FBI: Why Do You Rob Banks?
A: Because That Is Where the Money Is.
The above exchange is attributed to Willie Sutton a nationally (in)famous serial bank robber during the 1930s.
The same applies to income tax. The 2020 political cycle (aka “silly season”) started earlier than usual. On que, all sorts of calumny are attributed to the IRS. In response, it may be of some inconvenient interest to look at the facts.
The IRS recently released its summary of the 2016 individual (Form 1040) tax year returns. The following table summarizes the key data points:
- Row A shows the number of cumulative tax returns filed by each group of individuals. There were 1,409 million returns filed by the top 1% of taxpayers. There were 7,044 million tax returns filed by the top 5% of all taxpayers which would include the top 1% of taxpayers. And so on.
- Row B shows the share of Adjusted Gross Income by each group. Remember that each group includes the groups to the left. The top 1% had 19.8% of the total Adjust Gross Income for all taxpayers. The top 50% (which would include all groups to the left) had 88.4% of all Adjusted Gross Income. Who will pay the income tax? The top 50% of all taxpayers because that is where the money (Adjusted Gross Income) is!
- Row C shows the income tax paid by group. Of the total $1,442,386,000,000 in taxes paid by individuals, $538,257,000,000 (37.3%) was paid by the top 1%.
- Row D shows the cumulative share of the total income tax paid by group. The top 1% paid 37.3% of the total income tax paid. The top 5% which would include the top 1%, paid 58.2% of the total income tax paid. That says that over half of the total income tax paid was paid by the top 5% of all income taxpayers. This is very clear evidence that the income tax system is progressive – taxpayers with the highest Adjusted Group Income pay the most tax.
- Row E shows the amount of total income tax paid by that group alone. Take any group and subtract the amounts paid by the groups to the left. Each group adds less and less tax of the income tax paid. This reinforces that income tax program is progressive – taxpayers with the highest Adjusted Group Income pay the most tax.
- Row F shows the Adjusted Gross Income which just makes the bottom rung for that group. If a taxpayer reported $480,804 in Adjusted Gross Income in 2016, they just made it into the top 1%.
- Row G shows the average tax rate for the category. The average tax rate declines across the table as the tax rates go down for lower levels of Adjusted Gross Income in accordance with the progressive theory of tax rates - taxpayers with the highest Adjusted Group Income pay tax at the highest rates.
Row H adjusts row F by 2.5% per year to project what the income split point might be for 2019.
The most important take-way is that the tax system IS progressive – individuals with the highest income pay the most tax.
In 2016, the top 5% of all taxpayers paid over 58.2% of the individual income taxes. This also means that when taxes are reduced, the “rich” will benefit more because they pay the most taxes in the first place (37.5%).
The converse is also true. There are not that many taxpayers in the top 5% (7,044,000) so any significant increase in taxes to raise any significant tax revenue will fall on the middle group – the 45% of taxpayers who are in the top 50% but not in the top 5%. In 2016, that middle 45% group included 70,444,000 – 7,044,000 = 63,400,000 poor taxpayers. If everyone’s taxes were raised $10, far more tax revenue would come from the middle 45% ($634,000,000) than from the to 5% ($70,440,000). That middle group is where the (tax) money is!
When I hear that the “rich” don’t pay their “fair share”, I know that I am dealing with politically correct thinking – all emotion and no logic.” Fair share” is in the eyes of the beholder. A friend once said on this matter that the only thing he knew to be “fair” was a ball hit on the ground between first and third base.
The rich have never and will never pay their fair share because “fair share” cannot be objectively quantified. The “fair share” argument is just another never ending exercise in moving the goal posts.
I went downstairs to find Riley our Golden Retriever, to ask her what she thought about this data. As it was very hot, I found Riley stretched out in front of the floor fan. After explaining the table to Riley, I asked her what she thought. She simply readjusted her position in front of the fan. Yes, Riley, you probably do not care, as dogs do not pay taxes. Funny how Riley wants to be treated like part of the family but when it comes to taxes, Riley wants no part of that. H-m-m-m, just like most taxpayers.