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
The 25% of the population earning over 33k but less than 67k, pay an income tax rate of
The 50% of the population earning less than 33k, pay an income tax rate of
8 thoughts on “Just How Bad is the Income Tax Burden?”
it is a little hard for me to understand how you go from recognizing that non wage income and wages over 100k (approx) don’t pay payroll tax to justify adding it’s rate to the income tax rate to come up with a new revised effective rate.
i’m surprised you didn’t throw your alimony into the equation.
in any case the payroll tax is a funny kind of tax: you get your money back plus interest. you see its really an insurance premium for workers paid for by the workers themselves. ending up in a high tax bracket isn’t the same as knowing you will end up in a high tax bracket.
the purpose of the AB post was to begin to look at the cost of repaying the money “borrowed” by the government in order to give the tax cuts that were supposed to pay for themselves. they didn’t, but it turns out a tax raise back to the original level will be just enough to pay for the deficit. funny how that works out.
my purpose has nothing to do with the “fairness” of it all. just trying to get the bills paid. and, well, a little fairness: i’d prefer the bills were paid by the people who borrowed the money, as much as that is possible.
Yeah, I realize my intent/point is a little different from your original. I was actually going more towards the question of whether taxation is indeed as “progressive” (I guess the high income types often consider it “oppressive”, not “progressive”) as commonly thought.
As for SS/Medicare being insurance and not really a tax. I think you need to be more careful in your language. If it’s insurance, then people don’t necessarily get it back, they only get insurance premiums back with interest if they actually incur the insured-event: i.e. they actually get to live to be old enough and then live long enough after they start collecting.
I’m going by what most people view it as: a tax. It’s an involuntary deduction from paychecks. Yes, they may get value in return (again if they live long enough), but that’s also true of many other taxes. I benefit greatly from the taxes I pay that pay for other socially useful goods, but they’re still taxes nonetheless.
As regards my assumptions on on the over-100K crowd: Notice I’m not adding the full 7% to all the brackets on folks over 100k. Since I don’t know what the average income for each bracket actually was, I’m assuming that the entire bracket earned the minimum income to be in that bracket – for example the top bracket earns 400K or so. Assuming it’s from payroll, then the first 100K is payroll taxed at 7%, adding to tax paid & effective income+payroll tax. It’s only at under 100k brackets that the increase burden is a full 7%.
fair enough. but i would ask you to consider that what “you” mean by a word, and what “i” mean by a word both lack ultimacy. words “point at,” they do not “mean.”
i am trying to point at the insurance nature of the payroll tax. you may point at the tax nature of it if you wish, but that is that part that most people already get, and i am trying to show them something that they may not yet get.
as for “insurance,” i think your definition is too narrow. insurance is simply me paying a fee in return for a promise to pay something to me in the event of X happening. in the case of SS Old Age Insurance, the X is that I arrive at the age of 62 and “retire”. the “something” promised to me is a mothly check based fairly directly on the “fee” i paid. as it turns out, if you live the “expected” span of years after you retire you will get back more than you paid in. moreover if you only earn a fairly low amount before you retire you will get back considerably more than you paid in… an “insurance” against poverty in old age… the money for the “extra” coming from the “premiums” of those who did better than you… that is those who didn’t have the fire.
again, it is useless to argue over what the words mean. the whole point is what happens in the real world. i can only use words to point toward that,
and while you benefit from the taxes you pay, arguably, you don’t get your money back directly according to a chain of (claim of) ownership that traces directly back to you and what you paid in. that’s what makes the payroll tax more like an insurance premium. voluntary or not.
another problem with words… like voluntary… is that if you live in a country and agree to abide by its laws, and the majority, perhaps including yourself, vote for representatives who decide it is in the best interest of the country to collect a “tax” from you… is that tax voluntary or not?
