This topic has been brewing for quite a while ever since the days of the primaries where Bernie Sanders campaigned on making the wealthy pay “their fair share” and then proceeded to spout “speculation tax” nonsense (that had been tried and failed in Sweden before) and a carbon tax while at the same time saying that we should expand health services. In the Sanders vs. Cruz Heatlchare Debate, Senator Cruz said this
Let me put it in perspective. All of the federal income taxes we pay today are about $1.5 trillion a year. $2.5 trillion means every one of us paying income taxes would have to about triple what you pay in income taxes to get an additional $2.5 trillion.
Now, Bernie no doubt is going to come back and say, no, no, no, none of you are going to pay. Just the rich. Well, how about if we took every person that makes over $1 million a year and confiscated 100 percent of their income, took every penny that they make. That would raise only enough money to fund Bernie’s plan for five months. – [Source Transcript]
I don’t know where Cruz is getting his numbers for this claim and frankly I don’t care. I bring it up because it seems that the implication is that Sanders believes the poor are paying either their “fair share” or more than their “fair share”. Granted, the quote doesn’t mention the poor at all (outside of the phrase “you”, possibly) so how do I reason this implication? Based on context at the time of writing (that line is for the future historians reading this blog after I become President of the galaxy) the implication is that the wealthy pay too little. And you can reason this out as well even without context. Why would someone complain that the wealthy pay too much and then advocate for higher taxes on them? It doesn’t make sense. In addition, I feel that if everyone else were not paying their fair share, the argument would be “get everyone to pay their fair share” rather than “make the wealthy pay their fair share”. And I don’t believe Senator Cruz is incorrect in his assumption because I followed the Sanders Presidential campaign and Sanders was all about taxing the wealthy and expanding benefits for the poor.
First, let’s look at some sources. The first is some Pew Research data and the other is the wikipedia page on U.S. Income Tax. I use the income tax example because that’s what the Pew Research data focuses on, while mentioning the increase in payroll taxes over time.
On the surface, I’d probably say that the wealthy pay more than their “fair share”. Why? Because the United States (income) tax system is progressive in nature. The more you make, the more you get taxed on that extra you make. I’ll demonstrate this with an example with easy numbers. You are taxed 10% on income up to $100 and then at 20% for amounts over that. If you make $100, you pay $10, a tax rate of 10%. If you make $200, you pay $30, $10 from $0-$100 and then 20 from $101-$200. So your tax rate for making double goes from 10% to 15%. You might be tempted to say that the percentage increase isn’t much considering you now make double, but you’re forgetting the raw numbers. You make double the money, but you pay triple the money.
And look, while I am a bit of a free market libertarian, I’m not saying that there’s anything excessively wrong with such a tax system. And yeah, the example was vastly simplified, but it has the core tenets of a progressive tax system in place. The more you make, the more you get taxed on that money over these breakpoints.
So what we get – is that as you make more money, your tax rate will go up. It always goes up because there is no bracket with a lower tax rate than one above it. You will never see 10%, 20%, 15%, 30%. It will always be 10%, 15%, 20%, 30%. So no matter how wealthy the top 1% is, they will always have a higher income tax than you because they have more taxable income than you.
But sure, let’s just plod along and see what we get in the way of an income tax argument with actual numbers.
“All told, individual income taxes accounted for a little less than half (47.4%) of government revenue, a share that’s been roughly constant since World War II.” – Pew Research
According to the Pew Data, the people making $100k and above pay are estimated to pay for about 75% of our taxes, despite making up about 20% of our households (in 2007) (source). I would be highly skeptical of this number jumping to 75% in 10 years but you can try to prove me wrong.
Why Do We Care?
So what’s this all about? Why do we even care whether or not the wealthy are “paying their fair share”? While there are probably some talking points by the left that I could quote, I’m going to propose what I think this is all about – social programs and the deficit. United States Federal Debt seems to be around 20 trillion dollars. Let me just put down all of the zeroes for you so you can get an idea of how deep in the red we are.
The largest problem with the debt is (I would guess) the deficit. Which all of us should understand as the money that you’ve agreed to pay but do not have. You can have debt without a deficit and you can have a deficit without debt. I think the simple way to think of debt is as the accumulation of deficit. So what are we looking at in terms of deficit? By the same source, the estimated deficit for FY 2017 is $504 billion dollars.
We care because it’s difficult to justify spending more money without generating more revenue. And it’s difficult to expand current programs without either cutting other programs or collecting more revenue.
I’ve taken the liberty of generating a graph of deficit as a percentage of GDP. It makes more sense to have a higher deficit with a lower GDP.
And as we see, my prediction was correct. When President Obama took office, we were coming out of a recession and the GDP was some 4 trillion dollars lower than it was in 2016. But in having these deficits, our national debt has skyrocketed, nearly doubling over Obama’s two terms.
I feel it would be remiss of me to neglect mentioning that President Obama may have ‘almost’ doubled the national debt, but so did President Bush II. President Reagan tripled it. In fact, the trend among the past few presidents seems to be that the republican presidents contribute more to the debt (percentage-wise) than the democratic ones, but that’s just me playing politics I guess.
