On a recent flight, I remembered the inscription on the Internal Revenue Service building in Washington:
“Taxes are what we pay for a civilized society.”
I remembered it because there seems to be a lot less civilization going on these days in the USA. If you pay any attention to the constant stream of stories about people misbehaving on airplanes or going crazy at restaurants and bars, we Americans have become an uncivil bunch.
Seriously.
Need I mention the shouting match the Internet has become? Or that our elected officials all seem to be taking their etiquette lessons from World Wrestling Entertainment? And what is it that has made actors on streaming video series unable to speak a single line without a four-letter expletive about a very popular sex act essential for human reproduction? (Skeptics should check the new season of “Goliath” on Amazon Prime.)
It gives me an odd thought. Maybe we need higher taxes. Clearly, our current level of taxation isn’t enough to produce a “civilized society.”
Preventing a nation of dolts
I know, you think I’m joking.
You think I’m writing with tongue in cheek.
Well, maybe. Maybe not. There’s got to be something to deter us from becoming a nation of aggressive, in-your-face dolts. It’s certainly something we should be talking about rather than making the knee-jerk assumption that we are all horribly burdened with taxes.
To find some perspective on what we pay in federal income taxes, I used two websites to (1) calculate the effective tax rate on different levels of income and (2) see where each level of income stood, ranked as a percentile.
Surprise! A reasonable level of taxation. Kind of.
The results suggest, at least as far as the federal income tax is concerned, that our tax system is both reasonable and graduated for those who actually work for a living.
Witness:
- The lowest earners pay no income taxes.
- Workers with incomes around the median pay (around $50,000) at an effective tax rate under 10 percent.
- Workers in the top 1 percent (over $321,000 a year) pay an effective rate of at least 25 percent. (See table below.)
Also striking is how fast the income air gets really thin:
- An income of $12,400 allows you to pay no income tax. But it also means you are in the bottom 5 percent of all earners.
- By $30,000 of earned income you’re up to the 26th percentile and paying an effective tax rate of 6.38 percent.
- Go a bit higher and you’re up to the 52nd percentile with an income of $50,000, paying an effective tax rate of 8.63 percent.
- At $75,000 in earnings you’re doing better than 73 percent of all earners and your effective tax rate is 12.75 percent.
- Your income has to exceed $100,000 a year before your effective tax rate exceeds 15 percent, the preferred rate on capital gains and dividend income. At that level of income, you’re earning more than 85 percent of all workers.
- Even at $400,000, an income that puts you well into the top 1 percent of earners, your effective tax rate is no more than 27.61 percent.
Federal Income Tax Rises With Income |
|||
| This table shows the effective and marginal tax rates for levels of income from $10,000 to $400,000 in percent. It also shows the percentile ranking of income. The table is based on earned income and single taxpayer returns. | |||
| Income
Level |
Income Percentile | Effective Fed TR | Marginal TR |
| $10,000 | 3 | 0 | 0 |
| $12,400 | 5 | 0 | 10 |
| $15,000 | 7 | 1.73 | 10 |
| $20,000 | 12 | 3.80 | 10 |
| $30,000 | 26 | 6.38 | 12 |
| $40,000 | 39 | 7.79 | 12 |
| $50,000 | 52 | 8.63 | 12 |
| $60,000 | 62 | 10.44 | 22 |
| $75,000 | 73 | 12.75 | 22 |
| $90,000 | 80 | 14.29 | 22 |
| $100,000 | 85 | 15.10 | 24 |
| $120,000 | 89 | 16.59 | 24 |
| $140,000 | 92 | 17.65 | 24 |
| $160,000 | 95 | 18.44 | 24 |
| $180,000 | 95 | 19.25 | 32 |
| $200,000 | — | 20.52 | 32 |
| $250,000 | — | 23.18 | 35 |
| $300,000 | — | 25.15 | 35 |
| $350,000 | 99 | 26.56 | 35 |
| $400,000 | 99 | 27.61 | 35 |
| Sources: https://smartasset.com/taxes/income-taxes and https://dqydj.com/salary-percentile-calculator/ | |||
These figures don’t suggest a crushing burden to me. Indeed, when I pick up my completed tax return every year, the only burden I feel is the incredible thickness and weight necessary to report an uncomplicated but very adequate income.
So what could be taxed at higher rates?