and as for your assumptions about the over 100k crowd… you’d have to know what percent of their earnings is “wages less than 106k” I estimated that as about 1.6/4.0, but it is an unsteady estimate. coming at it from a different direction it could be as much as 1/2… but that is over the whole group, and you might guess that it is a lot lower the higher you go. in any case it is pretty irrelevant to the point i was trying to make, which was that the high earners can easily afford to pay back the money they borrowed from the SS trust fund. collecting that 3% on incomes over 100k would be more fairly distributed as a marginal tax somewhat higher than 3% on income actually over 100k for each taxpayer.
sure wish people would just understand the point instead of fighting with it. unless you mean to say no, they can’t afford it. no, it’s not fair. no, your calculation is materially off.
as for whether or not the tax is progressive… that seems to me to be obvious. even if you insist that the payroll tax is a tax… in the first place it does not affect the question of whether or not the income tax is progressive. in the second place once you account for what people get back from the payroll tax, it’s progressivity is manifest. you’d have to perverse to only look at the pay-in side without looking at the pay-out side in order to come up with “regressive tax” as many people who should know better do.
Sorry if I muddied the waters, I didn’t intend to.
I agree with your main point, that the “high earners can easily afford to pay back the money they borrowed from the SS trust fund.”
I was just trying to make the additional, (and hopefully supportive) point that at present, the tax+insurance premium system is nowhere near as steeply progressive as most think it is. And, that therefore, any effort to raise taxes on high-income bracket folks to make them pay back the tax cuts they received earlier would actually be within most people’s sense of fair. People don’t think 40% and 50% taxes are fair, but of course, that’s not what high income bracket people are paying, as your data and my adjustments both show.
I wanted to add in the SS/Medicare tax because, in my experience, the vast majority of people (I’m talking the bottom 60-70% of folks – the ones I encounter at the college), don’t distinquish between FICA and Fed income taxes. They estimate their tax bite from the difference between gross pay and take-home pay. They then infer that because they know the income tax system is supposed to be “progressive”, that rich people must really pay a lot more. Then they hear stuff like “50%”, “38% bracket”, etc. and assume that it’s the difference between gross and take-home for rich folks. Of course, it’s not.
In retrospect, I suppose I was talking more to the folks I encounter at community college (including a lot of mid-career and older folks) than the typical Angry Bear reader.
I agree that we need to emphasize the insurance aspect of SS – it could potentially change the debate, but SS just isn’t seen by most people as “insurance”. Medicare they see as insurance. That’s partly because SS is not voluntary in the sense that they can’t opt out of paying for it. But it’s also because the risks being insured against (which I understand and agree with you), are not well perceived by people.
so it seems we agree. i could not have told that at the beginning. perhaps both poor writing and poor reading on my part. you deserve some sort of medal for hanging in there.
don’t assume the AB readers are any more sophisticated or intelligent than the folks you meet at the jr college. i taught at a couple of real universities and first i don’t think i ever had a student who actually understood what i was teaching (baby statistics) though they could be taught to jump through hoops with the right cues. I see no evidence that the angry bear readers are any smarter, though some of them are better educated.
i should note that i do not exculde myself from the “not smarter” category. i content myself with the observation made by a psychologist who studies such things that even experts, when asked to think about something outside their field of expertise, think on about the level of a sixth grader. i like to think i have a correct picture of an important part of SS, but i have no sense that i have ever explained it to anyone even those who think they agree with me… and when i have to talk to people in another field… say farmers… it is clear than i am the dunce in the group.
but don’t tell anyone.
“but don’t tell anyone” — The secret is safe. 😉 (and ditto for me).
I agree that the writing is often difficult to get right in the blog format, especially. Nonetheless, you guys at AB have been doing a lot of things well. I think I told Rdan, I make frequent use of AB (and Calculated Risk) in classes.
Of course the writing challenge is made all that much greater because of the several years (probably decades) of nonsense and trite, but wrong, info that’s been peddled to folks. Keep up the work on SS. You’re providing useful stuff.
i am pretty sure we could get it right if we kept trying to talk carefully.
hard to get that on a blog, or apparently, in the council of economic advisors.
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