U.S. Income Taxes: Installment #3 — Tax Rates, Incomes, Demographics, Education and Some Misconceptions

This is the third installment on U.S. income taxes, following the summary of the prior two days regarding  who pays the most taxes  and why so many pay little to nothing (and some even get money without having paid anything).   Again, this is based on a study from The Tax Foundation, a non-profit research group located in Washington, D.C.  The Tax Foundation is dedicated to educate taxpayers about sound tax policy and the size of tax burdens borne by Americans at all levels of government.  The Tax Foundation has just released a 44 page presentation entitled “Putting a Face on America’s Tax Returns,” which can be downloaded as a PDF by clicking here.

Despite common beliefs, higher income earners pay a lot more in taxes than those not earning as much.  In 2010, the bottom 99 percent of all tax filers average tax rate was 8.4 percent, while the top 1 percent was well more than double that at 24 percent (almost triple actually).  Thus the rich, on average, pay a lot more than the typical American in both percentage and total dollars.  Naturally, there are always exceptions – but, unfortunately,  I am not one of those.

A large amount of the blame in the statement that “the Bush-era tax cuts made the rich even richer, at the expense of the lower and middle classes” is not supported in the data.  Demographic factors, among other issues, have had much greater impact.  In 2009, the top 1 percent of all tax payers’ share of total U.S. income was 16.9 percent—exactly equal to their share in 1997.  This was long before the Bush-era tax cuts.  Even before Bush 43.  While the top 1 percent did peak at 22.8 percent of all income in 2007, that had all retreated by 2009.  To say it perpetuates today is an inaccurate statement.�

Two things that become evident in retrospective are that the general business cycle has a lot to do with the number of higher-income individuals, and that the recurrence of earning $1 million plus per year is not a sure thing.  In 2002, 168,977 tax filers reported earning $1 million or greater.  By 2007 that number had essentially doubled to 392,220.  However, in 2009 the total number of filers reporting $1 million and up in earnings had retracted to 236,883, a reduction of 40 percent from the peak, and less than the 240,128 tallied in 2004.  These high income levels often were a result of a one-time event in a tax filers life.  Perhaps an exit strategy from the sale of a business or investment.  In the nine year period from 1999 to 2007, just one-half of those reporting earning $1 million or more in a year accomplished that feat more than once.  Just 15 percent repeated twice, 8 percent three times, 7.4 percent five times, 3.4 percent six times. 3.5 percent seven times, 2.5 percent eight times, and 5.6 percent tallied that seven figure income all nine times.

Not surprisingly, the age of the tax payer has an impact on high-end earners.  In 2009, those aged 45 and up accounted for 79 percent of all $1 million plus earners.  Still, 35 to 45 year-olds garnered 17 percent, while 26 to 35 year-olds represented 3 percent of these high-income tax filers.  In 1997, only 39 percent of taxpayers were older than 45, while 48 percent are today.  As our society continues to age, likewise will the older taxpayer likely make more money.  And that flows through to who pays taxes and the respective tax rate.  In 1997, taxpayers aged 45 and up paid 60 percent of all income taxes, contrasted to 70 percent today.

Demographic changes and other factors also are altering the income potentials of tax filers and the distribution of income across society.  In 1960, 65.2 percent of all taxpayers were married and 34.8 percent were single, and the income distribution across the country was more skewed to the middle class.  In 2010, however, married filers made up just 39 percent of all taxpayers while singles represented the majority at 61 percent.   Hence today, the majority of taxpayers are single, and not surprisingly they make less on-average than the married couples—thus the shift in high-income earnings to married couples.  As of 2007, on average, 67 percent of spouses were both employed versus 47 percent in 1966.  In 2010, 73 percent of households earning $200,000 and up had two or more earners while 50 percent of households earning from $50,000 to $54,999 had just one wage earner.  Demographics speak loudly when it comes to income.

Finally, perhaps the most powerful determinant of who earns what and who pays how much in taxes is a function of education attainment.  In 2008, the Dallas Federal Reserve Bank completed a study in Texas and found that a Texas college graduate would earn 97 percent more in the their lifetime than a non-college graduate in the Lone Star State.  A similar ratio holds across the nation also.  The Census Bureau (as reported in the aforementioned Tax Foundation Report), lists the following 2010 median incomes  by education:

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Emphasizing the value of education are U.S. Census data showing that Americans at the bottom end of the income scale (less than $20,000 annually), 69 percent have either a high school diploma or less.  At the top end of the pay scale ($200,000 and up), 9 percent of those have a high school diploma or less, while 78 percent have at least a bachelors’ degree.  While not all inclusive, the level of education is paramount to increasing incomes at all levels of society, and in growing income to fund this great country.

Thus far in 2013, tax reform, besides kicking the can down the road, exclusively has been focused on increasing taxes on the higher-income individuals – single filers earning $400,000 and up  per year and married filers earning a minimum of $450,000.  Even if we taxed those earning $1 million and up at 100 percent, the U.S. would still run a deficit.  So long run, the key must be to increase lower and middle class incomes, and that is a function of education and not wealth redistribution.  Accompanying that must be cuts in spending.  Taxes alone cannot erase the deficit.

Worse, if you increase the taxes on higher income individuals too much, they will offshore their capital, which will limit investments in the U.S. and ultimately reduce job formation in the country.

We need a well educated and skilled work force, with more jobs and reduced spending to reduce the massive ongoing deficits.  What we are getting, however, is just kicking the can down the road.

Hope everyone got their income taxes filed Monday—or at least your extension.


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