At a recent Senate hearing, Senator Elizabeth Warren worried that we would “let rich people keep paying taxes at about half the rate as everyone else.” (At 2:03). Senator Warren, President Biden, and other political leaders often say that people at the top are not paying their “fair share” of taxes. IS THIS CORRECT?

MAY 14, 2021 3:02PM

Tax Rates by Income Level


At a recent Senate hearing, Senator Elizabeth Warren worried that we would “let rich people keep paying taxes at about half the rate as everyone else.” (At 2:03). Senator Warren, President Biden, and other political leaders often say that people at the top are not paying their “fair share” of taxes.

I heard many similar complaints Wednesday at a Ways and Means subcommittee hearing. I testified about problems with the president’s tax plan, but the other panelists and numerous committee members focused on how federal taxation supposedly favors the rich and high earners.

As a general matter, the narrative that the well‐​off have a lighten tax burden than the rest of us is nonsense. There are certainly unjustified tax breaks that benefit high earners, such as the income tax exemption on municipal bonds. But data on overall tax rates show clearly that households at the top pay far higher tax rates, on average, than households in the middle or at the bottom. Let’s look at three authoritative data sources.

Internal Revenue Service (IRS)

Table 1 shows IRS data for average effective income tax rates in 2017 and 2018. That is, total income taxes paid divided by income for each percentile group. Income is AGI. The data is from here and here.

  • The tax rates on the highest‐​income groups are far higher than on the lower‐​income groups.
  • The data do not include the refundable portions of low‐​income tax credits, so it overstates the net taxes on the bottom 50 percent group.
  • The 2017 Tax Cuts and Jobs Act (TCJA) cut income taxes for 2018. The table shows that the top‐​end tax cuts of about 5 percent were smaller in percentage terms than cuts for the middle and bottom groups.
  • A complaint expressed at the Wednesday hearing was that top earners make out like bandits because they receive substantial capital gains, which faces lower tax rates than ordinary income. The top 0.001 percent group does report a lot of capital gains, which pushes the group’s tax rate lower than the 1 percent group. However, the tax rate on the 0.001 percent group is still far higher than the rates on the middle and lower groups.
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Tax Policy Center (TPC)

Table 2 shows average effective tax rate data from TPC along with my calculations of percent change. (Data from T20-0033 and T20-0035). These are total federal taxes, including individual income, corporate income, payroll, estates, and excises. TPC’s measure of income is broader than the IRS measure. The table shows data for 2017 and 2018, before and after the TCJA.

  • Tax rates in 2018 ranged from 3.0 percent at the bottom to 28.7 percent at the top. The highest earners have an average tax rate twice the rate of those in the middle and almost ten times the rate of those at the bottom. Senator Warren’s comment about the rich paying “half the rate” is ridiculous.
  • The TCJA cut overall federal taxes a similar percentage across the board.Note that a percentage cut in the average effective tax rate is the same as the percentage cut in actual tax dollars paid.
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Joint Committee on Taxation (JCT)

The JCT released a report Monday with various tax distribution estimates. The report’s Table 4 below shows average effective tax rates for all federal taxes, including individual income, corporate income, payroll, estate, and other. Like TPC, the JCT uses a broad income measure.

  • The average tax rate ranges from 6.3 percent on the bottom half to 32.9 percent on the top 0.01 percent. The rate on the top group is more than double the rate on the upper‐​middle income group (50–90 percentile).
  • Despite complaints that individuals at the top receive a lot of capital gains at low tax rates, the overall tax rate on the top 0.01 percent group is higher than all the other groups.
  • Just looking at individual income taxes, the average rate goes from -2.0 percent to 29.5 percent. That bottom half, on net, do not pay any federal income taxes. Rather, they receive subsidies (refundable credits) from the U.S. Treasury.
  • While the bottom 50 and 50–90 percent groups paid the highest payroll tax rates, the large income tax payments by the top groups produced overall rates much higher at the top end.

One of the panelists at the hearing complained that over the last several decades, “changes in tax policy have also tended to favor the highest‐​income taxpayers.” The chart here from the Congressional Budget Office clearly shows that statement is not correct. For all federal taxes, the average tax rate for the top 1 percent has hovered around 30 percent, while the rates on the bottom quintile and three middle quintiles have fallen.

The same panelist further claimed that over the past several decades, “reduced rates on high‐​income taxpayers have not only made the tax system less progressive but also impaired other fiscal goals.” This claim about “less progressive” is also not correct. The JCT report noted, “Since 1985, the progressivity of the Federal tax system has increased every decade.”

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March 3, 2021

President Biden c/o The White House
1600 Pennsylvania Avenue NW
Washington, DC 20500

Dear Mr. President,

______________________________

Dan Mitchell shows how ignoring the Laffer Curve is like running a stop sign!!!!

