Kruse Kronicle

Taxing Questions (Reprise)

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by

mwkruse
in

(This post was originally posted on Feb. 29, 2008. I have had more hits on this post than any other post in six years blogging and that stems from the fact that Greg Mankiw provided a link at his site back to this post. With todays' public discussion about taxes today, and in honor of tax filing day, thought I would give a reprise .)

Greg Mankiw links this report based on Congressional Budget Office data. Here are my own charts created from the data:

 

Totaleffectivetax

The 2005 total effective federal tax rate as a percentage of the 1979 rate:

  • Top Quintile = 92.7%
  • Fourth Quintile = 82.1%
  • Middle Quintile = 76.3%
  • Second Quintile = 69.2%
  • Bottom Quintile = 53.8%

The effects of the Bush Tax Cuts? The 2005 total effective federal tax rate as a percentage of the 2000 rate.

  • Top Quintile = 91.1%
  • Fourth Quintile = 84.9%
  • Middle Quintile = 85.5%
  • Second Quintile = 76.2%
  • Bottom Quintile = 67.2%

As repeatedly noted, the cuts cut a greater percentage for the bottom quintile than for the top. (32.8% vs. 8.9%) Even more interesting is the total effective federal tax rate for households with children:

Totaleffectivetaxchild

The 2005 total effective federal tax rate as a percentage of the 1979 rate:

  • Top Quintile = 101.2%
  • Fourth Quintile = 85.0%
  • Middle Quintile = 76.8%
  • Second Quintile = 60.1%
  • Bottom Quintile = 14.3%

As I showed in a post last month, the top 1% of taxpayers pay 40% of federal income taxes. The top 25% of taxpayers pay 86% of income taxes.

Tax3

Finally, keep in mind the New York Times article two weeks ago that pointed out that while the bottom quintile has $9,974 in income per household a year, it spends $18,153. That means non-cash assistance (as well as draws on savings in the case of retired or unemployed payers) nearly doubles the actual income of the bottom quintile.

Rather than populist outcry over "tax cuts for the wealthy," maybe we need to look at the whole package of consequences of tax policy. Is the final objective really to have all taxes paid by the top 1% of society?

Comments

6 responses to “Taxing Questions (Reprise)”

  1. Dennis Sanders Avatar
    Dennis Sanders

    I know this will make me look like a dummy, but can you put some of this econ jargon in really simple words? For some reason, I always have issues when it comes to understanding all this stuff.
    What does “total effective federal tax rate as a percentage of the 1979 rate” mean? I take it is not the same as marginal tax rates.
    I know I sound like an idiot, but I just get confused with some of the phrases.

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

    No dumbness involved. If you don’t live this stuff, the delineations are often unclear. I keep an economic dictionary by chair for discussions at this blog. 😉
    In a progressive tax system have something like this. Here are some earnings brackets.
    $0 – $10,000 = 0%
    10,001 – 20,000 = 10%
    20,001 – 30,000 = 20%
    and so on.
    Say you made $10,001. You will pay 10 cents … 10% of the amount you made over $10,000. Your effective tax rate would be 10 cents divided by $10,001 … a minuscule percentage. Your marginal tax rate will be 10%, the amount you will pay on the next dollar.
    If you make 15,000 dollars your taxes will be $500 (5,000 X 10%). Your effective tax rate then is 500/15,000, or 3.33%. But your marginal tax rate, the percent you will pay on the next dollar, is still 10%.
    Does that make sense?
    So if you made
    When you pay taxes, you pay 0% on the first few dollars. Then you pay a rate for the next several dollars. When you

    Reply
  3. Dennis Sanders Avatar
    Dennis Sanders

    Okay…the lightbulb is turning on! Thanks, that really does help.

    Reply
  4. Joan McKenzie Avatar
    Joan McKenzie

    Mike, you’re amazing! You should have been a professor … maybe I would have passed econ 101!

    Reply
  5. Dana Ames Avatar
    Dana Ames

    Mike,
    if I understand correctly, it seems that the graph is about how much people with certain incomes are supposed to pay (their tax rate), but not necessarily how much they actually pay (the actual amount that goes to the IRS).
    I’m sure you’ve seen the articles lately about how the richest folk pay much less than their earnings would indicate they should, due to loopholes, tax shelters, etc.
    To me, there is a great discrepancy here. Are the wealthiest actually paying what the tax rate would indicate they should pay (or close to it), or are they really stiffing the govt and shifting the majority of the tax burden to those of us who are not in the bottom quintile?
    Enlighten, please. And btw, a very blessed Holy Week & Easter to the Kruse household.
    Dana

    Reply
  6. Michael W. Kruse Avatar
    Michael W. Kruse

    Dana, these are effective tax rates. So my understanding is that the percentage in the first chart is the total amount of taxes paid by people in a quintile divided by the taxable income earned by people in that quintile. The “taxable income” is after all the deductions, loopholes, etc. It is what people actually earned divided by what they actually earned.
    Yes, the rich would pay more taxes if we were without the loopholes and shelters, but the “taxable income” would also therefore increase. This would mean that an even greater share of all federal taxes would be paid by the wealthiest persons but I doubt that effective tax rate would change.
    I was interested to learn the the top 1% of earners earn something like 20% of all income and pay about 21% of all taxes. The bottom 50% of earners earn about 3% of all income and pay about 2% of all taxes. The proportion of taxes paid tracks pretty close the proportion earned. Is that good or bad? I guess that depends on our goal.

    Reply

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