Cutting through the obfuscation about taxes

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.


  1. unbound says

    “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.”

    This resonates well with the ill-informed crowd that regularly watch Faux News. It needs to be fought with an equally simple language such as:

    Mitt Romney paid 13.9% in federal taxes on income of over $250 million in 2010. What percentage of your income did you pay in federal taxes in 2010?

  2. says

    The Romney campaign seems especially prone to bad math (on purpose). Take a look at the venn diagrams on his site mittromney dot com, where they show linear relationships using said venn diagram. Aside from the correlation fallacy, just what the hell…

  3. Kevin says

    Yeah, I just heard on Fox that Romney’s plan would decrease taxes on the American people. While it is true that the average would decrease, it would increase for the vast majority of people and decrease only for the very few on the top. Yes, let’s take more money away from consumers and hand it to people who are sitting on their money because there isn’t enough demand, surely that will help the economy /sarcasm. Stupidity at its best.

  4. fastlane says

    In the comments there, it’s been noted that some of the values have been corrected, and the table retracted. I didn’t dig to see how significant the revision is.

  5. iknklast says

    And in many cases, sitting on it somewhere else. They park their money in another country, while they live in luxury here, because that money is hidden from any taxes at all.

  6. robb says

    if you ignore the percentages of what poor and rich pay in tasxes and look at the amount instead, rich people can pay hundreds of thousands while poor just pay thousands. just comparing amounts like that seems to show taxes are inequitable and resonates with the faux news demographic.

    my question to readers here: what are good arguments that show that having the top 10% pay 70% *is* fair? arguments that are hard to refute.

  7. itzac says

    How does that 70% compare to their share of income? I suspect the top 10% earn much more than 70% of income.

  8. itzac says

    There’s also marginal utility of the dollar: $1000 is worth a good deal more to someone who makes $30k/yr than someone who makes $250k/yr.

  9. Mano Singham says

    Good point. I suspect that while it may change the numbers here and there, it will not be sufficient to nullify the point of this post. But it is worth looking out for the corrected table just to be sure.

  10. Kevin says

    It all boils down to a functional society. Suppose you say that everyone should pay the same amount, that would be the ‘fair’ thing to do. After all, that is what would happen if you want the top 10% to pay 10% of the bill. Well, then you have someone being unemployed having a bill that is equal to someone making $1,000,000. The total bill comes to about $7,700 per person.

    Now, it might not be ‘fair’ to make a baby pay that much (or maybe a 10 year old with a hundred grand in debt wouldn’t be a problem to you), so lets restrict it to those over 18. The bill per person is then a little over $10,000. Poverty line for one person: ~12,000 (~10,000 tax bill). Poverty line for two person household: ~15,000 (~20,000 tax bill). The poverty line increases by smaller margins thereafter. Lest not forget that about 15% of the population is under the poverty line. Do these people simply become homeless, do they go into debtors prisons? Either way, its a lose-lose all around.

    Lets say that you want to attain higher education. Add 40,000 to your degree plus interest for the loans that you had to take out for paying taxes. OK, maybe America should ditch higher education on this system and just have Americans study in other countries.

    Lets say we don’t want the brain drain and only make those who are working pay taxes. It then comes out to about $15,000 per person. We run into troubles with minimum wage again. Someone on minimum wage now has no incentive to work and even if they did, they would not be able to sustain working. So we now narrow it to people making above a certain amount (disregarding the other problems associated with it), say $50,000. Uh, oh. The bill comes to about $45,000 per person. The more you raise this threshold, the bigger the bill per person becomes per person.

    Anyway you cut it, if you want people to pay the same share, you need to ruin the country based on our current situation (if everyone made the same amount,then the top 10% of workers would foot 10% of the bill, which would happen with a progressive system as well; the problem is the income inequality). I don’t see it as a matter of ‘fairness,’ I see it as a matter of outcomes. Some of those outcomes are better for the economy and society and some are worse. If you think the top 10% paying 10% of the taxes is ‘fair,’ I won’t disagree with you, but I would consider you an idiot if you actually tried to implement it.

    *Not particularly directed to you, any mention of ‘you’ is to a hypothetical third party.

  11. says

    The most important thing to remember about the Buffet “rule” is that Buffet didn’t whip out his checkbook and write a check for what he agrees that he should have been paying all along.

    Shorter Buffet, “I’ve got mine, fuck you.”

  12. says

    Easy: “Look at the ‘take home amount’ as the total amount of money you end up with. That’s what matters, really. Everything else is window-dressing. If I make $2m and pay 90% in taxes I end up with $200,000 take home money at the end of the year. If you make $20,000 and pay no taxes at all, you end up with $20,000 take home money at the end of the year. Which would you choose?”

  13. Mano Singham says

    I don’t think that there can be objective measures of determining fairness when it comes to the issue of taxes. I think the best way is to find some way of implementing John Rawls’s’ ‘veil of ignorance’. (If you enter John Rawls in the search box, you will get all my posts on this topic.)

  14. aspidoscelis says

    Part of the difficulty is that nothing about the top 10% is fair to begin with. Our distribution of wealth is deeply unfair. To demonstrate that taxing the wealthy more heavily is a move towards fairness, that’s where you have to start. Unfortunately, it’s an indirect argument and a lot of people don’t like that.


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