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Skinning America: How the Tax Code Favors the Rich

The tax man cometh. And he taketh away more from some people than from others.

In 2009, Americans as a whole paid less in taxes as a percent of income than at any time since 1950. But that decline isn't spread evenly. Middle-class people today pay a greater share of their annual income in federal taxes than they did a half-century ago (2008 median household income was roughly $52,000).

Wealthy folks pay less. Over that time, the highest earners have seen their taxes as a share of income fall by as much as 66 percent, according to IRS data.

These facts neither demonize the rich nor sanctify anyone else. But they do document the undeniable shift in recent decades in which segment of taxpayers proportionally contributes the most. They also buttress claims of rising inequality. To wit: For the wealthiest one percent of Americans, the share of total personal income rose from nearly 10 percent in 1979 to 23.5 percent in 2007. For the bottom 99 percent, it fell from 90 percent to 76.5 percent.

The Wealth for the Common Good, a group of business executives, entrepreneurs, physicians and other affluent people, recently offered some other salient data points highlighting this trend:

  • Between 1960 and 2004, the top 0.1 percent of U.S. taxpayers -- who earn an average of $7.1 million per year -- have seen the share of their income paid in total federal taxes drop from 60 to 33.6 percent.
  • Between 1955 and 2007, the top 400 income-earners have seen the share of their income they pay in federal income tax fall from 51.2 percent to 16.6 percent.
  • In 1960, the middle 20 percent of U.S. taxpayers paid 15.9 percent of their incomes in total income, payroll and other federal taxes. Today, this segment pays 16.1 percent of their incomes in federal income taxes alone.
  • Tax cuts for the wealthy between 2001-08 cost the U.S. Treasury $700 billion.
  • The middle 20 percent of U.S. taxpayers in 2007 paid 9.4 percent of their incomes in state and local taxes.
  • The top 1 percent of U.S. taxpayers in 2007 paid 5.2 percent of their incomes in state state and local taxes.
  • The tax rate on capital gains, which rose as high as 39.8 percent in 1977, is today 15 percent.
Why do these numbers matter? Because, apart from simple fairness, tax policy has perhaps the most direct impact on what government can and can't do. And clearly we're asking it to do a lot these days.

And here's where the money goes. More than 60 percent of all federal spending is devoted to national defense, Medicaid, Medicare and Social Security. The next largest expenditure is unemployment compensation, at 5.5 percent, while veterans benefits absorb 3.5 percent.

While many people are concerned about the nation's spiraling debt, most would rather ease spending rather than raise taxes. That's where things get hard.

Asked what federal programs they'd cut to balance the budget, according to a recent Economist magazine poll, Americans are in general agreement -- they'd rather not curb funding for anything. Of more than a dozen government programs -- Social Security, education, health research, highways, the environment and so forth -- only foreign aid, which makes up no more than two percent of total spending, was cited by a majority of respondents as an area they'd like to scale back.

"We are quick to condemn the government for wasteful spending, but slow to identify wasteful programs," write Micahel Ettlinger and Michael Linden of the Center for American Progress, a Washington think-tank.

So what's it going to be -- do we starve the government of money for programs that everyone seems to agree are vital, or do we do something about those data points up above?

Happy April 15.

Image from Wikimedia Commons; graph from the Wealth for the Common Good

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