Federal Income Tax Disparity, Part II

One of these things is not like the other...

First allow me to say thanks to CL for letting me post a few thoughts here. Also, I wish to thank those of you who took the time to read my previous posts. One of those posts, 'Federal Income Tax Disparity' generated a comment from a person named 'Rick W'. Here is the entire comment:

The premise of this article is false and the charts are meaningless. The "percentage of total revenue" paid by any individual or group across the income spectrum cannot provide any sense of fairness or inequality unless the "percentage of total income" is part of the calculus.

But let's accept your unsupported premise that the tax system is unfair. We should therefore expect to see unfair outcomes. If the wealthy are contributing too high a percentage, as you claim, then certainly their income and net worth are falling as a result.

In reality the, of course, after-tax incomes of the top 10% have grown far faster than those of the bottom 90%. Between '02 and '07 the income of the top 1% grew 1000% faster than the bottom 90%. Net worth has also grown dramatically.

Asserting that individuals should contribute even percentages of their incomes to the national budget is absurd. First, that presumes the economy provides a perfect measure of an individual's effort and ability by delivering fair and proportional incomes, which is obviously not the case. Second, it presumes there is no value to society helping the less fortunate.

A fair tax system must take into account the degree to which the tax burden will impact the lives of the tax payer. A ten percent tax bill for someone earning $10k will have a much more significant impact than a thirty percent bill to a person earning $250k. Yes, $75k is a lot of money to pay in taxes. But it's a whole lot easier to live on $175k than on $9k.

I initially was going to respond to Rick in the comments, but decided that the charts I wished to publish would not show up in the comments. Voila, new post. Let's address Rick's concerns one at a time.

The premise of this article is false and the charts are meaningless. The "percentage of total revenue" paid by any individual or group across the income spectrum cannot provide any sense of fairness or inequality unless the "percentage of total income" is part of the calculus.

But let's accept your unsupported premise that the tax system is unfair. We should therefore expect to see unfair outcomes. If the wealthy are contributing too high a percentage, as you claim, then certainly their income and net worth are falling as a result.

The premise of the article is that there are disparities between the tax rates individuals pay based upon income level; increasing numbers of Americans who effectively do not pay income tax; a fair tax and entitlement reform would decrease the number of households who do not pay income tax.

The first section of the post shows how the overall percentage of tax revenue generated by the top 1% and 10% of earners has increased since 1987 and the percentage of tax revenue generated by the 26-50% group has fallen. I did not claim, as Rick suggests, that this indicates some sort of inequality. However, since he's brought it up, let's take a look at some unfairness.

Below are two charts. The first chart represents the Top 1% of wage earners in the United States. It shows their adjusted gross income in dollars, the tax revenue generated from this group, and the average tax rate percentage.

The second chart represents the 26-50% of wage earners group. It depicts adjusted gross income in dollars, the tax revenue generated by this group and the average tax rate percentage.

In 1999, 2000 and 2004 these two classes adjusted gross income were roughly the same as a group. In 1999 the AGI for each group was approximately $1.175 Trillion; in 2000 the AGI was $1.30 Trillion for each; in 2004 the AGI was $1.356 Trillion for each. However, the rate at which these AGI's were taxed is radically different. Why? One group's AGI was taxed at just a little over 26% and the others was taxed at 8.5%. One group paid an average of $330 billion in taxes while the other group paid an average of $108 billion. Same rough AGI, same earning peroid, same country. The only difference was the number of earners in each group, 1.28 million in one group and 32 million in the other. The top 1% of wage earners are taxed at a higher percentage because... they can handle the tax burden? What?! This thinking amounts to a penalization upon those who do well and succeed. We can argue all day long about who is in each tax bracket, and how they got there, but the reality is that a majority in each tax bracket would argue that they work hard to earn their income.

This is the unfair outcome, wealth is confiscated at a much higher rate from the wealthy than it is from the middle class.

Now on to Rick's second point.

Asserting that individuals should contribute even percentages of their incomes to the national budget is absurd. First, that presumes the economy provides a perfect measure of an individual's effort and ability by delivering fair and proportional incomes, which is obviously not the case. Second, it presumes there is no value to society helping the less fortunate.

A fair tax system must take into account the degree to which the tax burden will impact the lives of the tax payer. A ten percent tax bill for someone earning $10k will have a much more significant impact than a thirty percent bill to a person earning $250k. Yes, $75k is a lot of money to pay in taxes. But it's a whole lot easier to live on $175k than on $9k.

No one 'asserted' that 'individuals should contribute even percentages of their income to the national budget'. The Fair Tax taxes consumption, not production. From Americans For Fair Taxation's FAQ page:

What is taxed?

The FairTax is a single-rate, federal retail sales tax collected only once, at the final point of purchase of new goods and services for personal consumption. Used items are not taxed. Business-to-business purchases for the production of goods and services are not taxed. A rebate makes the effective rate progressive.

Therefore, the Fair Tax does accurately measure an individuals effort, the effort to spend.

