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Who Pays What?

In Taxes on June 29, 2010 by thesignalinthenoise Tagged: ,

Average Federal Tax Rates

The CBO has recently updated its data on federal tax rates.  The federal tax system is generally progressive — that is, average tax rates generally rise with income. Households in the bottom fifth of the income distribution (with average income of $18,400, under a broad definition of income) paid 4.0% of their income in federal taxes in 2007 (the most recent year for which this data is available). The middle quintile, with average income of $64,500, paid 14.3% of that income in taxes, and the highest quintile, with average income of $264,700, paid 25.1%.  The highest quintile also earned 55.9% of pretax income and paid 68.9% of federal taxes. In all other quintiles, the share of federal taxes was less than the income share. The bottom quintile earned 4.0% of income and paid 0.8% percent of taxes, and the middle quintile earned 13.1% of income and paid 9.2% of taxes.  However, so-called “social insurance” tax rates rise gradually across most of the income distribution, but falling for the top quintile because, for example, Social Security tax is only collected (in 2010) on the first $106,800 of income. Yet these social insurance taxes pose the greatest liability for all quintiles except the highest, for which the individual income tax is larger. Moreover, the very top of the top quintile(not reflected by this data) pays a lower percentage in taxes due to the impact of a capital gains tax rate that is lower than nearly all federal income tax brackets.  It should also be noted that state and local taxes (most particularly sales taxes) may make the U.S. tax system as a whole significantly less progressive.

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8 Responses to “Who Pays What?”

  1. Why don’t they add that seventh quintile, the top of the top, in these graphs? Morally sensible economists and commentators are always talking about how the statistics are misleading when it comes to the billiony millionaires club. It’s about time that we talk about them as a separate social class altogether.

    I mean, without making that distinction as a matter of course, we have an absurd situation. Decent, meritorious skilled workers like doctors and lawyers find themselves shunted into the same category as the anarcho-capitalists in the power elite — i.e., the people at the head of Enron, of Goldman Sachs, the brokers who cheat old ladies by getting them to buy FIAs, and so on.

    • Why don’t they add that seventh quintile, the top of the top, in these graphs?

      I suspect they don’t because they don’t want to be seen as singling any particular class of people out.

      Morally sensible economists and commentators are always talking about how the statistics are misleading when it comes to the billiony millionaires club. It’s about time that we talk about them as a separate social class altogether.

      I agree.

      I mean, without making that distinction as a matter of course, we have an absurd situation.

      Again, I agree, even though it’s a myth that the billionaires club avoids taxes altogether.

      …the brokers who cheat old ladies by getting them to buy FIAs, and so on.

      If by “FIA” you mean fixed index annuity, you’re being unfair I think (if I understand you correctly). For a risk averse client with sufficient liquidity, FIAs can be an excellent savings option. That isn’t to say that they (like all financial products) aren’t missold.

      • But they are singling classes of people out — that’s the purpose of the quintile, and any talk about social brackets at all. What I (and probably you) find concerning, and I think what libertarian capitalists ought to be very worried about, is that we have evolved into a form of political economy that is post-capitalist. It’s a corporate collectivist system, where ordinary capitalists are being managed like free-range cattle. This is a revolutionary shift, a completely new chapter in history.

        I didn’t mean to slight FIA’s in general, I just mean people who take advantage of their customers and have no sense of fiduciary responsibility.

      • The CBO is only singling out broad categories, but I don’t have any idea why their policy is what it is.

        The gap between our highest and lowest income people is far too broad, I agree, and is a major problem. Sadly, I don’t think it is being addressed properly by anyone.

        It’s interesting that you bring up fiduciary responsibility because it is a major point of contention within the industry. Few financial services professionals have a fiduciary responsibility to their clients in the U.S. Sales must be “suitable” but not necessarily in the client’s best interest. The regulatory bodies (most promoinently FINRA) want FR, but the big brokerage firms (especially) oppose it.

  2. I think I’ll ask the CBO why they do it.

    Fiduciary responsibility is a maddening subject. In business ethics, there are holdovers from Friedman out there, but not many — the new orthodoxy among ethicists is corporate social responsibility of some kind or other.

    But it is embarressing to me that the dialogue is so incoherent and superficial, because it seems like the problem of externalities is treated as window dressing instead of a fundamental constraint upon our ethical theories. In theory, I’m sympathetic to the outright repudiation of corporate social responsibility — let corporations be greedy as hell — but in that case, I am forced by the problem of externalities to advocate a muscular government to put restraints upon it. I’m also sympathetic to relaxed regulation — so long as corporations become publicly transparent and take responsibility. But the one position that is both inefficient and unethical is the idea that you can deregulate and abdicate responsibility at the same time. What do you think?

    • I’m generally in favor of less regulation and more transparency except in those cases where that default demonstrably doesn’t work. Derivatives aren’t anything like evil per se, but if they were exchange traded and minimally regulated, that transparency would help a lot.

      With respect to FR, I’m generally in favor with some practical limits. I routinely see consumers who complain to firms and regulators about alleged unsuitability simply because a trade didn’t turn out the way they’d like. That’s almost as big a problem as overreaching by the sales jockeys, which is to say — a serious problem!

    • Thought you might be interested in this. The CBO replied to my email:

      “There’s no strong reason behind the groupings that we have chosen for our standard tables. We’re trying to strike a balance between presenting enough subgroups to show meaningful distinctions but not so many that it’s hard to digest the tables. Showing the top percentile is a fairly standard presentation in distributional tables.

      We have, however, published some breakouts of the top percentile, up to the top hundredth of a percent. See the link below.

      http://www.cbo.gov/doc.cfm?index=9884

      I hope this information is helpful.”

      I’m pretty satisfied by this.

  3. The thing about transparency is that it would involve a growth in SEC style of government agencies, I think — not to regulate, but to audit. Transparency ends up being just a buzzword unless there’s a night watchman there to see when white collar crime is being committed and to catch the baddies in the act. So one way or the other, the government has to grow.

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