The US income tax situation and the “fair share” debate

This articles assesses the US income tax situation from the IRS tax data of 2010 and sets the scene for a debate on “fair share” tax payments

Since the Senate and House of Representatives just resolved the government shutdown and debt ceiling, this piece should be very topical. I wanted to refresh my memory and find out from which sources exactly the US Federal Government receives most of its taxes. Which groups of Americans make the most money and which groups will be paying the most in income taxes? This is a very “chart-y” Weekly Thought, but I think the data is pretty self-explanatory.

US incomeEnlarge Graph

About 47%, or $1.04 trillion, of the US Federal Government’s 2010 tax receipts came from US citizen income taxes (below). The rest was made up of Social Security/Social Insurance taxes (~35%), corporate taxes (~10%), and other tax revenue such as excise, estate, and gift taxes.

Size of Gross Income

# of Returns Filed

Taxable Income
($ in thou)

Total Fed Taxes Generated
($ in thou)

   Under $2,000

6,229,611

$62,644

$3,332

   $2,000 under $4,000

4,188,381

$211,504

$18,078

   $4,000 under $6,000

4,381,505

$281,836

$30,051

   $6,000 under $8,000

4,730,204

$1,500,243

$150,302

   $8,000 under $10,000

5,265,937

$2,498,292

$250,558

   $10,000 under $12,000

4,994,497

$5,919,907

$582,050

   $12,000 under $14,000

5,374,208

$10,231,033

$1,003,572

   $14,000 under $16,000

4,880,504

$13,719,288

$1,362,228

   $16,000 under $18,000

4,727,757

$18,343,632

$1,832,713

   $18,000 under $20,000

4,552,263

$23,370,404

$2,446,636

   $20,000 under $25,000

10,185,282

$75,758,308

$8,509,244

   $25,000 under $30,000

8,950,075

$101,252,604

$11,850,147

   $30,000 under $40,000

14,613,296

$258,532,507

$31,612,546

   $40,000 under $50,000

10,992,023

$285,711,442

$36,782,214

   $50,000 under $75,000

18,727,169

$735,533,903

$104,716,234

   $75,000 under $100,000

11,805,382

$701,536,561

$104,550,473

   $100,000 under $200,000

13,997,651

$1,373,739,786

$243,879,068

   $200,000 under $500,000

3,471,723

$783,347,436

$181,106,075

   $500,000 under $1,000,000

544,224

$309,036,735

$86,762,330

   $1,000,000 under $1,500,000

126,941

$131,137,821

$38,419,280

   $1,500,000 under $2,000,000

51,550

$76,330,993

$22,654,398

   $2,000,000 under $5,000,000

73,078

$188,551,425

$55,470,661

   $5,000,000 under $10,000,000

17,527

$104,713,552

$29,795,098

   $10,000,000 or more

11,264

$300,678,803

$73,957,817

Total

142,892,051

$5,502,000,658

$1,037,745,104

Source: IRS.gov, 2010 tax data.

I am refraining from any political stance by analyzing this data, so readers can decide on their own whether or not they think different tiers of income earners are paying enough in taxes. The below summarizes three different sectors of US income brackets, how much wealth they generate, and what percent of total taxes they pay. These are simply the facts, and discussions about “fair share” tax payments or income inequality can ensue…

“Tier” of Americans

Annual Salary of Tier

% of Total U.S. Income Generated

% Makeup of Total Taxes Generated by Gov’t

Top 3% of Americans

Over $200,000

34.4%

47.0%

Top 12.8% of Americans

Over $100,000

59.4%

70.5%

Top 58.4% of Americans

Over $25,000

97.2%

98.4%

Selected takeaways:

  1. Only 12.8% of Americans make over $100,000 per year
  2. One-third of total income wealth generated in this country is earned by the top 3% of Americans
  3. The top 3% of Americans make up almost half of all income taxes paid to the Federal Government
  4. ~40% of American households live at or below the poverty line (technically depends on how many family members per household)

The Market Realist Take

The federal income tax system is considered progressive, as higher income groups pay more than those with lower incomes. But the fairness of the distribution has been open to debate. The Tax Policy Center (a body of experts in tax and budgets that exists to provide tax analysis information to lawmakers, the media, and anyone else interested in tax policy) estimated that 43% of Americans will pay no federal income tax this year. This is down from the peak of 47% in 2009. The Center explained that although this 43% does not pay income tax, it does pay other forms of tax like Social Security, Medicare, and sales tax. The number is expected to decline going forward with the expiry of temporary tax cuts enacted during 2009.

An improving economy, which will lead to an increase in incomes, will add to revenue from income tax. However, the US economy is currently growing at a slower rate, and wages and salaries haven’t kept pace with inflation over the years. There has been demand for tax reform in recent times, particularly for a reduction in income tax and adding a consumption tax by way of VAT (value added tax). Another solution suggested by economists and policy analysts is to lower income tax rates and at the same time broaden the tax base while also putting a restriction on some tax breaks.

In a four-part series on our website titled Why the Federal Reserve raised its inflation estimate, we show that the Fed forecast that inflation would remain between 0.8% and 1.2% in its September meeting. The Fed has a dual mandate—to manage inflation and to stimulate the economy in order to promote full employment. The Fed fears deflation, and given that we’re at the lower bound for interest rates, a decrease in inflation actually increases real interest rates. So the Fed will try to keep inflation around 2%. As a practical matter, for the average American, 3% inflation with 3% wage growth feels much more comfortable than no inflation and no wage growth. So investors may exercise greater caution when investing in the State Street Global Advisors S&P 500 SPDR (SPY), Blackrock iShares S&P 500 Index (IVV), or the State Street Global Advisors Dow Jones SPDR (DIA) ETFs until consumption, investment, and GDP start to show greater signs of self-sustained growth. As growth accelerates, more cyclical ETFs like the SPDR S&P MidCap 400 ETF (MDY) and the iShares Russell 2000 Index ETF (IWM) should outperform.