Number Crunching

A couple of days ago I accidentally listened to part of the president’s speech (while trying to listen to something else), and I heard him say some things that were remarkably vague but clearly untrue. One was that, even though our nation’s credit rating has been downgraded below triple-A, he (who has been around the world apologizing for this terrible country that embarrasses him) insists that we always have been and always will be a triple-A country. That sounds like a disappointed parent of a youth sports team who tells the kids, “Even though they got more runs that you did, even though they performed better on the field, and even though we lost the game by all the usual measures, you’re still a winning team to me.” Right. Any kid hearing that would know what it really meant—they lost the game by not performing well enough. 

The other thing Obama said was that any solutions to our economic woes must include making the rich pay their fair share. I’m pretty sure I know what he means by that—more from me. But when listeners hear him say it and go, “Yeah, make those rich guys pay their fair share,” what do they have in mind?  

I asked my son Political Sphere if he knew, and he said he’d heard there was a study asking that question, and most people said they thought it would be about 25% of income. He said the whole percentage of the total tax burden that they pay isn’t what the envious poor are looking at; the pound of flesh they require is a quarter taken out of every dollar earned by those rich people (but not from themselves). 

I did some research; I didn’t find that particular study. But let’s go with that assumption and do some number crunching, first with percentage of total tax burden, and then also with that magical 25% number. 

The numbers we’ll use are from the IRS 2010 report (even though I’ll be using 2011 budget numbers, so the best we can do is estimate). Warning: math ahead, but nothing we can’t handle. The numbers are big, but the functions are pretty simple. 

Percentages of Taxes Paid

There were 139,960,580 tax returns (including only those with positive adjusted gross income—people who earned money). These earners reported an adjusted gross income totaling $8,426,625,000,000 ($8.5 Trillion). On that income they paid a total of $1,031,512,000,000 (a Trillion and some change). That’s only a quarter of the annual budget, so it’s good that income isn’t the only measure of GDP, and income tax isn’t the only source of revenue. 

The top 1% includes millionaires and billionaires, but also anyone making $380,354 a year or more; average in this group was $1.2 Million—wealthy, but not filthy rich. This percentile earned a total of $1,685,472,000,000 ($1.6 Trillion) and paid $392,149,000,000 (nearly $400 Billion). [Save these numbers; we’ll come back to them.] They earned 20% of total income and paid 38% of total income taxes. 

The top 5% needed to earn $159,619 to merit the honor of this category. (Note: all the US legislative branch and the president are at least in this category.) They earn 34.73% of income and pay 58.72% of income tax. Fair?  

The coveted top 10% earn at least $113,799. They earn 45.77% of income and pay 69.94% (round to 70%) of taxes. This is the category our household has inched its way into, following college degrees, graduate school, student loan payments, and nearly three decades of hard work and experience.  

Now for a paradigm shift. Average per capita income in the US is $47,500, in the top 10 nations worldwide. That means that an “average” household—married couple with two kids—would need to earn $190,000 to meet the average. They would need to be well into the top 5% of earners as a household. Our household (temporarily) has nine. To meet the average, we would need income of $427,500, far into the top 1% range. Instead, we earn about $30,000 less per capita than the average, explaining why we live in one just-below-median-cost home instead of several separate residences (just for this year, or part of this year, so don’t start up a donation fund or anything).[*] 

The point is, there is good reason we don’t feel rich. But we are considered a target by those who think we’re not paying our fair share. 

Just for completion, the top 25% earn $67,280 or more a year. They earn 67.38% of income and pay 86.34% (sometimes rounded to 90%) of taxes. 

The top 50% earn 87.25% (again close to 90%) of income, and pay 97.30%. So that resentful bottom half earns 12.75% of income and is paying only 2.7% of taxes. Fair?

Percentage Per Dollar Earned

OK, now for the all-important part about percentage per dollar earned. Those bottom 50% who want the rich to pay their fair share must define fair as “almost 10 times more per dollar earned than I pay,” because that bottom 50% is paying an average effective tax rate of just 2.59%. And, to be honest, only the top earners of the bottom 50% are paying that; the rest are paying nothing. Or less than nothing—receiving earned income tax credit, or possibly getting government handouts in the form of student grants, food stamps, or subsidized housing. 

