Taxes are unpleasant and unfair. We all know this. And our friends in government work hard to keep it that way. The only thing about taxes that all Americans can agree on is that someone else should pay them.
Perhaps we can learn something by examining how much we pay in taxes, who pays them, and how our tax payments have changed in the last 20 years or so. We can do this pretty easily, thanks to one of our tax-supported government agencies, the Internal Revenue Service. Every year it examines all the returns that are filed and analyzes changes in the patterns of tax payments. The latest year for which the data is complete is 2005. The basic data is available in the imaginatively titled work, “Individual Income Tax Rates and Shares, 2005.” Here are the key lessons of that data:
Historically, it’s basically same-old, same-old. In 2005 those of us who paid income taxes collectively paid 13.6 percent of our income. Some paid more. Some paid less. But the average burden wasn’t exactly overwhelming.
In fact, for all the drama about the Bush tax cuts, the reality is that our tax burden is about the same today as it was before Bill Clinton was elected president. In the 7 years before B.C., our average tax rate was 13.86 percent. In 1992 we paid taxes at an average rate of 13.7 percent— about the same as the 13.6 percent we are now paying.
During the eight years Bill Clinton was in office, the average tax rate rose from 14.1 percent (1993) to 16.1 percent (2000). In the Bush years since then, the average tax rate has declined from 15.2 percent to 13.6 percent.
Do you see high drama here? Do you see gigantic change?
Today, fewer people pay income taxes. In 1986 Americans filed 103 million federal income tax returns. Of those, 84 million had to pay some taxes. That’s 81.5 percent of all returns. By the time Bill Clinton took office, the percentage of filers paying taxes had declined to 75 percent. During the Bush years, the percentage of filers who paid taxes continued to decline. It fell to only 67.4 percent in 2005.
This is not a minor number. In 2005 some 134 million American households filed tax returns. Only 90 million of them paid any taxes. While the number of households filing returns rose by 5 million, the number of households actually paying income taxes fell by 6 million. Basically, 11 million lower-income households don’t have to pay income taxes that would have had to pay taxes before the Bush tax cuts.
Of course, the federal income tax isn’t the only tax that we pay. Anyone who works pays the employment tax, a stiff 15.3 percent of wage income. Republicans tend to forget this.
Today, the rich pay more; the poor pay less. Bush tax rate cuts notwithstanding, those with high incomes continue to pay at much higher tax rates than those with lower incomes. They also pay much more of the total tax bill, a reality that has escaped both Hillary Clinton and Barack Obama. Only 953,000 taxpayers— about 1 percent of the total who paid taxes— paid at the top 35 percent tax rate in 2005. They paid $315.4 billion in taxes on their $1,094 billion in income.
The most common marginal tax rate is 15 percent. That’s the rate paid by 54.4 million taxpayers. This means the typical taxpayer pays at less than half the tax rate of the top earners. The second most common marginal tax rate is 10 percent. About 25.5 million taxpayers pay taxes at that rate. This group pays taxes at one-third the rate paid by the highest-income taxpayers. So of the two-thirds of all households that pay anything in income taxes, about three-quarters pay at 15 percent or less.
Another 22 million, 3.7 million and 1.5 million households pay income taxes at marginal rates of 25, 28 and 33 percent, respectively. In the year 2000 this top 25 percent of all taxpaying filers paid a whopping 83.6 percent of all income taxes. By 2005 they paid 85.6 percent of all taxes. So in spite of tax rate cuts for the well-off, the share of taxes paid by the well-off has risen.
What does this all mean?
Simple. When political talk turns to tax “fairness,” none of the candidates mentions where a high income begins. So I thought you might want to know. You were in the top 25 percent of taxpayers in 2005 if your taxable income exceeded $61,055.
Millions of Americans have no idea what fat cats they are.
On the web:
Individual Income Tax Rates and Shares, 2005
http://www.irs.gov/pub/irs-soi/05inrate.pdf
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(c) A. M. Universal, 2008