Friday, March 11, 2011

What the Rich Pay in Taxes

The right wing has a tendency to portray the present tax situation in the US as if it's a tremendous burden for the rich. I was recently told by a friend that the top 10% of income earners pay 90% of all the taxes. That sounds pretty surprising and rather bogus. When I challenged my friend he withdrew the claim and revised it. Then the claim was the top 1% pay more than the bottom 90%. Well, that's also bogus. Where do they get this stuff?

My friend got the revised claim from the Koch brothers owned Tax Foundation and you can get it here. They aren't lying. What they are doing is omitting important information that caused my friend to misrepresent the claim.

I knew that Warren Buffet was paying less than his secretary, so I knew that the right wasn't showing the full picture. So I took some time to understand things. Here's what I came up with.

The Congressional Budget Office has great data here. It's only up to 2006, but still good. The Koch brothers want to talk about income taxes. Those are progressive, so focusing on them highlights the suffering of the rich. What they don't want to talk about is the payroll tax because that's regressive and highlights the contributions of the poor. And the payroll tax is now an enormous portion of the total federal revenue. They don't really want to look at capital gains either. That's a major source of wealth for the uber rich and is taxed at a lower rate. CBO looks at it all, include corporate taxes, which it divies up mostly to the rich because of course the rich own most of everything. So they are getting their credit for corporate taxes as well.

What's the end result? The top 1% pay 28.3% of all federal taxes. In 2007 they accounted for 23% of all the income. And they likewise have about 50% of the stocks, bonds, and mutual funds. Seen in that light it doesn't seem like 28.3% is all that outrageous. And if we were able to find data regarding the top 0.1% I suspect we'd find, as their income becomes more and more heavily skewed towards capital gains, that Warren Buffet's claim makes sense. They aren't even paying a share proportionate to their income, let alone their wealth. That's what's really outrageous.


Darf Ferrara said...

What is your moral reasoning behind the belief that this is outrageous? If the purpose of the government is to provide common services that presumably everyone consumes equally, why should some pay a higher rate for those services? If the rich are being provided with greater government services than the poor, then why not identify those services and then reduce them?

The idea that the payroll tax is regressive seems to contradict the goals of the Social Security program. It is sold almost as a forced savings program that is separate from the rest of the budget. The rich wouldn't expect to gain anymore from the program than the poor, so why should they pay more than them? And if you believe that the Social Security should be analyzed together with the rest of the budget, then you should certainly believe that the idea of a social security trust fund is bogus.

Bill said...

I think a Jon's argument is based on a fairly clear moral reasoning. From the government's perspective, a policy that promotes the common good should be preferred over a policy that doesn't. This certainly aligns with the preamble of the constitution.

Who is saying that "the purpose of the government is to provide common services"? I don't agree with that premise, and I doubt Jon does. I don't see how Jon (or anyone else) is supposed to be persuaded that greater tax rates on the wealthy are undesirable (or that we should cut some services?) without you defending your definition of the purpose of government.

Vinny said...

It is also misleading to focus solely on the Federal Income Tax. As a percentage of wealth and income, the middle class pays more in state and local taxes.

Jon said...

As I just heard from Bob Dutko, right wingers are outraged that the rich pay an amount disproportionate to the amount of money that they make. I'm saying if you are going to be outraged, why not be outraged that the uber-rich have contrived a system that allows them to shift things disproportionately in their favor? Why doesn't the right talk about that? I understand that you'd fix it by slashing rates for everybody, but I'm just noting the selective outrage of some, like Dutko.

As far as Social Security, I can understand the thinking about treating it separately. But it's not that it's just treated separately. It's completely ignored by the right to where people like Dutko just say that 39% of all federal taxes come from the top 1%. In fact yesterday he complained that something like 80% of federal expenditures are welfare/social programs. I went to his source and of course that's lumping in Social Security. So when he talks about the outrageous amount of money spent by the government he lumps in Social Security, but when he talks about the outrageous government collections suddenly he isn't interested in Social Security. There's an imbalance there that highlights the suffering of the rich and serves to undermine the poor and middle class.

