Why It's a Myth That the Rich Are Overtaxed

Last Updated Apr 19, 2011 10:04 AM EDT

Who pays most of the country's taxes -- the rich, poor or middle class? If you add up it all up, including federal income, payroll, excise (such as for gas), and state and local taxes, it's pretty even. Each group's share of total taxes is roughly equivalent to their income.

In other words, concludes Washington advocacy group Citizens for Tax Justice, the U.S. tax system is only marginally progresssive, meaning that people at the top hardly pay any more than folks lower down the income ladder.

In 2010, the wealthiest 1 percent of Americans -- who had average annual cash income of $1.2 million -- paid a total effective tax rate of 30 percent. Their federal income tax rate was 22.1 percent, while this group's state/local taxes came in at 7.9 percent.

By comparison, the middle fifth of the population -- with average income of $40,700 -- paid a total tax rate of 25.1 percent. Although the amount they paid in federal income tax, at 13.9 percent, was lower than for the very rich, they paid significantly more in state and local taxes (click on adjoining to expand, and see bottom for a complete breakdown by income group).

The top 1 percent actually pay less in total taxes than other well-off, if far less affluent, people. The next 4 percent of income earners -- who bring in an average of $241,000 per year -- paid a total tax rate of 31.3 percent. Same goes for the next income group ($140,000 per year).

The "Buffett" effect: Why the rich don't pay more in taxes
What does this and related data really mean? First, the idea that the wealthy bear the brunt of paying taxes in the U.S. is a myth. Yes, the top 1 percent pay more in federal income taxes than any other group -- somewhere around 38 percent. But as Pulitzer Prize winner and tax expert David Cay Johnston notes, personal income tax accounts for less than half of federal taxes and only one-fifth of all government taxes. He writes (in a piece I highly encourage anyone looking for a little clarity on this subject to read):
Social Security, Medicare and unemployment insurance taxes (known as payroll taxes) are paid mostly by the bottom 90 percent of wage earners. That's because, once you reach $106,800 of income, you pay no more for Social Security, though the much smaller Medicare tax applies to all wages. Warren Buffett pays the exact same amount of Social Security taxes as someone who earns $106,800.
Second, the super-rich are paying far less in taxes than they used to. As of 2008, the 400 richest U.S. households -- with an average income at the time of $345 million -- paid an average federal income tax rate of 17 percent. That was down from 26 percent in 1992. Over this same period of time, the average federal income rate for all taxpayers fell by a grand total of 0.6 percent.

In fact, Johnston underlines, average Americans are far more heavily taxed than those at the very top. Although the income of the richest 400 households has soared in recent decades, the amount they contribute in federal taxes has declined. The trend is the opposite for most Americans -- their share of the federal tax load has grown considerably more than their income, rising from 13.1 percent in 1961 to 22.5 percent in 2007.

What a country
Third, most people think the U.S. tax system is unfair. Eight out 10 Americans support raising federal income taxes on people making more than $1 million a year, according to a recent NBC News/Wall Street Journal poll. And nearly 70 percent of Americans favor eliminating the Bush-era tax cuts for households earning at least $250,000 a year.

Fourth, this is no way to run a country. The government collected less in taxes last year as a share of GDP than at any time since 1950. Inequitable tax policies are contributing to the startling accumulation of wealth at the top of American society, a sure sign of an economy that has blown a gasket. Tax policy is used less as a means to fund government than as a political weapon to reward friends and punish foes.

Not so long ago, being a "tax-paying American" was a badge of honor. Not that people, especially those of means, didn't always look for ways to minimize their taxes. But paying your fair share was once a matter of civic pride. It was the cost of ensuring economic opportunity for all. No more, it seems. That feeling was rooted in a sense of common purpose and common identity that, somewhere along the way, we lost.


Charts courtesy of Citizen for Tax Justice
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    Alain Sherter is an award-winning business journalist who has written for The Deal, MarketWatch and Thomson Financial Media.

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