But we want those top earners to be paying 25%; that’s what’s important, right? And they’re only paying an average effective tax rate of 23.27%. What’s with that? What it is is only part of the story.  

The top tax tier, you may know, is about 36%--that is, 36 cents out of every dollar earned above a certain income level. It will go up if Obama raises that upper rate to what it was before across-the-board Bush tax cuts nearly a decade ago. So their “richest” dollars are taxed well beyond the 25-cent fair level. That rate has been at times 78% (Reagan dropped it drastically, thus increasing revenue) and even 90% back during the Depression.  

But not all of their income is taxed that way. That’s right—because we have a progressive tax and not a flat tax.  

Also, some income of higher earners (and also some lower earners) comes in forms other than wages. They earn capital gains, for example, which are taxed at 15-25%. There’s a reason for the lower rate—to encourage capital investment, which equates to economic growth and jobs. And you have to remember that, when a person (you, even) invests capital, you’re taking a risk. The government doesn’t come in and give you a refund on your losses. Sunk costs are sunk. So, if an investor is expected to risk his capital, he needs to be able to accumulate enough growth that it doesn’t disappear into tax payments the moment he cashes it out; that would prevent him from reinvesting that money in another capital project. So raising that rate might look “fair,” but it would result in a worse economy and higher unemployment—also defined as a 100% tax on laid-off workers’ income.

The Answer You’re Looking For

For the sake of argument, what if we did “fairly” tax the top 1% of income earners at a flat 25%, just them? Their total income (you kept this number in mind from above, right?) is $1,685,472,000,000. So at 25% the tax revenue would be $421,368,000,000; that is $29,219,000,000 ($29.2 Billion) more—assuming all of it would be collected, meaning that the top 1% would behave no differently, make no attempt to put their income into other investments, or out of the country, or that they would refuse to bother earning the additional income.  

In the world of Washington spending, $29 Billion is a rounding error. Payroll for some random department.  

What if we included ALL the rich, those like us who make at least $113,799 a year? The total income of the top 10% (that includes, of course the top 5% and top 1%, by definition) is a little over $3.8 Trillion. Let’s say we raise the rate from 18.71% to 25% to be “fair.” Assuming no changes in behavior [which is impossible; read about the Laffer Curve], you could ideally increase revenue by $243 Billion (rounded up).  

Spending for 2011 is estimated to be $3.8 Trillion, with a deficit (less revenue than spending) of $1.27 Trillion. This hypothetical additional revenue would reduce this single year deficit to $1.03 Trillion. Not much of a dent. 

If we stopped fussing about who makes how much and just across the board taxed everybody 25 cents of every dollar earned (not including state and local, FICA, etc., that are not in this set of numbers at all), then we’d be bringing in not a mere $1.032 Trillion (total tax from all filers), but $2.11 Trillion. We’d reduce the deficit by $1.075 Trillion, still in the hole (with a painful chunk taken out of everyone’s paycheck).

How Much Is Enough?

What tax rate would we need to pay to meet this year’s expenditures? A little over 45%. From every income earner, rich to poverty-stricken.  

That’s just for this year. Obama insists that just about everything that can be cut has been cut, so you would need to expect another 45% to be taken out next year too. And that wouldn’t be to pay off the national debt. No, that would be just to keep our heads above water and not have to raise the debt ceiling yet again. 

Or, we can disregard everything this president says and do what it takes to cut spending to the specific lawful expenditures enumerated in the Constitution.

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[*] My son Economic Sphere read this and wondered about the high per capita income number, so I tracked it down. It is most likely per capita GDP, which is higher (like revenue without subtracting expenses in a business). One stat I located put 2009 per capita income at $27,000 or so, which may be closer to accurate. If you want to redo the math for this paragraph, it would mean a family of four would earn $108,000, still nearly in the top 10% category. Our huge household would need $243,000 to be average—so the point that we would need to be rich to feel average still holds. I got the original stat, and the chart of IRS stats I used, from here: http://www.financialsamurai.com/2011/04/12/how-much-money-do-the-top-income-earners-make-percent/