August 6, 2008
Union Leader
Who pays taxes, and how much, might surprise you
Don’t tax you; don’t tax me; tax that fellow behind the tree. Everybody’s favorite tax policy is to tax the guy behind the tree. I pay too much in taxes, and I’m willing to believe you do too. Maybe if we take the money of the guy behind the tree, we’ll both become richer. This is the same philosophy, by the way, that undergirds the decision of the guy with no neck to take someone’s lunch money in sixth grade.
Popular culture suggests to us that rich people take advantage of the dreaded loopholes to get off scot-free while hard-working Americans are forced to shoulder their burden. Or at least they probably aren’t paying their fair share. Like Charlie Brown’s little sister Sally, all we want is what’s coming to us; all we want is our fair share.
To help Charlie Brown’s sister figure out what exactly her fair share is, the IRS publishes data on tax liabilities each year. I think you might be surprised by who pays how much.
The most recent data are for 2006. Start by asking yourself how many Americans don’t pay any income tax at all — they either don’t have to file or have every dime and sometimes more refunded to them. Maybe 10 or 15 percent?
It turns out that about 41 percent of us have no income tax liability whatsoever, the highest percentage in modern history. Around 32 percent of all tax returns filed have no liability, so they get back everything they paid. An additional group of people don’t even have to file.
Of the people who file income taxes, including the third that has no liability, the bottom half pays 3 percent of all taxes and the top half pays 97 percent of all taxes. Narrowing even further, the richest 1 percent of all taxpayers account for 40 percent of taxes paid.
You are probably telling yourself, “they make more so they pay more, that’s simple enough.” In fact, the top 1 percent of American earners make 22 percent of the income and pay 40 percent of the taxes. That sounds like maybe they’re paying their fair share and then some.
The bottom 50 percent of tax filers earn 12.5 percent of all income and pay just 3 percent of all income taxes. No one is suggesting they should pay more, but it seems clear that their burden is getting lighter. Twenty-five years ago, the bottom 50 percent paid 7.5 percent. Now it’s down to 3 percent.
Another common accusation is that tax cuts have shifted the burden away from rich people. From 2002 (before the Bush tax cuts) to 2006, the share of taxes paid by the top 1 percent went up from 33 percent to 40 percent.
Tax cuts in the Reagan years also increased the share of taxes paid by the rich. In 1981, the richest 1 percent paid 17 percent of the total tax burden. It had increased to 25 percent by the time Ronald Reagan went back to California.
In recent years, the share of the total income tax burden paid by the richest 1 percent has been increasing and the share paid by the bottom 50 percent has been decreasing. In addition, the number of taxpayers paying no taxes at all is increasing.
Because New Hampshire is one of the wealthier states by average income, many of us will assume that we have many more of the highest earners than average. It turns out that New Hampshire is a very middle-class state with fewer high earners than average and fewer low earners than average, but a big middle.
Our top 1 percent earned only 18 percent of the total for New Hampshire, and the cutoff to be in the top 1 percent was $360,000 instead of $390,000 nationally. At the other end, only 24 percent of New Hampshire filers had zero tax liability compared to 32 percent nationally. New Hampshire’s median taxable income was $37,331 in 2006, about 15 percent higher than the national average.
In election years, it has become popular for politicians to seek your vote by turning you against the other guy. He’s going to lower your taxes by sticking it to the guy behind the tree. You can vote for me because we both have a common enemy.
Remember, the richest 1 percent of Americans earn 22 percent of the income, but pay 40 percent of the taxes. They didn’t get tax rebate “stimulus” checks this year, but they paid for mine.
Tax cuts for everyone who pays taxes, like the Reagan, Bush, and Kennedy tax cuts, are fair. Pitting you and me against the guy behind the tree is not a good recipe for unity or fairness.
Charles M. Arlinghaus is president of the Josiah Bartlett Center for Public Policy, a free-market think tank in Concord.