Do The Wealthy Pay Their Share?

Having linked last week to some discussion on whether the US is really becoming “Of the 1%, by the 1%, for the 1%”, I was struck by this chart, which I saw a link to this morning, over at Carpe Diem, showing top marginal income tax rates versus percentage of income tax paid by the top 1% of earners since 1980.

However, I thought it would be a lot more interesting if the chart showed the percentage of total income earned by the top 1%, and also showed the total federal tax liability (including Social Security and Medicare) rather than the just the income tax. Luckily, all this information is available easily on line. (Percent of taxes paid. Percent of total income. Historical tax tables.)

Here’s the chart I produced with that data:


The blue line is the share of total federal tax liability paid by the top 1% of households by income. It doubled between 1980 and 2007 from 14% to 28%.

The green line is the share of total adjusted gross income earned by the top 1% of households. It increased by 2.7x from 1980 to 2007, from 8% to 23%.

Whether this means the wealthy are paying “their share” or not probably depends a lot on one’s point of view. On the one hand, the share of income earned by the very wealthy has increased more than their share of total tax liability. On the other hand, their share of total tax liability remains greater than their share of income. Personally, I would tend to think that this represents the right balance, but there are sure to be those who think this means the wealthy are not paying enough (their income grew faster), and others who think it means they are paying too much (their share of tax liability is greater than their share of income.

Perhaps another way to look at the extent to which our tax system is adjusting for growing inequality is to look at the share of total federal tax liability for the bottom quintiles (A quintile is a 20% range, so the bottom three quintiles of income distribution are 0-20%, 20-40%, 40-60%) versus the share of total adjusted gross income earned by the bottom 50% of households. (I don’t have this by quintile in the above sources, but I think the bottom 50% should compare moderately well if we look at all three bottom quintiles, representing, in sum, the bottom 60% of earners.)

The result is as follows:

The share of adjusted gross income earned by the bottom 50% of households went down by about a third from 1980 to 2007, from 18% to 12%.

During that same period, the percentage of total federal tax liability (including Social Security and Medicare) went down by over half for the bottom quintile, from 2% to 0.8%; by a third for the second quintile, from 7% to 4.4%; and by nearly a third for the third quintile, from 13.3% to 9.2%.

Finally, it’s perhaps worth noting that the main “drag” on the progressiveness of the US tax system at this point are is the pair of “universal” programs (Social Security and Medicare) which tax all income up to ~110k at the same rate and then provide all citizens (rich and poor) with benefits. If those programs were made to work more like a welfare program and less like a fixed benefit pension, the solvency of these programs would no longer be in question and the tax burden on the poor and middle class would be lighter.

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