A fair assessment of the distribution of tax burdens requires a broader scope

As Election Day 2012 bears down on us (or so one would think given the constant media swirl) one of the hottest topics is tax reform, and within that, one particular focus has been on fairness in the distribution of the tax burden.  With recent broadsides across the aisle over the proposed “Buffett Rule” there has been a particular focus on the perceived unfairness in the distribution of the tax burden in this country across income groups.  In a recent article by Curtis Dubay for The Heritage Foundation, Mr. Dubay asserts that top income earners (the top 10%) paid 70% of Federal Income Taxes in 2008, while the bottom 50% paid a mere 3%.  His central chart illustrating this disparity would make anyone balk at how unfair tax distribution appears to be.  This representation is somewhat misleading, however, if a few other factors are taken into consideration.

First, one must recognize that this chart is reflecting what percentage of total tax dollars were received by the government from each earning class.  Thus it is only natural that the top 1% (who earn anywhere from roughly $400k+ up to the billions) end up contributing far more on a raw dollar basis than do those in the bottom 50% of wage earners (roughly $50k or less).

For example, in a world with only 100 taxpayers, Individual A and Group B (99 individuals), if A (as the top 1% earner) makes $1m pre-tax and is at a 35% rate, A will pay $350k of taxes to the government.  If our other taxpayers in Group B make only $30k on average and are taxed at a 15% rate each, Group B will pay $450k in taxes to the government.  Thus, the government’s total tax take for the year would be $800k, of which A’s share would represent nearly 44% of the government’s tax revenue for the year–yet A’s rate was only 35% on his income.  Furthermore, if we even assumed a flat tax rate of 20% on both A and Group B, A’s share would represent $200k in taxes while Group B’s share would represent $600k.  A’s share of total tax revenues to the government would still be 25% of the government’s total take for the year.  The reason for A’s substantial share of the overall tax burden is due to his vastly larger proportionate income than any of the other taxpayers in Group B.

Indeed, looking at how income gaps have widened in the last 30 years it is no surprise that on a dollar-for-dollar basis, the top 10% are paying a large portion of the government’s annual tax revenues.  The vastly growing gap between top income earners and the middle and lower levels is discussed in great detail in a June 2010 article by Arloc Sherman and Chad Stone for the Center on Budget and Policy Priorities.

That article brushes on another reason for the apparent disparity captured by Mr. Dubay’s chart: the impact of the recession that began mid-way through 2007 should be factored in.  His chart represents 2008–a year in which the American economy shed 2.6 million jobs, the majority of which hit middle and lower income workers.  The ultra-wealthy managed not only to hang on since the crash but have actually done quite well for themselves, taking advantage of cheap equities and other investment opportunities while middle class workers struggled to keep a roof over their heads.  It is no surprise, then, that the top earners ended up contributing much more to the annual tax revenue than they would otherwise–a large number of Americans were unemployed or underemployed at some point over the course of the year.

It is also too narrow a perspective to focus just on the Federal Income Tax.  As an article by Chuck Marr and Brian Highsmith for the Center on Budget and Policy Priorities highlighted, there are a number of other taxes such as employment taxes and state income taxes to take into account, as the following graphs illustrate:

Thus, while there is much criticism out there of how much lower wage earners pay toward taxes, usually the focus is too narrow and leaves out other crucial (if not regressive–social security) taxes from the consideration.  While achieving a fair and equitable distribution of the tax burden is certainly desirable, being fooled by the rhetoric and statistics thrown about without context is more harmful to the discussion than helpful.