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Something I'm interested in is taxes and slicing and dicing the data. I was browsing the Congressional Business Office data today and thought I could pass along some info, since this is a heated topic in todays political debates:
Congressional Budget Office - Data on the Distribution of Federal Taxes and Household Income (http://www.cbo.gov/publications/collections/taxdistribution.cfm - broken link)
Some data I was shocked to see was the definitions of each bracket:
- Lowest Quintile income earners had a salary rance of 0-$17,900
- Second Quintile = $17,900-30,500
- Middle Quintile = $30,500-45,200
- Fourth Quintile = $45,200-67,400
- Highest Quintile = $67,400 and above
- Top 10% starts at $92,400
- Top 5% starts at $126,300
- Top 1% starts at an income of $307,500
Total Share of Tax Liabilities for households, based on quintile:
So, not to start out on the wrong foot - since this can be a VERY sensitive conversation - let me say that these are all statistical data for 2005. With this said, I think the following generalization can be made without dispute:
- As you make higher income, you pay an increasing percentage of the overall federal tax burden
I think the big issue being debated is who should pay how much and how much is considered "appropriate", "fair", "patriotic" or whatever term you want to use. As a general rule, while I do have a tendency to lean toward Republican candidates, I am also a financial conservative (seems like neither party understands that term anymore) and I also believe that, as a higher income earner that is definitely in that "5th quintile", that I do have a responsibility to help my country and fellow countryman/women.
Some other observations:
- The top 10% earners make 40.9% of the country's income and pay 54.7% of the tax liability, therefore they are paying a higher ratio of income-to-taxes.
- The 1st, 2nd and 3rd quintile (0-60%) household incomes earn 25.8% of the overall income, yet pay 14.2% of the overall federal tax bill. (keep in mind they earn less than $45,200 per year per household in this group)
Statistics like this certainly help me to keep myself grounded, as we are in that top quintile - and dare I say top 5% household income (wife and I both work full time).
Ok, with all this data, let the discussion begin. Remember: Keep this discussion clean and clear.
Brian
Last edited by BstYet2Be; 10-16-2008 at 11:07 AM..
It is a very important issue.
On a federal level, I think the distribution of Tax Liability is broadly right. Frankly so do both candidates. The differences are really quite small. One favours a small tax cut that scews lower on the income level, one favours one a little higher on the income level, but no one is talking about a huge 1980's style shift in the tax rates, or tax burdens. We now quibble over differences of 3-5 percent, not differneces of 25-30 percent. Americans stll fight over that 3-5 percent as fiercely as we once did over much more major changes, but, putting rhetoric aside, we seem to have reached an overall consensus.
There are some major things that can only be addressed on a federal level, crumbling interstate highway infrastructure for example, improving the rail infrastructure also becomes more important as the cost of air travel increases, and these will require more money. I would prefer to see us do that through curtailing some other spending to free up funds, but once that is done, we may (may not will, no one can know yet) find that to fix these problems we need an increase in tax rates. We then hit one major issue on that. Where should that increase come from?
Two factors go into that decision, one practical, one idealogical. As a pure idealogical issue, I do not favour a greater increase on the upper end, on a practical level, you can't raise money where there isn't money. It seems to me that should this become nexessary, then practically it would have to be in an increase on the top quintile. I hope this can be avoided, but as I said no one really knows yet.
Now in Texas we have the oddity of no state Income Tax. This is replaced by a VERY high sales tax rate, and higher fee for services (licenses, etc) than many other states. This makes it very hard to track a real tax rate vs economic level in Texas. It also makes raising taxes a little easier, as we don't notice fee increases, or have the debate over them we have on income taxes. Income taxes are just more visible.
Perhaps it is time to replace these other sources with a state income tax, scewing a little more progressivey than the current sales, tax + fee structure does. Unfortunately most studies seem to show that taxation in Texas actually works out to be neither proportional , nor progressive, but regressive. The trick would be to create the income tax in the same bill that reduces or eliminates the other taxes and fees.
Don't know if that could be done though
Hope that was clean and clear, and that the discussion stays so.
The thoughts of all the "fees", which you are right in saying they are a tax, being lowered to focus on something more progressive is interesting. In Michigan, where I grew up, I believe your vehicle registration fee was based on vehicle value. If you can afford a $50K vehicle - you paid a higher registration fee. It's interesting and certainly subject to lively debate. Keep in mind one of the big ways Texas cities gather monies is through property taxes - which is based on property value - and IMO fair.
But for the sake of keeping this focused on income taxes, I'll not digress into other tax issues.
I also fully concur that we need to reign in spending. I sure wish we could somehow make spending bills "ala carte". Stop bartering with tax money to buy votes. If something is good, it should be good by itself... enough of the "I'll vote X down unless you add Y and Z into the bill so my people get something". It's time to realize that we are one country and stop this bickering in Washington.
Issues like health care, social security, medicare, etc - are all going to cost us massive amounts of money. We need to start cutting the waste and tightening our belts.
One area I struggle with is Capital Gains taxes. If someone makes an $1 via a job as income and pays taxes on it, then invests that money and makes a gain on that investment, should they be taxed? Some folks say that's double taxation - but it's only taxation on gains, not on the principal, so one could argue that it is not. IMO - I wish we'd simplify things. Income is income - whether it's from a job or investment. We can write off investment losses and take up to a net of $3000 per year as a deduction, which will give the tax benefit as if we had $3K less in income, therefore getting the BENEFIT of the higher income tax bracket - yet we want gains to be lowered. I don't see why we don't get rid of the capital loss cap altogether and then consider investment gains as income. That'll simplify things, and IMO, is fair.
