Tax Demagogues Are Lying Liars, in One Graph

The rich pay lower tax rates than we do.  Bush's tax cuts were only for the rich.  Both the Reagan and Bush tax cuts were sops to the rich.  Schmucks like you and me pay all the taxes so the rich can ride free.

You hear these lies every day.

In case you think I make these lies up, here are some examples.

"Changes in tax rates have strongly favored the very, very rich." -Paul Krugman

"Like Ronald Reagan, President Bush began his term in office with big tax cuts for the rich[.]" -Paul Krugman

"We know, for instance, that taxes on the rich have fallen dramatically in recent decades." -Ezra Klein

"The rich pay a huge share of the total taxes in the United States because they have a huge share of the money." -Matthew Yglesias

"If you make money with money, as some of my super-rich friends do, your percentage may be a bit lower than mine. But if you earn money from a job, your percentage will surely exceed mine -- most likely by a lot[.]  Back in the 1980s and 1990s, tax rates for the rich were far higher[.]"  -Warren Buffett

"Based on an exhaustive analysis of tax records and census data, the study reinforced the sense that while Mr. Bush's tax cuts reduced rates for people at every income level, they offered the biggest benefits by far to people at the very top[.]" -Edmund Andrews, The New York Times

"And that's why this plan eliminates tax loopholes that primarily go to the wealthiest taxpayers and biggest corporations -- tax breaks that small businesses and middle-class families don't get.  And if tax reform doesn't get done, this plan asks the wealthiest Americans to go back to paying the same rates that they paid during the 1990s, before the Bush tax cuts." -President Obama

These lies are rebutted by a single graph produced by the Congressional Budget Office, below.

The taxes included in this chart are for all federal taxes, not just income taxes.  Each quintile is one fifth of taxpayers, based on income.  The top quintile is the one with the highest incomes.

From just this one graph, several observations can be drawn.

  • The most obvious observation is that the higher your income, the greater your federal tax rate is. Taxpayers in the top quintile paid about 25% of their income in federal taxes, while those in the bottom quintile paid about 5% in 2007.
  • The rate for the top quintile has been very steady for the last thirty years: about 25%. In fact, the rate since the Bush cuts went into full effect (2003-07) was about the same as twenty years before (1983-87).
  • The same cannot be said for the lower quintiles; they have trended downward, especially since the Bush cuts in 2003. For the lowest quintile in particular, the rate has drifted downward since 1984, from about 10% of income to about 4%. That is a cut in the tax rate of about 60% for the lowest quintile, versus no cut in rate for the top quintile.
  • Changes in these rates cannot be explained by changes in income. The rate is taxes paid divided by income. If your taxes went up only because your income went up, then your rate would not change.
  • Reagan's tax cuts became fully effective in 1983. But look at the trend in average tax rate for the highest quintile of earners after that. It went up. That upward trend on the richest Americans went up for seventeen years after Reagan's tax cuts.
  • The same cannot be said for the lower quintiles. Tax rates for the lower 80% of taxpayers remained virtually flat, or trended downward, from 1983 to 2000.
  • A cut on the capital gains tax rate became effective in 1997. Do you see any kind of accompanying dip in the average tax rate for the highest quintile in that year or shortly after? Nope. The rate is pretty flat from 1993 to 2000.
  • The Bush tax cuts did cut tax rates -- for all income groups. The cut was about 2%-3% of income for all quintiles. But since the lower income groups were paying lower rates in the first place, the constant cut across income groups meant that tax rates were cut proportionally more for lower income groups. For example: the top quintile was cut from about 27% to about 24%, which is a cut in the rate of 11%. But the bottom quintile was cut from about 7% to about 4%, a cut in the rate of over 40%.

Some lying liars have tried to obfuscate things, sometimes by including multiple taxes (e.g., personal income and payroll) and at other times by complaining that not all taxes are included.  The above graph from the CBO includes all federal taxes.  However, if you were to look at personal income taxes only, the observations above would be even more obvious.  I recommend taking a look at a previous American Thinker Graph for the Day.  Since about 2002, the average federal income tax on the bottom 40% of "taxpayers" has been negative: they collect more in credits than they pay in taxes.

There is one minor flaw in the above CBO graph: that top quintile includes a lot of taxpayers.  In fact, in 2009, those making over $75,000 constituted the top 20.6% of taxpayers, or approximately the top quintile.  So that top quintile includes some of the middle class plus the rich and "mega-rich" (a Warren Buffett term).