The broader implication seems to be that the current 'progressive income tax' does a good job of measuring individual effort and ability. Such an assertion is ludicrous. You might suggest that the tiered tax rates are that measurement, but that's ridiculous as any family with and AGI of $114,000 will tell you. A family with an AGI of $114,000 in 2007 was taxed at 12.66% on average. However, a family with an AGI of $112,000 was only taxed at 9.43% on average. The implication that the progressive tax effectively measures individual effort then states that the family with the AGI of $112,000 worked harder than the family with an AGI of $114,000.

The Fair Tax does a good job of solving some of the inherent problems within our 'progressive tax system', and it places an incentive upon activities which grow the economy. To find out more about the Fair Tax, visit Americans for Fair Taxation.

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Tax Day! UPDATED

Well, unless you're one of our beer loving, hockey fan neighbors to the north, you're well aware that today is the final day which you can post mark your 2009 taxes in order to have them considered to be on-time by the IRS.

There's also another little thing you may have heard about happening today. It'd be your local Tea Party. I will be attending the one in Bakersfield. I will be there to be counted amongst those who believe that the increase in taxes upon the country are too high, the nationalization of private industry is immoral and that our country is headed for near certain disaster. Be sure to visit your local tea party. Take pictures, and upload them as I will be linking to ongoing Tea Parties throughout the day. Also, if you haven't already, watch the Teabagger video in the next post. Well worth your time.

God Bless America!

-UPDATE

Moonbattery has a pretty decent round up here.

Gateway Pundit has several posts relating to the Tea Parties, scroll through to find them.

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Federal Income Tax Disparity

The result of out of control government spending coupled with diminishing numbers of federal income tax payers.

In a report released on July 30, 2009, The Tax Foundation detailed the Federal Individual Income Tax Data. In the report are several interesting statistics, but when coupled with an article written by The Tax Foundation's Scott A. Hodge, those same statistics become quite alarming. Amongst the data contained in the reports is the revelation that the disparity between households which pay federal income tax and those that do not is growing, unsustainably.

First let's break down the remarkable federal income tax numbers. During the period from 1987 to 2007 (the most recent federal income tax data available), the percentage of total tax dollars paid in by the top 1% of earners shot up more than 62% from 24.81% to 40.42%. The percentage paid by the top 10% of wage earners during the same period has increased from 55.61% to 71.22%. Meanwhile, the federal income tax percentage paid by the top 26% to 50% of wage earners (those making between $32,879 and $66,532) has fallen from 17.02% to 10.52%.

Percentage Paid by Group

What these numbers tell us is that the top 10% of wage earners in the United States have had their total federal income tax burden increase by nearly 30% while the top 26% - 50% of wage earners have seen their tax burden decrease by nearly 40%. All the numbers get confusing, so let's graph it out.  In the graph below, 100% represents the tax figure paid in 1987.  The graph plots out how each group of tax payers share has increased or decreased on a percentage basis from 1987 to 2007.

Percentage Increase/Decrease by Group

Now let's take a look at the increasing number of those who do not pay income tax. In his article, "Once Self-Reliant, Now A Nation Of Takers," Hodge points out the record numbers of those receiving a tax refund from the IRS:

We've all seen someone who brings a small salad to the potluck but piles lots of your casserole on his plate. Or, there is always one person in the lunch group who orders the most expensive meal on the menu because she knows you are all splitting the check.

The same thing happens with government. A growing number of Americans are contributing little but taking a lot, and a shrinking number are giving a lot but taking little.

Recent IRS data for 2008 reports that a record 52 million Americans—or 36% of all filers—filed a tax return but had no income tax liability because of the generosity of the credits and deductions that have been enacted over the past 15 years.

The tax code has always had exemptions to protect the poorest Americans from paying income taxes, but the new credits—such as the child tax credit, Making Work Pay credit, and First Time Homebuyer credit—are now exempting middle-class families from the income tax.

Remarkably, a family of four earning up to $52,000 can expect to pay no income taxes because of these various tax credits. That too is a record.

Many more of these taxpayers are now getting checks back from the IRS even though they pay no income taxes. The IRS paid out $70 billion in "refundable" checks to non-payers in 2008. In essence, lawmakers have turned the IRS into an ATM machine for welfare benefits—and ATM now stands for Another Taxpayer's Money.

Sadly, millions of people now see April 15 as payday, not tax day.

Indeed the top 26%-50% of federal income tax payers (those who earn between $32,879 and $66,532) pay a mere 10.52% of the total federal income tax revenue. Theoretically, this group is also the second most likely to utilize support from federal entitlement programs. Sadly, the direction in Washington does not appear to be headed toward righting the problem before us. Hodge continues:

President Obama's policies, from health care to taxes, are all intended to increase the number of takers in America while reducing the number of givers. Our analysis of Obama's FY 2011 budget plan shows that it would increase the amount of redistribution from the top 10% of families by nearly $100 billion per year—to a total of $854 billion—while expanding the amount of government benefits targeted to the middle and upper-middle classes.

