April 15 is tax day. I’m happy to pay taxes. I’m happy to have an income so that I can pay taxes — and buy food and clothing and books and wi-fi. I’m happy to pay my share for schools and roads and social services. I am not complaining one bit about tax day.
Plenty of other people have complaints. Conservatives, in particular, complain about big government and what a heavy burden taxation is for the wealthy. They invariably point out that the rich pay more taxes. Why, the top one percent pays almost a quarter of all taxes!
That makes sense. The top one percent also takes home almost a quarter of all income. People who make more money, pay more taxes. That’s a feature, not a bug in the tax system.
I’m not saying the tax system is perfectly fair. I think the tax rate on the highest incomes should be even higher, the system should be less complex, loopholes should be closed, and so on. But the tax system as it’s set up now does not unfairly burden the rich. Quite the contrary. Here’s how it works.
The 20 percent of Americans with the lowest incomes average $15,000 per year. Do they pay taxes? You bet they do! Although they earn only 3.2 percent of the nation’s income, they pay two percent of total taxes. Note: That’s not the same as income taxes. We pay lots of different kinds of taxes, including social security taxes, sales taxes, gas taxes, and on and on. (If you want an analysis of Minnesota’s state and local taxes, you can find it at the Institute on Taxation and Economic Policy.)
So what about the millionaires and billionaires? The top one percent has an average income of $1,735,000. That one percent gets 22.2 percent of all the income earned in the United States. They pay 23.8 percent of total taxes. They pay a higher income tax rate than lower-income brackets, but a lower percentage of their income in social security taxes and many other taxes.
Are all those numbers making your head spin? These two neat graphics from the Institute for Tax Justice help make the numbers clearer.
First, here’s a graphic showing the amount of income that each group pays in taxes. If you’re in the lowest income group, you pay 19.2 percent of your income in taxes. If you’re in the middle group, you pay 27.2 percent. If you’re in the top one percent, you pay 32.6 percent.
Now, here’s where it gets interesting.
If you are in the lowest group, earning $15,000 per year, you pay $2,880 in taxes. That leaves you $12,120 per year to live on.
If you are in the middle group, with an average income of $48,900 per year, you pay $5,379 per year in taxes. That leaves you $43,521 a year to live on.
But if you are in the top one percent, with an income of $1,735,000 per year, you pay $412,930 a year in taxes. Is that an unreasonable burden? Does that really handicap your lifestyle? Probably not — you still have $1,322,070 to live on.
One more table: this one shows the share of total taxes paid compared to the share of total income received by each group.
Marginal tax brackets
The top federal income tax rate is 39.6 percent this year. That rate applies only to high-income earners, and only to that part of their income that exceeds $400,000 for an individual return.
That does NOT mean that top-bracket taxpayers will pay a 39.6 percent tax on all of their income. The rate is a marginal rate.
One of the common misconceptions about taxes has to do with marginal tax rates. Let’s say Terry Taxpayer earns $36,901, which puts her in the 25 percent tax bracket. How much tax does she have to pay?
If you said $9,225, you understand math but not tax rates. Here’s how it really works.
Terry will pay a ten percent tax on the first $9,075 of taxable income. That’s $908 at the ten percent bracket.
Then she will pay 15 percent on the income from $9,076 to $36,900. That’s $4174 on the income in the 15 percent tax bracket. Add together the two amounts and you get a total of $5082.
But Terry earned $36,901, which means moving into the 25 percent bracket. She only pays the 25 percent rate on the marginal income — on the one dollar that puts her in the 25 percent bracket.
How much is too much tax for top incomes?
Back in 1913, when the federal income tax was established, the top rate was seven percent. A few years later, during World War I, the top rate jumped up to 77 percent, falling back to 25 percent after the war. During the Depression, the top rate went to 63 percent, and then up to 94 percent during World War II. According to the Bradford Institute, the 94 percent rate applied “on taxable income over $200,000 ($2.5 million in today’s dollars.)”
Throughout the 1950s, 1960s and 1970s, the top rate never went below 70 percent. In 1981, it was cut to 50 percent, and in 1986 to 28 percent.
The higher rates of the last century did not hurt the economy or the one percent. I’m not advocating a 90 percent marginal tax rate, but I think a higher top-bracket tax would be a good idea — and just one of many reforms that we ought to make in the tax code.