So let's look at that top quintile, shall we?  The table below shows 2009 average federal income taxes as a percent of income (adjusted gross income less deficit) for the various income groups.  The groups with incomes over $75,000 constitute the top quintile, approximately.  (Data for the year 2009 is the latest available.)

Average Federal Income Taxes Paid, as Percent of Income

Income

Average tax rate

Under $75K

6.6%

$75K to $100K

8.5

$100K to $200K

11.9

$200K to $500K

19.6

$500K to $1M

24.4

$1M to $1.5M

25.3

$1.5M to $2M

25.6

$2M to $5M

25.8

$5M to $10M

25.4

$10M or more

22.6

The obvious observation from this data is that the rich pay higher taxes than the poor or middle-class.  The rates are strictly progressive up to incomes of $5 M: each income group, up to $5M, paid a higher percentage of income in taxes than the next lower group.

It is true that the very highest income group, those making over $10M per year (the "mega-rich"), paid a lower rate than those making merely a few million.  But that group still paid a higher percentage than all groups making less than half a million dollars.  The average billionaire would pay a higher tax rate than his secretary unless he paid his secretary a couple million dollars per year.

Does it not strike you as odd that this "anomaly" in progressivity is used to justify increasing taxes on everyone making more than $200K per year?  If the top 8,274 taxpayers are the ones who bother you, why are you raising taxes on the top three million taxpayers, a good several hundred thousand of whom already pay a higher rate than those 8,274?

There is a simple reason the "mega-rich" pay a slightly lower average rate on personal income taxes than the merely "rich."  That reason is not some dark secret known only to tax loophole experts.  It is that most of their income is from capital gains, which is taxed at a lower rate than "normal" income.

And there is a simple reason for that: capital gains have already been taxed in the form of corporate income taxes.  Warren Buffett likes to include payroll taxes in his little anecdotal calculations, but he neglects to include corporate income tax, inheritance taxes, and other forms of taxes that are paid disproportionately by the mega-rich.

And by the way, total federal revenue in 2007, well after the Bush tax rates were in effect, was 18.5% of Gross Domestic Product.  The 1960-2000 average was 18.2% of GDP.  All that tax rate-cutting, and still the actual revenues collected were above the historical average.

Randall Hoven can be followed on Twitter.  His bio and previous writings can be found at randallhoven.com.

The rich pay lower tax rates than we do.  Bush's tax cuts were only for the rich.  Both the Reagan and Bush tax cuts were sops to the rich.  Schmucks like you and me pay all the taxes so the rich can ride free.

You hear these lies every day.

In case you think I make these lies up, here are some examples.

"Changes in tax rates have strongly favored the very, very rich." -Paul Krugman

"Like Ronald Reagan, President Bush began his term in office with big tax cuts for the rich[.]" -Paul Krugman

"We know, for instance, that taxes on the rich have fallen dramatically in recent decades." -Ezra Klein

"The rich pay a huge share of the total taxes in the United States because they have a huge share of the money." -Matthew Yglesias

"If you make money with money, as some of my super-rich friends do, your percentage may be a bit lower than mine. But if you earn money from a job, your percentage will surely exceed mine -- most likely by a lot[.]  Back in the 1980s and 1990s, tax rates for the rich were far higher[.]"  -Warren Buffett

"Based on an exhaustive analysis of tax records and census data, the study reinforced the sense that while Mr. Bush's tax cuts reduced rates for people at every income level, they offered the biggest benefits by far to people at the very top[.]" -Edmund Andrews, The New York Times

"And that's why this plan eliminates tax loopholes that primarily go to the wealthiest taxpayers and biggest corporations -- tax breaks that small businesses and middle-class families don't get.  And if tax reform doesn't get done, this plan asks the wealthiest Americans to go back to paying the same rates that they paid during the 1990s, before the Bush tax cuts." -President Obama

These lies are rebutted by a single graph produced by the Congressional Budget Office, below.

The taxes included in this chart are for all federal taxes, not just income taxes.  Each quintile is one fifth of taxpayers, based on income.  The top quintile is the one with the highest incomes.

From just this one graph, several observations can be drawn.