Economists have identified a phenomenon they call "fiscal illusion." When people perceive the cost of government is less than what it really is, they will demand ever more government. The real danger today is not just that we have so many non-payers, but that the $1.5 trillion deficit is making the cost of government look cheap for all of us. So much spending is raining down on us that it now seems like "free money" in a sense.

Every marketing guru will tell you that people love free stuff and that they will take as much as they can get whether they need it or not. But for a nation, this is a recipe for fiscal disaster.

This constitutes one of the most major of flaws inherent in the 'progressive income tax.' A progressive tax system is, by definition, not fair. Groups within the tax system are penalized by the fact that they are a member of a specified group. This creates the incentive to 'game' or cheat the system. Looking at our current tax system, if you are in the top 1% of wage earners, and you can find a way to represent your earnings as being within the top 2-5% of wage earners, you can take 22% off the amount you would have paid. At an income of $410,096 that means more than $20,000 in tax money that would otherwise be paid into the federal tax system which is instead in your pocket. Think there's an incentive to cheat?

The increasing discrepancy between the numbers who pay federal income tax those who do not is one of the strongest arguments for a fair tax. The most popular of these would be levied in the form of a national sales tax. Every transaction, taxed at the federally required 23%. A recent article at National Review Online by Ramesh Ponnuru entitled, "A Misleading Sales Pitch" argued that the proposed 23% tax would not be enough:

It is not at all clear that this [23] percent sales tax would raise enough revenue to eliminate income and payroll taxes. Brookings Institution economist William Gale has estimated that to replace current federal tax revenues, the tax rate would have to be 44 percent...

The piece is not so much a damaging blow against the advocacy for a fair tax, as it is an indictment of the cost of entitlement programs. Americans for Fair Tax Reform has a point by point rebuttal of Mr. Ponnuru's more serious charges.

A fair tax coupled with true entitlement reform would correct the imbalance in federal income tax payers and serve to reduce bloat in federal government at the same time. True tax reform is desperately needed, and unless someone appears on the political scene who can put aside personal ambition in favor of reforming our current system, our economic future is sealed and the greatest human experiment is destined for the trash heap.

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Unintended Consequences

Today on Morning Joe, Jim Cramer talked about some of the anticipated effects of 'health care reform' being passed. Just what does Cramer anticipate? Take a look:



According to Jim Cramer, should Obamacare pass, income tax rates will jump into the 50-60% range, it will "break the [federal] budget" and will likely cause capital gains and dividends to be taxed at the income tax rate. Do I need to tell you what the tax increases alone would do to our economy? It's important to note that these are not included in the CBO analysis of the bill, they are the professional opinion of investor, Jim Cramer.

H/T: Mark Finkelstein @ Newsbusters

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Bend Over, Here It Comes

Regardless of whether or not Reuters withdrew the story, you're about have some taxes shoved through your back door:

Published under the headline “Backdoor taxes hit middle class,” the article opened by describing the Obama Administration’s plan to cut more than $1 trillion from the deficit over the next decade as relying “heavily on so-called backdoor tax increases that will result in a bigger tax bill for middle-class families.” Four hours and three minutes after it hit the wire, the story was “withdrawn” with a promise that “a] replacement story will run later in the week.”

Why did Reuters pull the story? One site cited a Reuters rep as saying the piece was withdrawn “due to significant errors of fact” and “should not have gone out.” I think it was the language used in the article that prompted Reuters to pull it. In particular, it was the series of phrases shown below that, combined with the one mentioned above, must have made the hair stand up on the back of Rahm Emanuel’s neck:

“…effectively a tax hike by stealth.”


“middle-class families will face a slew of these backdoor increases.”

Perhaps the largest contributing factor to the article being yanked is a list of tax break provisions popular among middle-class families that Obama might allow to expire:

* Taxpayers who itemize will lose the option to deduct state sales-tax payments instead of state and local income taxes.

* The $250 teacher tax credit for classroom supplies.

* The tax deduction for up to $4,000 of college tuition and expenses.

* Individuals who don’t itemize will no longer be able to increase their standard deduction by up to $1,000 for property taxes paid.

* The first $2,400 of unemployment benefits are taxable, in 2009 that amount was tax-free.

The last line of the story was, perhaps, the proverbial “nail in the coffin” for the Reuter’s piece:

* Trickle-down-taxation.

And from the 'Doctor of Democracy:'

Here's why. "If the provisions are allowed to expire on December 31, the top-tier personal income tax rate will rise to 39.6 percent from 35 percent. But lower-income families will pay more as well: the 25 percent tax bracket will revert back to 28 percent; the 28 percent bracket will increase to 31 percent; and the 33 percent bracket will increase to 36 percent." This is what they all were before Bush cut them. "The special 10 percent bracket is eliminated." This is all true. Every bit of it is true. If you're going to let these tax cuts sunset, it means we're going to go back to what they were before Bush cut them, and those are the rates that I just gave you. That means that everybody paying income taxes is going to effectively get an increase, a tax increase, despite Obama's constant pledges that 95% of the American people get a tax cut, and he's calling one-time tax rebates a tax cut. So obviously the White House did not like this story.

If you just relax your muscles and stop resisting, the 'Hope and Change' will slide in much easier.

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