And it's not just him. The friend I'm referring to makes the exact same kind of statements. They read the Koch brothers and come away and make false statements, like Dutko did.

Jon said...

Maybe Dutko's claim was that a third of wages in the US are in the form of government handouts.

Darf Ferrara said...

Bill, your definition can't really be a clear moral reasoning without a clear definition of common good. I doubt that such a clear definition exists, and there are good reasons for believing that it doesn't (Arrow, eg).

Vinny, it is certainly true that state and local taxes make the issues somewhat less clear, especially given the interactions between states and national govts, but I think the federal taxes give a good guide.

Jon, if SS and the payroll tax were eliminated, then tax rates would be more evenly distributed, but I assume you would be against that. I think that if you take your own arguments seriously you should think about why that is.

You are making a claim that it is outrageous that rich people contrive a system whereby they benefit, and poorer people benefit less or not at all (correct me if I'm wrong). But most rich people (probably, I haven't done a survey) don't actually lobby the government to change the laws. They earned their money in a system that inherited, and had very little influence on the laws. I think most people you call right-wingers would agree that people that lobby for unfair gains shouldn't be rewarded, but you lump all people of wealth into a single group. If that isn't what you mean, then being more clear might help others agree with you.

Jon said...

This post is a call for honesty in the reporting of what is paid in federal taxes. It doesn't follow from that that I think SS taxes should be eliminated.

And something can be outrageous even if those that benefit from it didn't contrive it. Warren Buffet thinks it's outrageous, but he didn't do it. It's not about finding someone to blame. It's about fixing what is wrong.

Bill said...


I don't see how you have presented a moral premise sheds light on the purpose of government. Further, I don't see that you have provided a basis for disputing what Jon is arguing. What are you trying to show? Are you try to make an argument from premises that I would agree with? I really don't see it.

If you are saying he is advocating something undesirable, why is it undesirable? There are several definition of the common good. To move the discussion forward, propose a working definition.

Arrow's theorem really seems like a red herring at this point. Maybe it's not, but you need to connect it to premises that Jon would agree with.

HispanicPundit said...

But it's not that it's just treated separately. It's completely ignored by the right to where people like Dutko just say that 39% of all federal taxes come from the top 1%.

I just want to make one comment with regard to social security. Social-Security is, and should be, treated separately because its not just a system of taxes: it has benefits as well.

And while the payroll tax is regressive, social security benefits are progressive - multiply the two together, and you get a near cancel out (in fact, you probably get MORE benefits for the poor - which STRENGTHENS the argument that the rich are taxed more, but leave that aside for now).

Here is Paul Krugman on Social-Security benefits:

Second, the formula determining Social Security benefits is progressive: it provides more benefits, as a percentage of earnings, to low-income workers than to high-income workers. Since African-Americans are paid much less, on average, than whites, this works to their advantage.

Liberals, of course, understand this clearly when talking about privatizing social security, but when talking about taxes it's all the sudden forgotten. So Jon's strongest argument - the payroll tax - tends to in fact undermine his argument and point to the opposite conclusion.

Darf Ferrara said...

I'm simply trying to see what is outrageous here. If I go to the store, and I see my boss, who makes twice my salary, paying the same rate I do for apples, I don't find that outrageous. What is it about what government produces that changes this? And it isn't like Buffet is complaining that the rich don't pay more in taxes,they do statistically. He's complaining that rich don't pay the same rate as the less afluent, even though it is pretty close if SS is excluded, and there are reasonable people that do that. Usually only when convenient though.

Bill, Steven Landsburg has proposed the effeciency criterion . If you take this seriously then something like a head tax would probably be the best system. I don't nessesarily endorse this, but it is another way to think about the problem. What criteria claims that wealthier people should pay higher rates?

Jon said...

I think I've already stated that the reference to "outrage" was in regards to the outrage based on selective and misleading claims about how the rich pay proportionately way more than everyone else. It's not as disproportionately high as some right wingers say. Relative to wealth it's actually low. And in fact contrary to the portrayal the rich uber rich are paying disproportionately low taxes even as compared to income, let alone wealth.

A discussion about what tax rates should be is not relevant to my post. But if you want to talk about it we can.

