Facts on Income Tax Payers

I found this article from Kiplinger's fascinating. It's on taxes and who pays what. here are the parts I found especially interesting:

• New data show that an income of $30,881 or more puts you in the top half of the class. Earning about twice that much -- $62,068 -- earns you a spot among the top 25% of all wage earners. You crack the elite top 10% if you earn more than $103,912.

• And $364,657 buys top bragging rights: Earn that much or more and you're among the top 1% of all American earners. Together, the top 1% earn a full 21% of the income reported to the IRS -- far more than the 13% of total income reported by the bottom 50% of earners.

• Here's another powerful statistic about the top 1% of earners: They pay a whopping 39% of all federal income taxes. The bottom 50% pay just 3% of all income taxes.

A few thoughts here:

1. Wow, $31k puts you in the top half of all earners? Yikes! There are a boatload of people not making very much -- even when you factor out students and those living on Social Security.

2. Earning $100k puts you in a pretty good position still. I remember when a "six-figure-income" was what everyone strived for but I thought it had lost a bit of its glamour just like becoming a millionaire has. It probably has lost a bit of ground, but still, it puts you in the top 10% -- not bad. (And, by the way, being a millionaire, while more common, also puts you among the elite in terms of net worth.)

3. The bottom 50% only earn 13% of the total income. Seems like the gap between rich and poor is growing.

4. 50% of the population lives in the U.S. and gets all the government services for free basically (yeah, they kick in 3% so they do pay some.) That is simply astounding to me -- half of all people pay virtually no taxes whatsoever. I'm starting to see why some people say they don't give because they "give" to help others in the form of taxes. (No, I don't buy this argument, but I can see where it's coming from when looking at these numbers.)

Comments

[Curtis]

These are the same stats I've used when teaching economics when someone says the rich should pay more in taxes. Not only is their marginal and average rate higher, they are picking up the brunt of the tax load as it is.

It's rather enlightening when you really stop to think about it and hear politicians against tax cuts for the rich. Heck, I'm going to squeak into that 10% this next year for the first time and I'll take all the tax breaks I can get!

It's especially telling when you look at the number of people in those top percentages who own businesses that employ others. If they don't have money to keep and invest in those businesses, those lower 50% won't have nearly the amount of jobs they do.

[Curtis]

Also, I have a further breakdown of those numbers from the IRS website on my review of Flat Taxes a few weeks back.

[mysticaltyger]

I have to agree with everything Curtis said. Because of my large retirement plan contributions, I'm in the bottom 50%, but I don't resent those who have more or think they should have to pay more than they already do.

These numbers appear surprisingly low because we think of working taxpayers like ourselves - are we really in the top 50/25/10 percent?

Millions of tax returns are filed by retirees with - no surprise - low incomes, and millions are filed by teenagers and college students with marginal incomes who in many cases are filing merely to get back income taxes withheld from their paychecks. So the overall numbers are dragged down by a lot of low under-25 and over-65 incomes.

[Kevin]

It is astounding to me that half the people (probably more since some don't file) make under $30k.

As far as the top 1% paying 39% of the tax, I have no problem with that. They made their money under this country's laws and should pay the taxes those laws call for. And I can guarantee you none of those people are hurting. Let's face it, in a country like this no one should be suffering the way some do.

[beastlike]

Kevin,

Remember that those 50% making under 30k can also change careers, change educations, etc. to start making more money like a lot of the "rich" people had to do. I am not rich by any means but it is completely not fair that they (at least most of them) busted their a$$ to crap most of it away to taxes.

You start taking the rewards of becoming successful away from individuals and you can kiss new ideas and inventions good bye.

Maybe a socialist country would be better suited for you?

[Kevin]

Beastlike,

I realize that anyone can change careers, education, etc and better themselves. I am just personally surprised at the sheer number of people making less than $30k.

Your "taking rewards away from becoming successful" argument is ridiculous. Let me show you why...First off, I think we will agree that any type of income will and should be taxed in this country - that is a fact of life.

Implicitly you are arguing for a lower tax rate for the uber-wealthy. OK, let's say they are taxed at the 15% tax like the lowest bracket.....Are you honestly going to argue that someone with a million-dollar idea is going to turn it down because they will "only" make $650,000 (using the highest current, 35% tax bracket) instead of $850,000 (assuming the 15% lowest tax bracket.) Ideas and inventions are always going to happen in a capitalist society since the person with the idea has incentive to make money - no matter how much goes to taxes.

And no, I am not for socialism. I just think in a country as well-off as America, it is not too much to ask of those super-rich to help out their fellow countrymen.

[Lord]

Actually the situation is even more unequal than these figures show because nearly all tax shelters and deferments are used by the rich and that income doesn't show up on tax returns. Also, there is some evidence that progressive taxation encourages risk taking and innovation by softening the blow of mistakes.

