As the November election approaches, there will a lot of noise about taxes and the so-called ‘Buffett rule‘, named after Warren Buffett who has been saying that it was wrong that rich people like him should pay taxes at a lower rate than people who earn much less, like his secretary for example. This will intensify as the end of the year approaches and the Bush tax cuts are set to expire.
This has generated squeals of protest similar to this this priceless item from last year from the impressively named John Steele Gordon about how millionaires are so misunderstood, that they are not really rich but are just like the rest of us, and picking on them is so mean and unfair, so please stop it.
The media lackeys of the oligarchy are combating the rising calls for greater taxes on the rich by trying to confuse the issue. Take for example, the popular complaint of the rich that “the top 10% of income earners provide 70% of all income taxes” and that this implies that the current tax system is unfair to the rich. Some time ago, Chris Hayes pointed out that first, this statistic only includes federal income taxes and excludes state taxes, payroll taxes, and property taxes. Second, the ratio of taxes paid by the rich to that paid by the rest is largely determined by how income is distributed, not by the rates.
For example, if only 1% of the population earned enough to put them above the minimum taxable income, then 100% of the taxes would be paid by this 1%. Does that mean the tax system is unfair to the rich or is it an indication of a highly skewed income distribution? As another example, some are saying that too many people are not paying any taxes at all and that this is so unfair and what should be done is increase the number of people paying taxes. Again, the reason that so many people pay little or no federal income taxes (though they do pay state and local and sales and payroll taxes) is because they earn too little, not because they are somehow finagling the system. Again, does that mean the tax system is unfair to the rich or is it an indication of a highly skewed income distribution?
Even under a flat tax system, which is what the rich dream about achieving, the rich in the US will pay much more than the poor because income is heavily skewed towards the few rich, and that inequality is increasing.
Another attempt at confusion comes via the claim that it is not true that the rich pay income taxes at a lower rate than the poor. But few are claiming that. Not all rich pay income taxes at a lower rate than all poor people. What is true is that a significant number do. Via Paul Krugman, I came across an interesting table that showed the distribution of cash income and taxes paid in the US.
(Note that ‘mean’ is the same as average, while ‘median’ is the value for which 50% lie above the value and 50% lie below. So the sequence of numbers 1,2,4,10,13 will have a mean of 6 but a median of 4. In general, if you have a distribution of numbers that is fairly symmetric about some central value, then the mean and the median values will be very close. If the mean is much greater than the median, that means that the distribution is skewed towards the high end, while if the mean is much lower than the median, the distribution is skewed towards the low end. When it comes to income distribution, the median is a much better gauge of equity than the mean since a very few very rich people can skew the mean upwards, giving a false sense of general prosperity.)
Note that the table only considers cash income and federal income and payroll taxes (i.e., Social Security and Medicare) and includes the employer portion of the payroll taxes as well. The employee portion of Social Security taxes consists of 6.2% of the employee’s salary (up to a maximum salary of $110,100 in 2012) and 1.45% of all salary (without a cap) for Medicare. The employer matches that, to give a total of 15.3%. (In 2010 the employee portion of the social security tax was reduced to 4.2% to supposedly serve as a stimulus.)
To understand how to read the table, here are some examples. The table says that half of all people whose income is in the $40,000-$50,000 range (i.e., close to the median income) pay federal income and payroll taxes that take up at least 13.1% of their income. Meanwhile, 25% of millionaires pay federal income and payroll taxes that take up at most 12.6% of their income. So a quarter of all millionaires pay taxes at a lower rate than half the people earning the median income.
As another example, 50% of people earning in the $100,000-$200,000 range pay at least 19.5% in taxes while as much as 40% of millionaires pay at most 19.1% of their income in taxes.
At the most extreme, 40% of people who earn less than $10,000 pay at least 5.2% of their income in taxes while 10% of millionaires pay at most 4.2% of their income in taxes.
So the point is that there are a lot of very wealthy people who pay a smaller proportion of their income as taxes than those earning much less.
And you can be certain that Mitt Romney, who paid just 13.9% on income of over $250 million in 2010, is one of them.