It looks to me, Darf, like you subscribe to a sort of hyper-skepticism. We don't know what the common good is. We don't know what the public wants. Can we figure out if it's better to raise taxes on the wealthy or drop a nuclear bomb in Wisconsin? I'm being serious. Which would be better?

If you do know then you know you can make reasonable guesses with regards to alternatives even if you don't have perfect knowledge. That principle applies to taxes as well. We can't be absolutely sure because life is complicated, but in my view a reasonable approach is to look historically at what worked better and what works worse and do what worked better, which means more progressive taxation.

Again, if you think life is too complicated or if you think we can't know what the people would want even though 81% said they support raising taxes on millionaires to solve the crisis in Wisconsin, then why do you object to these proposals? If you can't know what the common good is and you can't know what people want it would seem it makes no difference. But you always object to these proposals as if you think it harms the public good.

Jon said...

Again, HP, I have no objection to treating it separately. What I object to is lies. Dutko says that the top 1% pay 39% of all federal taxes. Not true. They pay 39% of all federal INCOME taxes. Then he turns around and complains that our government is too involved in paying out wages. No mention that the poor in fact paid in so the poor could extract wages. Treating it separately is one thing. Acting like it doesn't exist is another.

Also no mention of capital gains and he certainly doesn't mention the share of income or wealth that they have. The top 1% pay 39%. That's what matters. I'm saying let's put the facts on the table and then decide how outrageous it is that the top 1% pay 39% of all INCOME taxes and 28% of all taxes combined. The way it's often portrayed as far as Dutko is concerned the top 1% could make 39% and he'd be outraged that they pay 39% of the taxes. Are we going to expect the unemployed to pay it all?

Darf Ferrara said...

The social sciences aren't like physics, so I think that more scepticism from most people would be warrented. My reasons for being a libertarian aren't fully formed, but it's a combination of consequentialist and deontological reason. I think that economic ideas that libertarians generally espouse lead to efficient outcomes, but I also believe that there are certain moral principles that shouldn't be violated. What I tend to see on the progressive side is a failure to take seriously public choice arguments. If I say "there isn't any reasonable way to aggregate a public choice" and Bill says "That's a red herring" and you say "unions!" I haven't been given any clarity on why you think that unions would work as a collective choice mechanism, or even what the solution really is. Creative solutions to problems by libertarians are ignored and spurned without any thought being put into them, almost as a knee-jerk reaction.

Here is a true statement in social science that you seem to be very scepticle of "A well defined private property system, that allows individuals to exchange at agreeable terms improves the allocation of all parties."

Is there a reason that you are sceptical of this?

Vinny said...


When you figure in state and local taxes, there is little difference between the tax burden on the 99th percentile and the 60th percentile. It is a very different picture than the one provided by looking only at the federal income tax.

Jon said...

Bill's statement about red herrings and my various statements about unions were not in response to your statement "there isn't any reasonable way to aggregate a public choice". You must deal with our statements in their proper context to understand our positions and our questions.

In truth I'm not sure I understand exactly what you mean with the terms in your question. Does "parties" refer to two individuals in an exchange and those that might be affected by the externalities? Does "agreeable" mean people are properly informed? Because when one side has concentrated wealth and has the ability to engage in massive propaganda I think they can persuade one side that something is "agreeable" even if in retrospect the one party may come to regret their decision. There's a massive imbalance in persuasive power. I mean, an F150 isn't much different from a Silverado. Yet Ford gets attractive people and athletes to sell theirs while they show it ripping through mud like a baja race, creating an impression that really is intended to cause you to make the decision to buy even if it is irrational. Is it efficient for a father of 2 with an out of work wife making minimum wage to buy that F150 brand new because he gets overwhelmed by the imagery? That's probably not the most efficient use of his resources. So are you assuming a level playing field in terms of knowledge and persuasive capacity?

Does this permit the creation of something like computers? Because while something can be more efficient in the short term it can be less efficient long term. Decades of state subsidy to create computers was in a sense inefficient, depending on who you were. So for instance if you are 80 years old in 1950 it's not so efficient for you to pay taxes that support computer development. For us though it creates conditions that allow us to be a lot more efficient.