  • The most obvious observation is that the higher your income, the greater your federal tax rate is. Taxpayers in the top quintile paid about 25% of their income in federal taxes, while those in the bottom quintile paid about 5% in 2007.
  • The rate for the top quintile has been very steady for the last thirty years: about 25%. In fact, the rate since the Bush cuts went into full effect (2003-07) was about the same as twenty years before (1983-87).
  • The same cannot be said for the lower quintiles; they have trended downward, especially since the Bush cuts in 2003. For the lowest quintile in particular, the rate has drifted downward since 1984, from about 10% of income to about 4%. That is a cut in the tax rate of about 60% for the lowest quintile, versus no cut in rate for the top quintile.
  • Changes in these rates cannot be explained by changes in income. The rate is taxes paid divided by income. If your taxes went up only because your income went up, then your rate would not change.
  • Reagan's tax cuts became fully effective in 1983. But look at the trend in average tax rate for the highest quintile of earners after that. It went up. That upward trend on the richest Americans went up for seventeen years after Reagan's tax cuts.
  • The same cannot be said for the lower quintiles. Tax rates for the lower 80% of taxpayers remained virtually flat, or trended downward, from 1983 to 2000.
  • A cut on the capital gains tax rate became effective in 1997. Do you see any kind of accompanying dip in the average tax rate for the highest quintile in that year or shortly after? Nope. The rate is pretty flat from 1993 to 2000.
  • The Bush tax cuts did cut tax rates -- for all income groups. The cut was about 2%-3% of income for all quintiles. But since the lower income groups were paying lower rates in the first place, the constant cut across income groups meant that tax rates were cut proportionally more for lower income groups. For example: the top quintile was cut from about 27% to about 24%, which is a cut in the rate of 11%. But the bottom quintile was cut from about 7% to about 4%, a cut in the rate of over 40%.

Some lying liars have tried to obfuscate things, sometimes by including multiple taxes (e.g., personal income and payroll) and at other times by complaining that not all taxes are included.  The above graph from the CBO includes all federal taxes.  However, if you were to look at personal income taxes only, the observations above would be even more obvious.  I recommend taking a look at a previous American Thinker Graph for the Day.  Since about 2002, the average federal income tax on the bottom 40% of "taxpayers" has been negative: they collect more in credits than they pay in taxes.

There is one minor flaw in the above CBO graph: that top quintile includes a lot of taxpayers.  In fact, in 2009, those making over $75,000 constituted the top 20.6% of taxpayers, or approximately the top quintile.  So that top quintile includes some of the middle class plus the rich and "mega-rich" (a Warren Buffett term).

So let's look at that top quintile, shall we?  The table below shows 2009 average federal income taxes as a percent of income (adjusted gross income less deficit) for the various income groups.  The groups with incomes over $75,000 constitute the top quintile, approximately.  (Data for the year 2009 is the latest available.)

Average Federal Income Taxes Paid, as Percent of Income

Income

Average tax rate

Under $75K

6.6%

$75K to $100K

8.5

$100K to $200K

11.9

$200K to $500K

19.6

$500K to $1M

24.4

$1M to $1.5M

25.3

$1.5M to $2M

25.6

$2M to $5M

25.8

$5M to $10M

25.4

$10M or more

22.6

The obvious observation from this data is that the rich pay higher taxes than the poor or middle-class.  The rates are strictly progressive up to incomes of $5 M: each income group, up to $5M, paid a higher percentage of income in taxes than the next lower group.

It is true that the very highest income group, those making over $10M per year (the "mega-rich"), paid a lower rate than those making merely a few million.  But that group still paid a higher percentage than all groups making less than half a million dollars.  The average billionaire would pay a higher tax rate than his secretary unless he paid his secretary a couple million dollars per year.

Does it not strike you as odd that this "anomaly" in progressivity is used to justify increasing taxes on everyone making more than $200K per year?  If the top 8,274 taxpayers are the ones who bother you, why are you raising taxes on the top three million taxpayers, a good several hundred thousand of whom already pay a higher rate than those 8,274?

There is a simple reason the "mega-rich" pay a slightly lower average rate on personal income taxes than the merely "rich."  That reason is not some dark secret known only to tax loophole experts.  It is that most of their income is from capital gains, which is taxed at a lower rate than "normal" income.

And there is a simple reason for that: capital gains have already been taxed in the form of corporate income taxes.  Warren Buffett likes to include payroll taxes in his little anecdotal calculations, but he neglects to include corporate income tax, inheritance taxes, and other forms of taxes that are paid disproportionately by the mega-rich.

And by the way, total federal revenue in 2007, well after the Bush tax rates were in effect, was 18.5% of Gross Domestic Product.  The 1960-2000 average was 18.2% of GDP.  All that tax rate-cutting, and still the actual revenues collected were above the historical average.

Randall Hoven can be followed on Twitter.  His bio and previous writings can be found at randallhoven.com.

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