Something else that I find interesting about income. If we are taxed to pay into social security - why do we pay income tax on SS earnings? That doesn't make much sense to me, other than for the fed to be able to take back more of it from people that were able to save more and therefore have more sources of income outside of SS. While I'm on the taxing of benefits from the gov't - I have to state that I agree with the sentiment that unemployment shouldn't be taxed.
Does anyone have a link that shows the amount of tax that is actually paid by each group. I know the wealthy are taxed at a higher rate but I want to know what precentage of that rate do they pay on average.
The link to the CBO shows the % of burden and the % of overall income. Are you asking what their "effective rate" is?
On the link above, it shows a chart and has the data. For 2005, effective federal tax rates are as follows:
- Bottom Quintile = 4.3%
- 2nd Quintile = 9.9%
- 3rd Quintile = 14.2%
- 4th Quintile = 17.4%
- Top Quintile = 25.5%
- Top 10% = 27.4%
- Top 5% = 28.9%
- Top 1% = 31.2%
Something interesting is that the Social Security portion is whacked. From bottom to top quintile: 8.3, 9.2, 9.5, 9.7 and then 6.0%. I personally have no problem with removing the cap on social security spending - but it's worth noting that this will not fix the long term insolvency of the program, other changes need to be made in concert.
NOTE: I am quoting the household numbers, not individually broken out data, since tax rates overall are affected by household.
The link to the CBO shows the % of burden and the % of overall income. Are you asking what their "effective rate" is?
On the link above, it shows a chart and has the data. For 2005, effective federal tax rates are as follows:
- Bottom Quintile = 4.3%
- 2nd Quintile = 9.9%
- 3rd Quintile = 14.2%
- 4th Quintile = 17.4%
- Top Quintile = 25.5%
- Top 10% = 27.4%
- Top 5% = 28.9%
- Top 1% = 31.2%
Something interesting is that the Social Security portion is whacked. From bottom to top quintile: 8.3, 9.2, 9.5, 9.7 and then 6.0%. I personally have no problem with removing the cap on social security spending - but it's worth noting that this will not fix the long term insolvency of the program, other changes need to be made in concert.
NOTE: I am quoting the household numbers, not individually broken out data, since tax rates overall are affected by household.
How does the effective tax rate tie into the various deductions? I fall into the 25.5% bracket yet my effective tax rate was around 6% last year. Thank god for the mortgage interest deduction, the property tax deduction, child tax credits, and the sales tax deduction.
Personally I'm in favor of scrapping the income tax system altogether. If we really want to encourage Americans to be savers and not spendthritfs, a consumption-based tax system offers a much better alternative. Give people more of their check to take home and let them decide if they wanna pay the 31.25% sales tax on that plasma TV they don't really need.
Let's be honest and call the IRS and the income tax system what it is - a bloated bureaucracy that's become so loaded with deductions and other pet projects that it's nothing more than an election-year wish generator for both parties.
How does the effective tax rate tie into the various deductions? I fall into the 25.5% bracket yet my effective tax rate was around 6% last year. Thank god for the mortgage interest deduction, the property tax deduction, child tax credits, and the sales tax deduction.
Two "tax rates" are out there: Marginal Tax Rate and Effective Tax Rate.
Marginal tax rate is basically which bracket you belong in - if you made $50K, but had $20K in deductions, you had $30K "taxable" and therefore, assuming a single individual, your tax brackets are:
0 to $8,025 = 10%
$8,025 to $30,000 = 15% (the upper limit on this bracket is $32,550, where the next bracket goes to 25%)
In this scenario, since you're last taxable dollar is in the 15% bracket, you are said to be taxed in the "Marginal Tax Rate of 15%".
Then, your "effective tax rate" is taking your total tax and dividing it by total income. Using the example above, taxable income is $30K (on $50K total income). You paid ( $8,250 x 10% ) + ( ( 30000-8250) * 15% ) = $4,087.50 in total taxes. $4087.50 / $50,000 = 8.1% - so you had an 8.1% "effective" rate. Effective rates are the one, at the end of the day, you and I care about.
I do not read the Dallas Morning News much but do respect the views of Scott Burns, a Personal Finance writer, whose columns are carried Sundays. Within the last year or so, he had an article indicating that after more factors are considered (example: lower paid people spend higher percentage on sales tax), the effective total tax rate for most people is similar. His argument was that there was probably no need for a flat tax since we are already at that point. I thought that it was quite interesting. Wish I had the link.....
EDIT: found the link - he cites a study showing the effective "all in" marginal tax rate is about 40%. Not sure if the "all in" marginal is the same as "effective". Interesting nevertheless. http://articles.moneycentral.msn.com...TaxRate40.aspx
I do not read the Dallas Morning News much but do respect the views of Scott Burns, a Personal Finance writer, whose columns are carried Sundays. Within the last year or so, he had an article indicating that after more factors are considered (example: lower paid people spend higher percentage on sales tax), the effective total tax rate for most people is similar. His argument was that there was probably no need for a flat tax since we are already at that point. I thought that it was quite interesting. Wish I had the link.....
Which is the perfect impetus for saving billions by eliminating the IRS.
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