The problem here is that while earned income is taxed on a reasonable and graduated basis, all the other sources of income aren’t. So the opportunity to increase civilized society by increasing taxes will have to come from other sources of income.
Yes, there are other sources. They are rare for most people, but substantial for the folks who have most of the assets. Here’s a short list of items that allow those with the greatest wealth to pay taxes at rates the less fortunate envy.
- Capital gains get a soft touch with tax rates of 15 to 20 percent.
- Qualified dividends don’t pay more than 15 percent.
- Real estate, residential or investment, is a fabulous tax dodge since you can take cash out tax-free by borrowing.
And don’t forget an old favorite: Cheating
Beyond that, we’ve got the other way to pay lower taxes: cheat. Earlier this year IRS chief Charles Rettig estimated that a stunning $1 trillion a year went uncollected through tax cheating. Most of the cheating, he said, was being done by wealthy individuals and corporations.
Sounds like providing the IRS with a bigger budget is a straight shot for a more civilized society.
Related columns:
Scott Burns, “Taxes: Don’t Raise the Bridge, Lower the Water,” 2/15/2020 https://scottburns.com/taxes-dont-raise-the-bridge-lower-the-water/
Scott Burns, “Taxes and the Long Road to Richistan,” 2/1/2020 https://scottburns.com/taxes-and-the-long-road-to-richistan/
Sources and References:
Smart Assets tax calculator: https://smartasset.com/taxes/income-taxes
DQYDJ salary distribution calculator: https://dqydj.com/salary-percentile-calculator/
Rosy Cordero, “Goliath” Final Season to Premiere This Fall on Amazon Prime Video, 7/27/2021 https://deadline.com/2021/07/goliath-season-four-premiere-amazon-prime-video-1234800636/
Alan Rappeport, “Tax cheats cost the U.S. $1 trillion per year, I.R.S. chief says,” https://www.nytimes.com/2021/04/13/business/irs-tax-gap.html
This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.
Photo:
(c) Scott Burns, 2021
3 thoughts on “Are Income Taxes Too High?”
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Scott,
Is it possible for you to comment on the myriad tax credits and other benefits that “lower” income earners receive that essentially drive their effective tax rates to zero. Is there any truth to the argument that the bottom 50% of all wage earners pay essentially no income taxes?
I would be interested to see a breakdown on true effective tax rates, if possible.
This may be very similar to all the arguments that marginal rates pushed 90% in the past. Did anyone pay 90% in taxes? The number and value of deductions were enormous also during those days.
With all the programs we have the answer to your question is really complex. At the lowest end of the income scale, for instance, it is possible to pay nothing in actual taxes but to face a marginal tax rate of 100 percent. The reason for this is that benefits that are provided for the poor are removed at actual income rises.
One study, done some time ago but probably still valid, found that “all-in” the poorest paid the highest effective marginal tax rates while the richest paid the lowest marginal tax rates. And the effective marginal tax rate for the multitude between the poorest and richest was remarkably flat.
The one thing we know for certain is that if marginal tax rates for the highest incomes are raised too high, that income will find a way to disappear. But if, as some say, we are in a “winner take all” economy, we’ll need to find a way for the winner to pay all the taxes…
As a long time admirer of your work, I am a little disappointed by “Are Income Taxes Too High?” although your thoughts are interesting.
a. Take Capital Gains: If I bought a stock in January 2005 for $191 and sold it in January of 2020 for $258, I would have a taxable gain of $67. But if I go look at the Department of Labor’s Historical CPI Chart (https://www.bls.gov/cpi/tables/supplemental-files/historical-cpi-u-202109.pdf), I find the CPI for January 2005 was 190.70 and the CPI for January 2020 was 257.97. I had no real gain at all because the basket of goods that I bought in 2005 now costs $67 more in 2020. Fairness suggests one should be allowed to adjust their basis by the change in CPI before calculating a taxable gain.
b. I believe the maximum tax rate on “Qualified Dividends” is 20%. Please correct me if I am wrong.
c. You also might include mention of the Net Investment Income Tax of 3.8% imposed on people of greatest (and not so great) wealth.
d. I do find it odd that people of means can borrow against their assets in order to get stepped up basis at their death in order to sell the assets at “no gain” after death to pay off the loans. On the other hand, paying estate tax and capital gains tax at death does not leave much for the kids.