Wealth and Income – Tax Rates Discussion

DISCUSSION – Tax Rates

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Beginning in the Reagan administration, there has been an overall trend towards lower tax rates as shown in the graph below.  Despite differences in timing, the total average tax rate for middle America has declined virtually the same as for the highest 1% of households.

Change in federal tax rate

The next graph shows trends in who is paying how much in total federal taxes.  Here clearly shows tax rate reductions have brought down the share of lower 80% of all taxpayers from 45% of total taxes to 35%. One group that has an increased share is the top 1%, rising from 15% to a 28% share.  With declining rates and overall increases in share of tax payments can mean only one thing.  The top 1% are increasing income at a significantly faster rate than other taxpayers.

share of total federal tax liabilities

The total federal taxes in the above two slides comprise several components, individual income taxes, payroll taxes (social security and Medicare), corporate (taxes on interest, dividends, and capital gains from investments), and excise taxes which is a proxy for consumer spending.

Individual income tax rates from 1979 are shown below. Here we see that the top 20% rates did not decrease as much as the other income brackets which would explain why higher incomes contribute proportionally more taxes now.

individual income tax rate

In the next graph, contribution to payroll taxes for social security and Medicare are broken out by income bracket.  Because of income ceilings on these payroll taxes, these can be considered regressive as they take a bigger proportion from lower incomes than from higher incomes. 

In the next graph the red line combines the lower 80% of taxpayers who now pay 58% of payroll taxes.  The top 20% contributions are stacked bars showing their distribution. Generally, the upper 20% all move in concert indicating that these taxpayers are beyond limits set for payroll taxes. 

share of payroll - social security taxes

The real difference between the lower and top income earners is their share of corporate income. CBO does not report these directly, but allocates to households according to their share of capital income which are shown below.  Here 99% of all households are shown as stacked bars. Their share of corporate income, initially as high as 65% of total, has declined to only 40%.  Conversely the share of the top 1% not only has risen sharply over the decades, but now far exceeds the combined income of the remaining 99% of the population.  This is an incredible skewing of wealth towards the highest 1% of households.

share of corporate income - dividends, cap gains, etc.

The final component of federal taxes is excise taxes which can serve as a proxy for consumer spending. In the following graph the average excise tax rate for all quintiles is divided by the average excise tax rate for the top 1%.  Those in the lowest 20% spend over 10 times more of their income on goods and services.  For the 20% – 40% bracket, they spend 6 times as much; for the 40% – 60% and 60% – 80%, they spend 5 times as much.  Clearly, the wealthy do not spend nearly the same proportion of their income as do lower income brackets.  The political corollary to this is that a dollar tax cut for the lower income earners will have a far greater effect on spending than a same dollar break for the very wealthy.

relative excise tax rate vs top 1% of income

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