I’m thinking of inventing a game, sort of a fiscal version of Pin the Tail on the Donkey.

Only the way it will work is that there will be a map of the world and the winner will be the blindfolded person who puts their pin closest to a nation such asAustralia or Switzerland that has a relatively low risk of long-run fiscal collapse.

That won’t be an easy game to win since we have data from the BISOECD, and IMF showing that government is growing far too fast in the vast majority of nations.

We also know that many states and cities suffer from the same problems.

A handful of local governments already have hit the fiscal brick wall, with many of them (gee, what a surprise) from California.

The most spectacular mess, though, is about to happen in Michigan.

The Washington Post reports that Detroit is on the verge of fiscal collapse.

After decades of sad and spectacular decline, it has come to this for Detroit: The city is $19 billion in debt and on the edge of becoming the nation’s largest municipal bankruptcy. An emergency manager says the city can make good on only a sliver of what it owes — in many cases just pennies on the dollar.

This is a dog-bites-man story. Detroit’s problems are the completely predictable result of excessive government. Just as statism explains the problems of Greece. And the problems of California. And the problems of Cyprus. And theproblems of Illinois.

I could continue with a long list of profligate governments, but you get the idea. Some of these governments are collapsing at a quicker pace and some at a slower pace. But all of them are in deep trouble because they don’t follow my Golden Rule about restraining the burden of government spending so that it grows slower than the private sector.

Detroit obviously is an example of a government that is collapsing sooner rather than later.

Why? Simply stated, as the size and scope of the public sector increased, that created very destructive economic and political dynamics.

More and more people got lured into the wagon of government dependency, which puts an ever-increasing burden on a shrinking pool of producers.

Meanwhile, organized interest groups such as government bureaucrats used their political muscle to extract absurdly excessive compensation packages, putting an even larger burden of the dwindling supply of taxpayers.

But that’s not the main focus of this post. Instead, I want to highlight a particular excerpt from the article and make a point about how too many people are blindly – perhaps willfully – ignorant of the Laffer Curve.

Check out this sentence.

Property tax collections are down 20 percent and income tax collections are down by more than a third in just the past five years — despite some of the highest tax rates in the state.

This is a classic “Fox Butterfield mistake,” which occurs when someone fails to recognize a cause-effect relationship. In this case, the reporter should have recognized that tax collections are down because Detroit has very high tax rates.

The city has a lot more problems than just high tax rates, of course, but can there be any doubt that productive people have very little incentive to earn and report taxable income in Detroit?

And that’s the essential insight of the Laffer Curve. Politicians can’t – or at least shouldn’t – assume that a 20 percent increase in tax rates will lead to a 20 percent increase in tax revenue. They also have to consider the degree to which a higher tax rate will cause a change in taxable income.

In some cases, higher tax rates will discourage people from earning more taxable income.

In some cases, higher tax rates will discourage people from reporting all the income they earn.

In some cases, higher tax rates will encourage people to utilize tax loopholes to shrink their taxable income.

In some cases, higher tax rates will encourage migration, thus causing taxable income to disappear.

Here’s my three-part video series on the Laffer Curve. Much of this is common sense, though it needs to be mandatory viewing for elected officials (as well as the bureaucrats at the Joint Committee on Taxation).

The Laffer Curve, Part I: Understanding the Theory

Uploaded by  on Jan 28, 2008

The Laffer Curve charts a relationship between tax rates and tax revenue. While the theory behind the Laffer Curve is widely accepted, the concept has become very controversial because politicians on both sides of the debate exaggerate. This video shows the middle ground between those who claim “all tax cuts pay for themselves” and those who claim tax policy has no impact on economic performance. This video, focusing on the theory of the Laffer Curve, is Part I of a three-part series. Part II reviews evidence of Laffer-Curve responses. Part III discusses how the revenue-estimating process in Washington can be improved. For more information please visit the Center for Freedom and Prosperity’s web site: http://www.freedomandprosperity.org

Part 2

Part 3

P.S. Just in case it’s not clear from the videos, we don’t want to be at the revenue-maximizing point on the Laffer Curve.

P.P.S. Amazingly, even the bureaucrats at the IMF recognize that there’s a point when taxes are so onerous that further increases don’t generate revenue.

P.P.P.S. At least CPAs understand the Laffer Curve, probably because they help their clients reduce their tax exposure to greedy governments.

P.P.P.P.S. I offered a Laffer Curve lesson to President Obama, but I doubt it had any impact.

___________________________

Thank you so much for your time. I know how valuable it is. I also appreciate the fine family that you have and your commitment as a father and a husband.

Sincerely,

Everette Hatcher III, 13900 Cottontail Lane, Alexander, AR 72002, ph 501-920-5733,

Williams with Sowell – Minimum Wage

Thomas Sowell

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By WALTER WILLIAMS

—-

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