I. Taxes and Deficit Reduction (continued)
There is a widespread perception in the United States that taxpayers at all, except the very highest income levels, are being overtaxed by the national government. The following section presents some reasons why this is not so and makes a more detailed case why this is especially not the case in regard to the top 20 percent of taxpayers. There are several reasons why overtaxing is not the case:
1) The federal income tax as a percentage of the economy is at the lowest level since the Truman administartion.
2) The Center for Budget and Policy Priorities has calculated that a family of four at the exact middle of the income tax spectrum pays only 4.6 percent of its income in taxes to the national government.
3) Using 2007 data — the last year for which full data has been analyzed — the IRS has found that 47 percent of U.S. households pay no federal income tax.
4) The period from the end of World War II to the deep recession of the early Reagan 1980s may have been the most economically prosperous period in U.S. history. Yet this approximately 35-year period was characterized by marginal income tax rates far higher than they are today, refuting the trickle-down argument that lowering tax rates on the wealthy stimulates economic growth.
My own experience in paying income taxes is that last year our family paid 4.7 percent of its adjusted gross income in income taxes to the national government. In each of the past two years, our tax owed to the state of New Mexico was slightly over two tenths of one percent. Yet in each of the past two years, the New Mexico legislature has refused to raise taxes to cover deficits of several hundred million dollars.
There are several ways we can measure how both individuals and corporations were taxed in the last half-century or so, and how concentrated the wealth has become at the top of the economic pyramid in the United States. First we will look at top and bottom marginal tax rates beginning in 1950. Highest marginal tax rates:
1950 – 84.35 % ($400,000 and over); 1960 – 91 % ($400,000 and over); 1970 – 71.75 % ($200,000 and over); 1980 – 70 % ($215,400 and over).
Lowest marginal tax rates:
1950 – 17.4 %; 1960 – 20.0 %; 1970 – 14.0 %; 1980 – 14.0 %.
There are a number of measurements to determine how much of their income the wealthiest households pay in federal income tax:
1) IRS data showed that the 400 wealthiest households paid 18.1 percent of their total income in federal income tax in 2008; however, in 1955 they had paid 51.2 percent. By another IRS measure, after adjusting for inflation, the top 400 in 2008 reported incomes that were 20 times the incomes of the top 400 a half-century before.
2) The Center on Budget and Policy Priorities found that the effective income tax rate for the top 400 taxpayers declined by nearly half in only a decade, even as their pre-tax income had grown five times larger. The top 400 households paid 16.6 percent of their income in federal income taxes in 2007, down from 30 percent in 1995.
3) MIT economist Peter Diamond found that in 2007 the top one percent, on average, paid 22.4 percent of their incomes in taxes
4) According to the Congressional Budget Office, gaps in after-tax income between the richest one percent of Americans and the middle and poorest fifth of the country more than tripled between 1979 and 2007.
As to how wealth has become concentrated among the economic elite in the country, there are several measurements, which, though they have some variations due to how weights are assigned, paint a pretty clear picture of the situation.
Economist Leon Friedman has calculated that the top one percent of the population owns 35 percent of the nation’s wealth and the top five percent owns 62 percent. Economist Joseph Stiglitz says the nation’s top one percent takes in nearly a quarter of the income and controls 40 percent of the wealth. He further claims that their incomes have risen 18 percent since the year 2000.
The Economic Policy Institute calculates that the richest five percent claims 63.5 percent of the nation’s wealth and the richest 20 percent claims 84 percent.
As a very dramatic illustration of how under-taxed are the individual households and corporations having $1 million or more in income each year, the Institute of Policy Studies has found that if they were paying taxes at the same rate as they did in 1961, there would be an additional $716 billion in revenues to the national government each year.
Turning now solely to corporations, their contribution to the revenue of the national government and to state governments has declined significantly in the past six decades. In the 1950s, the corporate sector accounted for an average of 27.6 percent of all federal revenue; however, in 2010 it was 8.9 percent. Census Bureau data puts the corporate share of total state taxes at 10 percent in 1980 and 5.9 percent in 2010.
According to a 2008 Government Accountability Office report, two-thirds of corporations in the United States do not pay any federal income tax.
While corporations are carrying an ever declining share of the costs of running the nation’s governments, their profits are coming more heavily from their own workers: writing in the Washington Post in July 2011, Harold Meyerson says 75 percent of corporate profits come from declines in wages and benefits
In the first two quarters of 2011, Corporate America is reputed to have socked away nearly $2 trillion.
The ultimate economic royalists today, however, are the hedge fund managers. A single hedge fund manager earned $4.9 billion in 2010; also, the top 25 Wall Street hedge fund managers made a little over $22 billion in 2010, according to a survey by AR magazine.
As previously demonstrated, the U.S. taxpayer is not being taxed too much in regard to federal income tax; moreover, in a representative form of government the people are responsible for the actions of their representatives and it was the people’s acquiescence in their legislators’ actions which caused the huge run-up in the deficit. So, in the spirit of “we’re all in this together” and taking collective responsibility, the revamped tax system outlined below is designed to raise tax rates at all taxing levels. A proposed new taxation structure will be presented in the next blog.