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How America actually taxes the affluent

With tax season in full swing, the Internal Revenue Service (IRS) is giving Americans a peak into what they should expect for a refund check this year. (Getty)

A recent editorial decrying how much the rich pay in taxes brings to mind Mark Twain’s famous expression. “There are three kinds of lies,” Twain explained, “lies, damned lies, and statistics.” 

Using data compiled by the Tax Foundation, the piece bases its assertions on the comparison of the share of federal income tax paid by the top 1 percent to the share of the total adjusted gross income flowing to that group in 2020. Similar observations have been made by conservative economists using this comparison for different years. 

Because the top 1 percent paid 42.3 percent of the total federal income tax in 2020 while receiving 22.2 percent of total adjusted gross income, the logic goes, they’re getting “soaked.” 

Focusing on 2020, the year the pandemic crashed the economy, necessitating emergency help for practically every household outside the top 5 percent, is a funny choice. Much of that help took the form of tax rebates, as the Tax Foundation noted. An important reference to this qualification can be found in the Tax Foundation’s report:

“The income dip for the bottom half of taxpayers combined with the tax credit boost unavailable to higher-income households led to lower average tax rates at the bottom and a greater share of taxes borne by households at the top, compared to a typical year.” Thus, it appears 2020 is a cherry-picked, atypical year for this argument. 

Using the year 2020, however, pales compared to a focus on the federal income tax, to the exclusion of other federal and state taxes, to make this argument. The contrast used — the percentage of total federal income tax paid versus income flowing to the top 1 percent — is more a measure of economic inequality than a measure of tax progressivity. By design, income up to the poverty level is not subject to federal income tax. This policy choice is implemented through the standard deduction, which in 2020 exempted from taxation the first $12,400 of income for single filers and the first $24,800 of income for married couples. 

To see the disproportionate impact that income inequality has on the percentage of tax to the percentage of income, consider what the percentage of the total federal income tax paid by the top 1 percent would be if the adjusted gross income of the entire bottom 99 percent were equal to the standard deduction. In that scenario, even with an effective tax rate barely above zero, the top 1 percent would pay 100 percent of all federal income tax. Would the top 1 percent be getting “soaked” in that scenario?

For a more meaningful comparison, the adjusted gross income flowing to the various income groups should be reduced by the standard deductions taken by those groups. To approximate this, I assumed an average standard deduction of $20,000 and adjusted the Tax Foundation’s numbers. Using that adjustment, the share of the income that actually is subject to tax for the top 1 percent would be 29.3 percent. 

Think about that. Of all income above the poverty line in America, nearly one-third is flowing to the top 1 percent of households. That’s extreme inequality. 

So, in a year in which the federal income tax burden was atypically skewed by a pandemic to the country’s richest, the top 1 percent, with an average income per household of over $1.7 million, footed 42.3 percent of the total federal income tax bill while taking in “only” 29.3 percent of the income subject to federal income tax. The next highest group of taxpayers, those between the top 5 percent and top 1 percent, paid 20 percent of the total federal income tax bill and received the same 20 percent of the income subject to federal income tax. 

That’s not a “steeply progressive” tax. It’s a modestly progressive tax. 

But even that’s not the whole story. Federal income tax is only one of many taxes Americans pay. Apologists for the rich often minimize this reality by noting that federal income taxes contribute about 50 percent of all federal revenue. That’s deceptive. With state and local taxes included, the Tax Foundation noted, the share of tax revenue from the federal income tax drops to the 25 percent range. The other 75 percent of tax revenue includes steeply regressive federal payroll taxes and state and local sales taxes. 

When you account for all taxes, as professors Emmanuel Saez and Gabriel Sucman did in their book, “The Triumph of Injustice,” the overall tax system in America is nearly flat, and the 400 taxpayers at the very top — billionaires, that is — pay the lowest overall rate. It was factual, not “demagoguery,” as some have charged, for President Biden to say that billionaires pay lower tax rates than their secretaries. 

No, America doesn’t drain the affluent. But the highly affluent — particularly, the top 1 percent — sure are draining the rest of us.

Bob Lord, a tax lawyer for 40 years, is a senior advisor on Tax Policy for the Patriotic Millionaires.

Tags COVID-19 relief federal income tax Income inequality in the United States Politics of the United States top 1 percent

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