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August 13. 2013 5:38PM

Charles Arlinghaus: Federal taxes don't look like you'd think


 

Because the numbers are so large, most people don't bother to look at federal taxes and end up making assumptions that are at odds with the actual numbers. Federal taxes and the federal budget are very different from political rhetoric and muck of media reporting.

Every year the federal government adds to its historical analysis of who paid income taxes and how much they paid. Based on the rhetoric that floats around during the budget crisis that seems to return every few months, you might get the wrong idea. Interestingly, the federal income tax — the laregest share of federal revenues — is remarkably progressive and has been getting more so for the last 30 years.

While the only certainties in life are said to be death and taxes, the federal income tax is an exception. Everyone may hate taxes but we don't all pay them. Almost half of Americans, about 47 percent, don't pay any income taxes. I don't mean they get a refund of some of their pre-payments. Their annual tax income tax bill is either zero or negative (meaning their refunds exceed payments). That number varies by year and is a little higher in the early years of the recession but even in good times it was 40 percent.
One analyst, by the way, remarked that perhaps the 45 percent of people in polls who are happy with the tax system aren't actually crazy as we might think but rather just the people who have nothing to be annoyed by because they don't get a bill.

Everyone knows that richer people pay more in taxes because they have more money. If you make ten times what I make then I suspect you pay ten times in taxes. But is it proportional or do the wealthy manage to avoid their fair share as some think?

According to the 2010 data, the top 1 percent of all tax filers made 19 percent of the total income in the country. Their share of taxes, though, was much higher at 37 percent — almost twice as much as their income share would lead you to think. In contrast, the bottom 50 percent earned almost 12 percent of all the income but paid just 2.4 percent of the taxes. Instead of twice their income share, they paid one-fifth. Very progressive indeed as is every income split in between those bookends.

But do rich people pay less of a share than they used to? In fact, the change over 30 years has been remarkable. In 1983, the top 1 percent of earners paid 20 percent of federal income taxes and the bottom 50 percent paid 7 percent.

So, over the course of 30 years, the richest 1 percent has gone from paying three times the share of the poorest 50 percent to paying more than 15 times as great a share (and if you look at the year by year data it has been a steady progression over that time).

For those keeping track, the bottom 50 percent in 2010 was incomes under $34,300. The top 1 percent consisted of people earning more than $369,000.

The other great federal tax myth is that current levels of taxation aren't anywhere close to balancing the budget. We can't support the current government without big changes or so we are told.

Actually revenues grow every year — some years more than others and some less but, barring another huge recession, they will rise each year. According to the Congressional Budget Office, even with the current anemic growth assumptions, taxes will grow by an average of 5.8 percent each year over the next decade.

That could balance the budget without reducing spending. In fact, the lag for revenues to reach current spending levels is only three years. In other words, if we froze spending at the current dollar level, natural revenue growth would provide a surplus in three years.

Politicians in Washington can't possibly freeze spending (though, of course their colleagues at the state level actually reduced spending in states across the country). But, let's say they decided (an unnatural act for politicians) that come hell or high water the budget had to be balanced in ten years. Would huge spending cuts be required?

Not at all. Mild restraint would be required. Spending could grow at 3.7 percent and we would achieve balance in ten years. Why is that so problematic? Current spending projections anticipate spending to grow by 5.4 percent. Apparently, growing but by a little bit less is a Herculean task that we have no realistic hope of ever expecting the Lilliputians we send to Washington to accomplish.

Charles M. Arlinghaus is president of the Josiah Bartlett Center for Public Policy, a free-market think tank in Concord. His email address is arlinghaus@jbartlett.org.


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