money. Much more money. In fact, in 2007 the top one percent of Americans held its highest share of income than at any time since 1928.

Total federal tax rates (including income taxes, capital gains taxes, payroll taxes, estate taxes, and corporate income taxes) have fallen dramatically for the rich and remained flat for low- and middle-income earners in the last 50 years (via NYT).

Shifting the Tax Burden Graphic

In the last 40 years, the top 10 percent's tax rates went down, but their tax burden went up, because their household income grew faster than the rest of the country. To get a better sense of how taxes have changed since 1979, let's look at tax rates (the percentage of your income you give the government based on your tax bracket), tax share (the percentage of total taxes that each income bracket pays) and share of total income (the percentage of total US income earned by households in each bracket).*

Tax Rates
Big picture: the United States is still big, it's the tax rates that got small.

In 1979 the overall tax rate was above 22 percent. In 2009 it is closer to 18 percent. Every quintile paid a lower effective tax rate in 2006 than in 1979. Since 1979, total tax rates have fallen across the spectrum, including for the top 10, 5 and 1% of taxpayers.

History Effective Tax RATES.png
Tax Share
Big picture: the cost of paying for the US government falls increasingly on the rich.

In 1979 the top quintile contributed 56% of all federal taxes. In 2006 they contributed nearly 70%. The share of federal taxes paid by the top 1% nearly doubled in that time from 15% to 29%. Tax shares declined for every group except the top 20 percent, as the tax burden shifted from the bottom 80% to the top 20%. But again, this was not the result of rising tax rates. It was the result of rising household income at the top...

History Effective Tax SHARES.png
Share of Total Income
Big picture: the rich are get richer, faster.

Just as the share of total taxes declined for the bottom 80% and increased for the top 20%, so did the share of total income fall in every quintile and concentrate in the top 20% since the early 1970s.

The numbers are even more dramatic for the top percentile. Between 1979 and 2004, after-tax income increased 20% for the middle 20% and jumped 176% for the top 1%. Wealth in the top one percent has accelerated over the last three decades so fast that income concentration in the top percentile is the highest since the late 1920s.**

History Share of Income.png
Sometimes it takes a lot of numbers to say something very simple. When critics say the rich are shouldering an undue and historically unique tax burden, the correct response is that this has much more to do with their rising income than the rate at which it is taxed.


*If you want to dive into the numbers and swim around yourself, you can find historical tax rates here, historical tax burdens here, and historical aggregate income data here. All data up to 2006.

** Update: From the Center on Budget and Policy Priorities: