Are the 1% Paying their fair share?

According to Greg Mankiw when you take transfer payments into account the one percent effectively pays the highest percentage of their income when compared to any other income group.

From Greg Mankiw’s Blog:

Because transfer payments are, in effect, the opposite of taxes, it makes sense to look not just at taxes paid, but at taxes paid minus transfers received.  For 2009, the most recent year available, here are taxes less transfers as a percentage of market income (income that households earned from their work and savings):

Bottom quintile: -301 percent
Second quintile: -42 percent
Middle quintile: -5 percent
Fourth quintile: 10 percent
Highest quintile: 22 percent

Top one percent: 28 percent

The negative 301 percent means that a typical family in the bottom quintile receives about $3 in transfer payments for every dollar earned.

This is an interesting view of the tax code. Not just what one pays, but more of an income – expenses view. I personally think this is much more telling than just the effective tax rate an individual may or may not pay into the system. I also found this very interesting:

…the middle class, having long been a net contributor to the funding of government, is now a net recipient of government largess.

I think that statement might become important later. Especially when we start to frame the middle class as beneficiaries of the state rather than a group paying into it.

Income vs. Market Income

Just in case you were thinking that Mankiw was playing with the definition of income by calling it “Market Income” (I suspected fowl play to adust the statistics) here is a definition:

Market Income: Market income is the sum of earnings (from employment and net self-employment), net investment income, (private) retirement income, and the items under “Other income”. It is equivalent to total income minus government transfers. It is also called income before taxes and transfers.

I have to say, upon further research, using the term Market Income seems pretty water tight.

Thoughts on these findings?

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9 thoughts on “Are the 1% Paying their fair share?

  1. galudwig

    It depends on what your definition of ‘fair’ is. A lot of people seem to think that it would be ‘fair’ to take the lion’s share of the income of the rich, pay the bureaucracy who does the taking and give the remaining scraps to .

    However, ‘fairness’ is a subjective property. There is no set definition of what is ‘fair’. In practice, I don’t consider progressive taxation or progressive redistribution as ‘fair’ at all.

    Morally speaking, taxes are never fair because they are by definition involuntary. The only ‘fair’ tax is no tax (just like the only ‘fair trade’ is free trade), but a flat tax is more ‘fair’ than a progressive one, *according to what I think is fair*.

    That said, Mankiw makes a good point. The American system is much more progressive than liberals generally let on.

    And, to answer your question, are the 1% paying their fair share? I don’t know. Post this on some left-wing and right-wing blogs, and you’ll get hundreds of additional graphs and statistics that claim that they either are or are not paying their ‘fair share’. That’s the current state of economics for you: graphs, interpretations and lots of rhetoric, but little to no substance.

    Reply
    1. Atticus Finch Post author

      As the old saying goes: “there are lies, damn lies, and statistics.” I’m sure liberals or conservatives can turn the same data in any way they see fit to push their agenda.

      One point where we differ though is that I do think some taxation is necessary and even voluntary. Voluntary as in I would vote in favor of it and I think that most of the country would aswell. However, the current system is a mess – that I think most of the country would agree with too.

      Mostly I just thought it was interesting everyone complains about the top not paying enough taxes or paying equal taxes to the poor – when in reality – that might not be the case.

      Reply
      1. galudwig

        But we haven’t voted for it though. And even if we did vote, I doubt the result would be unanimous. And even if the concept of taxes were unanimously accepted, I doubt every subsequent individual tax transfer would happen with universal consent.

        Taxation may be necessary, that is certainly up for debate. But it is by no means voluntary.

        Reply
  2. philebersole

    Just to put a human face on these statistics, I’m one of the people who receives more in what Greg Mankiw calls transfer payments than I pay in federal taxes. I’m 75 years old, I have cancer which is held in check by expensive injections, and I receive more each year in Social Security and Medicare payments than I pay in income taxes. I don’t feel I am taking advantage. I paid into the system for many years.

    Some more thoughts. I also pay state income taxes, county and city property taxes, and state and county sales taxes, but the CBO study which Mankiw quotes only deals with federal taxes. It would be interesting if somebody did a study including all taxes and all types of government benefits. I don’t expect the results would be the opposite of what Mankiw reports, but it would be interesting.

