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Tax rates: Current vs Historical averages

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mwkruse
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Greg Mankiw's Blog: Tax rates: Current vs Historical averages

Do you think the wealthy should assume more of the tax burden for the US? Here is part of a post from Greg Mankiw:

A new CBO report gives the effective federal tax rate by income group. These numbers include all federal taxes, not just income taxes, and are expressed as a percentage of household income. …

The first number below is for 2005, the most recent year available. For comparison, I computed, and present in parentheses below, the average effective tax rate from 1979 to 2005, the time span covered in the report.

All households: 20.5 (21.6)

Lowest quintile: 4.3 (7.2)
Second quintile: 9.9 (13.2)
Middle quintile: 14.2 (17.1)
Fourth quintile: 17.4 (20.1)
Highest quintile: 25.5 (26.1)

Top 10 percent: 27.4 (27.6)
Top 5 percent: 28.9 (29.0)
Top 1 percent: 31.2 (31.7)

As Mankiw notes, the rate dropped for all brackets, yet you can see that the drop is more significant for the lower brackets than for the higher ones. That means that while the wealthy pay less as a percentage of household income, they pay a greater portion of the overall tax burden. Bush tax cuts have shifted much of the tax burden to the wealthy. I can't put my fingers on it right now, but as I recall, about 85% of federal taxes are paid by the top 50% of earners.

Comments

9 responses to “Tax rates: Current vs Historical averages”

  1. Sage H. Avatar
    Sage H.

    Michael- would you please publish another statistic? I’d like to see the % difference between what the lowest quintile and highest quintile pays relative to household income. Thanks! Sage.

    Reply
  2. Michael W. Kruse Avatar
    Michael W. Kruse

    Sage, I’m not sure if I’m getting the question right.
    The lowest quintile is paying 4.3% of household income to all taxes. The highest is paying 25.5%. The top one percent is paying 31.2%.

    Reply
  3. Sage H. Avatar
    Sage H.

    Sorry Michael, I was careless about not checking my question. Yes, that part is clear and already answered. The invisible part is how much household income in each quintile is spent on biological existence plus transportation, (neccesary for existence and going to work) and what is the taxation % relative to what is left after that. I hope this is a better question.

    Reply
  4. Michael W. Kruse Avatar
    Michael W. Kruse

    I get it now.
    I don’t have the stats readily available. I don’t think it is uncommon for people in the lowest quintile to devote 30% to rent/mortgage and 20-25% to food. This is where the Wal-Mart controversy gets interesting because what has kept basic food and clothing prices so low is Wal-Mart’s impact. This has a far greater impact on the poor for whom these items are a greater portion of their budget.
    The amount spent by the upper quintile on food and basic needs is far less. However, the wealthiest 20% aren’t spending everything they get. They invest large sums and that creates investment capital (debt and equity) for financing business. Also, most small business owners are in the top quintile because their business income (if they are sole proprietors) counts as personal income. Tax the upper quintile to heavily and you take capital out of the market, making it more expensive to borrow or raise equity, thus stagnating economic/job growth. Excessive taxation to help the poor is proverbial cutting off your nose to spite your face.
    Anyway, that is more than you asked but that is my take.

    Reply
  5. Sage H. Avatar
    Sage H.

    Very good. I think that your estimates of 30% for rent and 25% for food may reside in the second quintile, but I won’t quibble. Let’s say that for these figures, in a moderately priced metro area, a person who makes 30K/per year and has no debt, and has a job that has health insurance can have a decent car which can be maintained (or buy bus passes), eat, feed two children, have a roof overhead and pay for utilities. This worker probably spends most everything they make to get by. let’s say their household is taxed at 10%.
    Compare to the forth or fifth quintile- using the same standard to measure for what is necessary. They are taxed at 20 or 25%. Look at the total household income, see the 30K nested in there? How many 30K’s are in that household’s income? How many tax dollars are paid in this household per 30K vs. the other worker’s one and only 30K? That is my question.
    My feeble math indicates that households which earn more than 90K are paying functionally fewer tax dollars per 30K, and that is way below the fourth or fifth quintile.
    P.S.- how are you holding up with all of the storms raging across your area? we had that pattern last year and it was dangerous.

    Reply
  6. Sage H. Avatar
    Sage H.

    Well that came out all wrong too. A percent is a percent and a dollar is a dollar. The higher income person has a lot more left over, and knows how to use it. I’m just saying relatively speaking, that it doesn’t cut into their survival.

    Reply
  7. Michael W. Kruse Avatar
    Michael W. Kruse

    “I’m just saying relatively speaking, that it doesn’t cut into their survival.”
    Very true.
    “My feeble math indicates that households which earn more than 90K are paying functionally fewer tax dollars per 30K, and that is way below the fourth or fifth quintile.”
    True. But I would add that the biblical mandate is to see that the poor are cared for, not to equalize incomes or wealth.

    Reply
  8. Daniel S Avatar
    Daniel S

    This is 1979 and 2005.
    Correct me if I’m wrong, but the U.S was in a severe recession im 1979 and was dealing with years of stagflation. Why would this be a good basis in comparison. I’d me more interested in a comparison now and 1986 or 1998….

    Reply
  9. Michael W. Kruse Avatar
    Michael W. Kruse

    Daniel I not sure why Mankiw chose this time frame but keep in mind that the number in the parentheses is the average of the 27 years not a “then and now” comparison. It should capture all the extremes.

    Reply

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