Even the deficit for President Trump’s first year in office is estimated to be higher than the lowest deficit during the Obama years. But as a side note… if we have the same GDP that we had in 2016, (it will probably go up) then we STILL see a lower deficit as a percentage of GDP over every single Obama year, coming in at 2.1% compared to Obama’s lowest at 2.8% (it’s still higher than the last Bush year of around 1.1%). It’s unfair to give President Trump any credit for that though, as his first fiscal year will be in 2018, not 2017. So we’re still under Obama as far as budget is concerned.
This analysis means nothing by itself, really. Because it’s one thing to point fingers and say President Obama’s spending money that we don’t have, and another thing to question what he’s spending it on. The stimulus package, unemployment benefits, more military spending, etc. are all nice things to have. So I guess the question at the end of the day is if you could take away the spending and the benefits, would you do so?
But let’s take that estimated deficit for this year and say it’s about 500 billion dollars. Let’s look at the number of tax returns in the 33%+ tax bracket (dollar total varies based on status, but it’s around $200k). If we tax all of these individuals for $200k regardless of total income, how much money do we get?
Using the chart for taxable income (why would we calculate based on non-taxable income?) from the IRS for 2014, we see that we get around 1 trillion dollars. Which would pay for double the deficit, at the cost of 3 million returns, 2.4 million of which are married couples (so, 2.4 million families) lying at the border of $200k.
Let’s dig a bit deeper though. We’re most concerned about the people lying at the border, right? How much tax do they really pay? Well, if you take the revenue generated by taxing the 33% and higher brackets, you get about $400 million, of which the 33% bracket pays about 25% of ($111 million). The 39.6% bracket pays the bulk of that, at around 60%.
My guess is that if you’re wealthy enough to be in the 39.6% bracket, you’re so obscenely wealthy that you wind up paying more tax. Who knows.
Most of that money comes from couples filing jointly, about 90%. I’m not quite sure where I’d like to go with this analysis, it’s just something I wanted to point out. It’s possible, but it’s not going to pay the debt any time soon (it would take 40 years with current spending).
I’d like to go one step further before I come to my conclusion. I’d like to evaluate what I’m going to call a 50-50 analysis since I don’t know if it has an official name. I’m going to evaluate the number of tax returns such that the revenue generated by these returns (by bracket) equals that of the other bracket. I will neglect capital gains for this analysis (as I did the one before) because of what (my understanding of) capital gains taxes are.
So let’s take the poorest and compare them to the wealthiest. The 10% bracket generated $75,927,732 compared to the 39.6% bracket which generated $227,474,052. The 10% bracket is heavily outweighed by the 39.6% bracket, so let’s tack on the 15% bracket, generating $229,998,073, which outweighs the 39.6% bracket… [math ensues]
And what we end up with is this (and I’m actually quite surprised by this result). The brackets necessary to balance each other out are the 10%, 15%, and 25% brackets compared to the 28%, 33%, 35%, and 39.6% brackets. The totals are $490,067,188 to $412,524,138. Much closer to a 50/50 split than I thought, coming out to 54.29/45.71
“Now just hold the phone, Artemis! From what I see, the poor pay more than the wealthy!” Ehh, technically yes, But there are also a lot more poor people than grossly wealthy people. The number of returns for people in the lower-half is substantially higher than that of the higher half, with around 101 million returns for the lower have compared to around 9 million for that of the higher half. So the higher half pays 10x as much on a per return basis than that of the lower half. And all of this is ignoring capital gains taxes which are likely heavily slanted against the wealthy compared to the poor.
I’m self-employed, I make around $16,000 a year. You take take ten of me and you get well past the 25% bracket, you actually get squarely within the 28% bracket for a single person. And I know that anecdote isn’t really an argument, so let’s use the federal minimum wage. A full-time federal minimum wage worker makes $15,000 a year, and 10 of them is also squarely within the 28% bracket (for singles). So no matter how I cut it, it seems fair. 10 of me would make 10x as much money and I would flip from my side of the ratio to the other. Ironically enough, you only really need about 6 of me to flip sides of the ratio, which means that the wealth are actually overpaying (through this analysis).
No matter how I cut it, I can’t help but get to the result that the wealthy are not only paying their fair share, they’re paying more than their fair share. So I don’t see the need to start increasing the taxes on the wealthy. I think if anyone wants to take a good stab at the deficit, the first place you hit is the military (Amdahl’s Law). But we live in the United States so I don’t think that’s likely to happen any time soon despite spending double that of China and totaling that of the four countries that follow us in terms of total spending. Despite China spending only 1.9% of their GDP on the military, we spend 3.3% (source). I dunno, shoot me.
Of course, you’re more than welcome to poke at my analysis. I’m not tax expert, I’m just a robot in a cave looking at numbers. If I’ve made any mistakes in my analysis, or if you just think it’s terrible, please let me know in the comments or by email. As always, I welcome criticism. Thanks for reading.