[beastlike]

Kevin -

I understand your arguement, but it's time where people start taking care of themselves instead of counting on others to take care of them.

Sorry, but I rather fight for the rich that make jobs and own business than the bottom half that suck off the system.

[beastlike]

Lord - Are you saying more people would be willing to risk everything to earn (for instance) 500k compared to 3 million?

[Kevin]

Beastlike - I guess we will agree to disagree, but you seem to have a pessimistic view of the world. I agree there are some that "suck off the system", but I'm willing to put up with them if the people that really need the help can get it.

[beastlike]

Kevin - I agree with helping people that truely need it, but unfortunately I know and heard of too many stories where the opposite is true.

Such as people paying with food stamps that just walked out of their 2008 Mercedes.

[MrAtoZ]

Are these numbers overall income or AGI?

[beastlike]

Isn't it true that in many European countries they all take a few months off in vacation from work because thier income taxes are so high? I vaguely remember hearing this in one of my MBA classes many years ago…. I think…

"The bottom 50% pay just 3% of all income taxes" from this you conclude, "That is simply astounding to me -- half of all people pay virtually no taxes whatsoever."

THe bottom half pay virutally no taxes relative to the entire pot of taxes collected. BUt let me put it another way, which owuld you prefer, earning 30k a year and paying 5k in taxes, or earning 300k a year and paying 100k in taxes. Which person do you think is better off.

The first person pays "virtually no taxes" compared to the second person but not compared to what they have.

[Bx1985]

Understand what your are saying, but the person making 30k has every opportunity to make 300k in a free country. these numbers are truely amazing. If I ever make a lot of money one day I will be sure to try to shelter my earnings

[LotharBot]

"The bottom 50% only earn 13% of the total income. Seems like the gap between rich and poor is growing."

You can't determine a trend from only one data point. (But take a look at today's WSJ for the trend.)

[LotharBot]

"the person making 30k has every opportunity to make 300k in a free country"

From the aforementioned article in the WSJ:

"nearly 58% of filers who were in the poorest income group in 1996 had moved into a higher income category by 2005. Nearly 25% jumped into the middle or upper-middle income groups, and 5.3% made it all the way to the highest quintile." Over one in twenty people in the bottom 1/5 of incomes in '96 made it to the top 1/5 by 2005!

[Lord]

People will take more risks when their downside is reduced which is what occurs under a progressive tax. People don't know before they begin whether they will make 300k or 3m, but paying less when it is 30k greatly helps. For them 300k or 3m are both unimaginably large so the difference between them negligible. Only an innumerate petulant would consider they paying a few m in taxes makes 300k undesirable.

Every opportunity is surely a gest. Opportunity exists but is never equal. What education could they afford, what social contacts do they have, what capital do they start with, what security does their family offer? Possible does not mean likely and a broad array of circumstances can intervene.

So-called income mobility is largely a function of age. Virtually everyone starts out at the bottom, most move up the income scale as they gain experience and perhaps promotions as others ahead of you retire. As these people leave the workforce and retire they fall back down the income scale.

small changes in income can move you up or down one income quintile, but once you control for age, there is little income mobility in this country.

[Somewhere in the middle]

The top 1% wouldn't want the bottom guys paying more taxes. These are the consumers whose discretionary money goes into the companies they own or invest in.
If a guy making $50,000 paid more taxes to kick in is fair share and paid 25k what would he have left to put into the economy? Nothing. ex. If you were the family that owned Walmart for example. Most of the bottom rung of tax payers work for you and the others most surely spend money there. Taking money out of there pockets would not be a good thing for profits.If I made 10 million a year and came out with 6.5 mill. I would gladly hand the money to the tax man with a smile and be glad I live in the greatest country in the world. Lastly, The system works for the top tax payers or they wouldn't be in the top and if it isn't broke done fix it.

[Dan]

So the top 1% pay a whopping 39% of all federal income taxes and the bottom 50% pay just 3% of all income taxes. Pull out the violins, it must be tough to hold 90% of all the wealth and have to pay taxes on it (18% according to Warren Buffett) . And those bad poor people, they have 1% of the wealth and pay 3% of the taxes (more than capital gains rate I think). I think the top 1% do .001% of the hard labor, and the bottom 50% probably do 89% of the hard labor. I don't begrudge anyone working hard for a living to get some help if they need it. I feel privlidged to have a professional job and am thankful for those who work hard with their hands and backs.

[Kevin G]

If you took into account the EITC the bottom 50% would actually contribute less than 3%.

What I find most disturbing about those number is 1/2 of the voting population pays virtually nothing in taxes. Is it any wonder why our government is growing so rapidly? 1/2 the population gets the lion share of govt services at no charge.

[BH]

interesting findings, but i think we are making an incorrect logical leap. just because the bottom 50% only pay 3% of total income tax, it doesn't mean that they pay only 3% of the overall tax. we are forgetting property tax, sales tax (regressive), payroll tax (regressive), and state and local income tax. the figures are grossly misleading.

