A Graph-Heavy Guide To Tax Day
Happy Tax Day! Today we recognize that taxes are the price we pay for a free society, and that America is worth paying for. So you're armed with the facts in case you get randy and go out for some teabagging, here's a little primer:
First of all, people are more satisfied with the level of income tax that they pay than at any time since 1956 - with 48% believing the amount they pay is "just about right," and 61% regarding the amount of tax they pay as fair. Since a good amount of people pay no income tax, this means that the majority of people who pay anything think they're paying too much, which stands to reason, but the shift from previous years is significant, and anyway people don't necessarily differentiate between the different kinds of taxes they pay. Gallup surmises, and I agree, that the reason for this satisfaction is the Making Work Pay tax credit in the stimulus, the largest tax cut on the middle class in history, and the idea that people finally might get something in exchange for those taxes.
Now, the real problem conservatives have with taxation is that the code is too progressive and too many lucky duckies don't pay anything. And they manipulate statistics to show how terribly burdened the overclass is (the top 10% pay 72% of the taxes is a common statistic used). But the more important statistics are the percentage of total income earned by the top 10%, and therefore the effective tax rate.
When I look at the CBO's dataset on long-term tax trends, I see plenty of things that are important besides the share of federal tax liabilities. Most important is the top decile's share of the national income. In 2001 the top decile earned 37.5% of the national pretax income. In 2006 the same decile earned 41.6% of the income. In 2001, households in the top decile earned an average pretax income of $294,700. In 2006 it was $366,400.
Why should we be surprised that this group pays more in taxes? It earns more money.
Another trend is the effective tax rate. Between 2001 and 2006, the top effective income tax rate fell from 18.7% to 16%. The top rate for all federal taxes fell from 28.5% to 27.5%. So while the top decile is paying a larger share of federal taxes, it is being taxed at a lower rate.
When you add state and local taxes, most of which are flat or regressive, the share of total income and the share of total taxes match up pretty evenly. Conservatives conveniently leave this out.
And of course, a lot of these numbers don't take into account the multitude of tax breaks, loopholes and work-arounds that have made the actual tax receipts collected less fair over time.
Thirty years ago, the tax code was broadly progressive, reflecting shared contributions to public investments and our common good. Loopholes were fewer and covered such items as home mortgages that everyone could understand and appreciate.
Now the tax code is a scam. Billionaire hedge fund managers pay taxes at lower rates than their receptionists. Corporations get tax breaks for moving jobs overseas. Oil companies with the largest profits in corporate history receive annual tax breaks worth $14 billion, roughly twice the budget of the Environmental Protection Agency.
While rich people reap tax breaks, working people struggle just to keep even. Adjusted for inflation, weekly wages were lower in 2007 than they were in 1979 [...]
Income inequality is rising — measured by the ratio of after-tax income of the top one percent (1.1 million people) to after-tax income of the whole middle 60 percent (68.3 million people). Top-end taxes are declining — measured as the average effective tax rate of the top one percent. The trend lines for top-end tax cuts and income inequality since 1980 form the X in the chart on this page and in the report.
Our report explains the X. Inequality rose 144 percent; top-end taxes dropped 15 percent.
One way we could make the tax code more fair, and make the broad majority of people even more satisfied with their taxes by giving them more and better services, is by adding more marginal brackets.
It’s well known that tax rates on top incomes used to be far higher than they are today. The top marginal rate hovered around 90 percent in the 1940s, ’50s and early ’60s. Reagan ultimately reduced it to 28 percent, and it is now 35 percent. Obama would raise it to 39.6 percent, where it was under Bill Clinton.
What’s much less known is that those old confiscatory rates were not as sweeping as they sound. They applied to only the richest of the rich, because yesterday’s tax code, unlike today’s, had separate marginal tax rates for the truly wealthy and the merely affluent. For a married couple in 1960, for example, the 38 percent tax bracket started at $20,000, which is about $145,000 in today’s terms. The top bracket of 91 percent began at $400,000, which is the equivalent of nearly $3 million now. Some of the old brackets are truly stunning: in 1935, Franklin D. Roosevelt raised the top rate to 79 percent, from 63 percent, and raised the income level that qualified for that rate to $5 million (about $75 million today) from $1 million. As the economist Bruce Bartlett has noted, that 79 percent rate apparently applied to only one person in the entire country, John D. Rockefeller.
Today, by contrast, the very well off and the superwealthy are lumped together. The top bracket last year started at $357,700. Any income above that — whether it was the 400,000th dollar earned by a surgeon or the 40 millionth earned by a Wall Street titan — was taxed the same, at 35 percent. This change is especially striking, because there is so much more income at the top of the distribution now than there was in the past. Today a tax rate for the very top earners would apply to a far larger portion of the nation’s income than it would have years ago.
It's even worse at the state level - in California, you pay the same income tax rate on every dollar from $47,500 to $999,999. The genius of the marginal tax rate system, lost on conservatives, is that it rewards work over wealth, and only taxes those dollars earned above that particular marginal rate at the higher number. More than any cap on executive compensation or bonuses, this would actually promote the highest standard of living for the most Americans, and discourage the rampant inequality that helped this crisis along.
When you teabag, it's good to have the facts. Consider yourselves armed.