That's not to say that a price system can't be efficient ever. It's that sometimes it isn't if I understand what you mean by it.

Darf Ferrara said...

You hadn't mentioned unions in your response, but Bill's response was understood in the correct context. To assume that there is a common good is to assume that one exists, and also that it is knowable. It is not a read herring to claim that there are clear reasons to believe that a common good doesn't exist. Arrow's theorem is such a reason.

And it isn't simply that you haven't dealt with the issues of how a democratic government should work. I haven't seen the very real problems with voting dealt with from very many progressives at all, and usually it is only in a casual way. And other public choice arguments are completely ignored. Are you aware of any sources that deal with how decisions should be made by government that take these issues into consideration?

You mostly understand the statement I made. The primary objections you seem to have are buyers remorse, people not knowing their own preferences and unequal bargaining power. I don't think you can do much about people not knowing their own preferences by using a different form of allocation, and I think that you greatly overestimate the leverage that the "powerful" side has in bargaining situations. There are good reasons for thinking that corporations and the like have far less power than you think. In fact, if you take seriously the idea that corporations must do whatever they can to maximize profits, then their bargaining power falls.

Jon said...

Personally I think your objections are a non-issue, though of course I haven't read all the books you've recommended. I wonder if you represent them fairly because what I see from you is a hyper-skepticism. Answer this question. Which alternative is in the best interest of Wisconsin residents: tax increases or a nuclear bomb. As I understand your position you don't know because of Arrow's Theorem. Well, I don't think you are using it right.

Darf Ferrara said...

For someone who claims that I am too theoretically oriented, this is a completely contrived example. But that's good, it allows for a focus on the essentials.

First of all, I think it is obvious that the answer to the question us ask is tax increases are in the better interest of residents of Wisconsin than having a nuclear bomb dropped on them. What you might really want to know is, how do we deduce what the residents of Wisconsin think about their options. In this case there is an easy way. You can take a vote, and the majority determines what most cheeseheads think. The reason for this is that there are only two options and Arrow doesn't kick in until there are at least three. If these are the only two choices, you have to wonder how those came to be the only two choices available. It would seem that the only people who matter are the people that choose the menu. Why was a nuclear bomb an option, and not free weekly footrubs? It seems that the choice to increase taxes was already chosen.

Jon said...

That's actually very helpful. We could throw in a third option and see how Arrow applies. Let's add poison gas.

It is contrived of course, which is how we test the logic of your view. The answer is obvious, so the question is on your view is it really not obvious because of Arrow? If so that means the way you apply Arrow is wrong.

When it comes to choices between raising taxes and cutting benefits it's not so obvious. But my view is that making a best guess decision is reasonable. You have to do something obviously. The money isn't there. So we're either going to have to do what we think wealth wants (cut spending) or do what we think the public wants (raise taxes). There are lots of perturbations there. What level of cutting? What level of raising taxes? Broadly speaking though these are our two options. You say we don't really know what either sector wants. But I think "know" for you means know with 100% certainty. We don't know it in that sense, but with know it with a certain confidence level (I'd put my confidence level at about 95%).

Arrow's Theorem and public choice difficulties don't change the fact that choices must be made and implemented. My choice is based upon my best estimates of the outcomes. It seems you object to that, but I don't see an alternative.

Darf Ferrara said...

If the third option is footrubs, then given a nearly even split between footrubs and tax increases, and the right voting system nuclear armeggedon is possible. Throw in strategic voting, and there is even more likely to be a disaster.

The claim that there are choices to be made assumes public choices. A private choice by way of private property rights does not have these flaws, although it does have some interesting challenges. Given the obvious advantages of private choices, it would seem like the first thing to do would be to figure out a way to convert every choice into a private choice. Without a mechanism for determining how to make a public choices, they can lead to a disaster. And then people will claim that democracy isn't the problem, that democracy was never tried. Well, maybe it just doesn't work well.

Elijah said...

Federal unemployment tax is what helps pay employees unemployment compensation when they lose their job. The business pays for this out of their own funds, the employees do not pay this tax debt loans.