[BH]

Even if we disregard state and local taxes, the income tax is only 47% of all Federal revenue. The top 5% earn 30% of the income and pay 40% of the Federal taxes. So, the Federal tax system is somewhat progressive.

If you included state and local taxes (including sales taxes), the progressivity would decline significantly.

[Lord]

Including all taxes, income and payroll, the effect is close to a flat tax system. One might say payroll taxes are both taxes and benefits though so the effect can be considered somewhat progressive. It does show however, even in the richest country, most people are working poor.

[treacherous]

Enough of the federal government stealing nearly 40% of our income.

FairTax Now!

[BenC]

enough about the super rich and the extremely poor. What about us middle-class people, the 49% who pay 60% of the taxes in this country? Is that fair? I want a tax break!!!!! ;)

[Compounding]

Yikes! Well, I am already around the $70k mark, and we are a single income household. It is going to be absolutely crazy when my wife starts working again, and I make even more (she will likely be around the $50k mark within a year or two of getting out of school, and I am looking to be between $85-100k). We really need to keep our adjusted gross income below whatever the magic number is for phasing out deductions. At this point, I really like putting my money away via a Roth 401k, but when that time comes, I am likely going to need to switch back to a Traditional 401k to get my AGI down. The plus side will be that we can max out both of our 401ks each year, our HSA, and up to the max credit back for our state's 529 plan. After all of that, we will still max out our Roth IRAs, which will satisfy my after-tax retirement savings, I suppose.

And by the time that this begins to be a problem, my kids will be fairly close to moving out, so hopefully our expenses will drop dramatically.

[James]

One quick comment - if you read the article, those numbers are Adjusted Gross Income - so 401K/IRA, Alimony, Bad Debt, moving expenses, Student Loan Interest, Tuition and Fees, and Educators expenses are all taken off of that.

In most cases it's still not a lot of money deducted from the gross income to get to the AGI - but it is one thing to notice.

[BrianK]

Why shouldn't those at the top pay more in taxes? They're the primary beneficiaries of the way that tax money is spent. Multiple studies show that the wealthy get more than $1 worth of services for each dollar they pay in taxes.

[LotharBot]

Some anonymous person wrote: "once you control for age, there is little income mobility in this country."

Yeah?

http://www.treas.gov/press/releases/reports/incomemobilitystudyfinal.pdf

Page 6: "the analysis follows the common practice in previous research of excluding taxpayers who were under the age of 25 in 1996."

I repeat, 5.3% of people who were in the lowest quintile in 1996 -- and who were over the age of 25 -- made it into the highest quintile by 2005. One in twenty people went from the bottom to the top. Even controlling for age, there's plenty of income mobility in this country. You just might not see it if you surround yourself with people who are content to work in the same job with the same 3% raise every year for 25 years.

There is certainly an age component to incomes. But there's also plenty of mobility unrelated to age.

[mysticaltyger]

Kevin,

>

You TOTALLY contradicted yourself in this statement.

You can't say that those paying the highest tax rates need to pay more and then turn around and say you're not for socialism. Your statement IS the very essence of socialism.

[Duncan]

Curtis,
Your thoughts on marginal rates are simply incorrect. Some of the highest marginal rates are paid by the upper middle class. They pay 28% income tax plus a 15% (include the employer's contribution) payroll tax. The highest Federal rate is only 35%. Tell me who has a higher marginal rate? In addition, many of the richest Americans earn much of their income through long-term capital gains (15%), so their effective tax rate may be lower. Business owners structure their income to earn most of it as capital gains. Warren Buffet is quoted as saying that his marginal rate is lower than his secretary. The poor pay taxes. Many state and local taxes, such as fees and sales taxes tend to be regressive.

The arguement can be made that the lower-tax rates for capital gains create investment and improve the overall economy. There is some truth to this arguement. Too many people don't understand how the overall tax burden is distributed and focus only on income taxes.

I wouldn't say that one in twenty constitutes plenty of mobility. There are plenty of opportunities for people who are in the right place at thge right time and are able to take advantage of it. You can go from bottom to top with one business or real estate deal, or perhaps with an inheritance you can use to make money. One in twenty isn't exactly an everyday event And if you lack cash and credit, it's unlikely any amount of hard work will get you to the top..

[StoppedClock]

The article neglects to include the effects of payroll taxes (social security tax). Those under 94K income pay this at a rate of about 6.7%, while income over 94K is not taxed for social security at all. If the effects of all taxes are included, such as sales tax, property tax, etc., just about all income levels are paying tax as a similar fraction of income (about 20%). Warren Buffet has spoken about this a lot, for example here:
http://www.cnbc.com/id/21553857
These arguments that the upper few percent pay almost all the tax, like the one presented here, use cherry-picked statistics.