    There are four main types of taxes—income taxes, which fall most heavily on the rich; residential property taxes, which fall most heavily on the middle class; payroll taxes, which fall most heavily on working people; and excise and sales taxes, which fall most heavily on poor people. The drive for tax cuts over the years has been almost exclusively on the first type of tax.

    The people who make out the best from the tax system, in my opinion, are the upper 1/10th or 1/100th of 1 percent, those whose incomes comes almost entirely from capital gains. Warren Buffett falls in that class, and he says he pays less of his income in taxes than his secretary.

    Also, we might think about what is included and not included in “transfer payments.” It doesn’t include the bailout money that the Treasury Department and Federal Reserve transferred to the big Wall Street banks, which enabled their executives to keep on paying themselves million-dollar bonuses.

    Also, as Mankiw himself pointed out, the reason tax revenue is down and transfer payments are up is that we’re in the middle of a recession. There are lots of unemployed people who would prefer to be in the net-taxpaying class if they could.

    It’s complicated, but I would be very pleased to trade places financially with the average taxpayers in the upper 1 percent tax bracket. I wouldn’t want to trade places with the people in the bottom quintile.

    Just my thoughts.

    Reply
    1. Atticus Finch

      All excellent points, Phil. I certainly agree with your last point “I would be very pleased to trade places financially with the average taxpayers in the upper 1 percent tax bracket. I wouldn’t want to trade places with the people in the bottom quintile.”

      However, instead of framing the question “are the rich paying their fair share” I think the question should be “are we being overtaxed” and “is the Government using the money appropriately.”

      As I have said in the past and continue to say I think taxes are necessary, but I question if the Government really needs to increase taxes at all to get the job done. We spend far to much on things like military and pork barrel spending. I mean countries all over the world are providing public services with the same or less in tax revenue (by percent of GDP).

      Reply
    2. Holden

      I’d like to just take issue with one point you’ve made Phil.

      A lot of people have recently brought up this whole, “We need to raise Cap Gains tax and even Warren Buffett thinks so!”

      Don’t we want to encourage investing by giving it a favorable tax rate since it is investing that really enables business to raise funds and create business whith provides jobs?

      Buffett might pay a lower rate of tax on his income than his secretary, but at the same time, how many people have jobs as a result of his investing? I know in my community, we owe an astonishingly large amount of the jobs in our local economy to Shaw Industries, a company owned by Berkshire Hathaway.

      So in regards to capital gains tax, while it might be nice to think of these fat cat wall street types paying taxes at a rate more in line with the average working joe, I hate to think what would happen to our economy without them.

      Reply
      1. philebersole

        The problem with the capital gains tax is that there is no good way to distinguish between the investors who furnish the start-up money for companies, who deserve to be richly rewarded, and passive investors, who buy and sell existing stocks. I’m one of the latter. My savings are in Vanguard and T. Rowe Price index funds. I don’t even remember what’s in those funds. I’m glad to be taxed at a low rate when I sell mutual fund shares, but I’m not sure why I should pay a lower tax on that income than I did on the income I earned through actual work.

        Another issue is the special tax treatment enjoyed by hedge fund managers who, as a group, probably subtract value from the U.S. economy rather than add to it.

        Back in the 1980s, it sounded reasonable to think that if you cut marginal income tax rates, and gave special tax treatment to capital gains, this would stimulate investment. But for whatever reason, this didn’t happen. Maybe it is because when marginal taxes were high, you could tax a bigger tax writeoff for losses and this canceled out. I don’t know.

        I do think that a marginal tax rate of 70 percent, which was in effect in the 1970s, is way too high. I don’t advocate raising taxes just for the sake of raising taxes. And I do agree that, even when you take into consideration all the things that I’ve mentioned, it is a fact that the top 20 percent of income earners pay a larger percentage of their income in taxes than the middle 20 percent or the lowest 20 percent. I don’t think that’s unjust, but reasonable people can differ.

        Reply

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