Just How Bad is the Income Tax Burden?

Rdan and Dale Coberly at Angry Bear give us a short summary of the true effective tax rate for different groups of taxpayers.  The effective tax rate is basically:  TotalTax$Paid / Income = Eff.Tax Rate%.  Note this is different from the marginal tax rate which is the percent of the next (additional) dollar of income that will be paid as taxes.  Many people get the two rates confused.  Adding more confusion is that deductions, tax credits, etc. are most often available to higher-income payers and not to lower-income households.  There’s a reason the low income households use the 1040-EZ form.  Anyway, here’s what they found for 2008:

The richest one percent of the population, who make more than 410 thousand dollars per year (AGI) pay an income tax rate of 22%. (Rdan…Does not include less taxed capital gains and estate income)

The next top 4% of the population, earning over 160k but less than 410k, pay an income tax rate of 18%

The 5% of the population earning over 113k but less than 160k, pay an income tax rate of 13%

The 15% of the population earning over 67k but less than 113k, pay an income tax rate of 9%

The 25% of the population earning over 33k but less than 67k, pay an income tax rate of 7%

The 50% of the population earning less than 33k, pay an income tax rate of 3%.

Now these numbers are excluding capital gains from the income numbers. Capital gains, the money earned from investments, is taxed at a lower rate. Capital gains are also significant sources of income for the upper 5%, but not very significant for those making less than $200,000.

Finally, these numbers don’t include the Social Security/Medicare payroll taxes which all wage earners pay on incomes up to approx. $100,000, but incomes over that are exempt from payroll taxes.  So, just out of curiousity, I decided to add the payroll tax number to the above numbers to get a better idea of just how big of a bite the Federal government is taking out of our paychecks.  Now the employee’s porton of the payroll tax is just a little over 7.5%,  The employer also pays an additional 7.5% to make approx. 15% in total, but the employee doesn’t see the employer share reported on his/her check stub. Now since, the above numbers from Angry Bear are already rounded, I’ll just use 7% as the SS/Medicare tax bite.  Without the detailed income numbers for the top 3 brackets, we’ll have to estimate, so I assumed the minimum level of income.  The revised numbers become:

The richest one percent of the population, who make more than 410
thousand dollars per year (AGI) pay an income tax rate of 22%. no more than 24%

The next top 4% of the population, earning over 160k but less than 410k, pay an income tax rate of 18% no more than 24%

The 5% of the population earning over 113k but less than 160k, pay an income tax rate of 13% no more than 19%
 

The 15% of the population earning over 67k but less than 113k, pay an income tax rate of 9% 16%

The 25% of the population earning over 33k but less than 67k, pay an income tax rate of 7% 14%

The 50% of the population earning less than 33k, pay an income tax rate of 3%. 10%

It’s the Lack of Demand, Stupid

The talk about “uncertainty about government regulation or healthcare” as being the major reason why businesses are holding back and not hiring is just plain nonsense.  It’s not supported by either any intelligent micro-level analysis of firm level decision making.  It certainly isn’t what the businesses themselves report when asked.  We turn to the NY Times Economix column today by  Catherine Rampell

What’s Holding Back Small Businesses?

The biggest single problem facing America’s small businesses isn’t taxes or overregulation. It’s low demand, according to a new report released by the National Federation of Independent Business.

Thirty-one percent of small businesses surveyed by the N.F.I.B. said that “poor sales” are their company’s “single most important problem.” The other options included were competition from large businesses, insurance costs and availability, financing and interest rates, government requirements and red tape, inflation, quality of labor, cost of labor and “other.”

Here’s a chart breaking down what percent of small businesses cited each of these problems as their biggest challenge, going back to 1986:

DESCRIPTIONNational Federation of Independent Business, via Haver

Much of the debate about how to spur growth and encourage hiring has focused on making the tax picture temporarily more business-friendly. But as you can see, the portion of small businesses citing taxes as their superlative problem has remained about the same — mostly in the 17-22 percent range, say — for about a decade.

Additionally, lending help for small businesses is another key stimulative policy in play, and meanwhile financial and interest rate concerns are a comparably negligible concern.

By contrast, the share of companies saying the poor sales is their main challenge has about doubled since the downturn began.