Today's awkward situation: Suppose the rich and the affluent were cows. And suppose the rest of us ran the farm.
Query: Are we treating the herd right?
The answer, according to the most recent IRS statistics, is a resounding yes. Over the last two years, tax collections have enjoyed the largest increase in history.
We're doing right well by the herd. They are treating us well in return. The herd is growing. It is providing a good deal of milk in the form of tax payments. Year after year, the productivity of the herd appears to be growing because it is yielding ever more tax milk.
The most productive cows on the farm are otherwise known as corporate executives. Their specially engineered tax milk comes from stock options, which are generally taxed at ordinary income tax rates when realized. So it's the rich and creamy 35 percent stuff. The more of these cows we have in the herd, the greater the productivity of our tax farm.
Needless to say, this isn't the conventional way of looking at income tax statistics. Even corporate executives, who get called lots of things, might object to being thought of as cash cows.
The usual view is to bemoan the growth of income at the top. After that, we worry about how it is depriving the rest of us of our ability to pay for cell phone minutes, lattes, lottery tickets and other life essentials.
In fact, if "taxes are the price of civilization," most of us are getting our civilization cheap.
Why? Because the rich and affluent -- our cash cows -- are paying most of the bill. In 1986, according to IRS data, the top 10 percent of all households had incomes of $48,656 or more, collected 35.1 percent of all income and paid 54.7 percent of all income taxes. They paid an average tax rate of 22.6 percent.
By the recently released figures for 2004, the top 10 percent of all households enjoyed adjusted gross incomes of $99,112 or more. They collected 44.3 percent of all income. And they paid a whopping 65.7 percent of all taxes, at an average rate of 18.6 percent. Lower tax rates on top-earner income had the beneficial result of reducing the portion of the tax burden that the other 90 percent had to pick up.
Viewed from the other end of the pyramid, the bottom 90 percent of all households collected only 55.7 percent of all income. But they paid only 31.8 percent of all taxes. Better still, they paid at an average rate of only 6.9 percent. As a practical matter, you're pretty much excused as a taxpayer if your income is in the bottom 50 percent, some $30,124 or less in 2004, because your average tax rate will be only 2.94 percent.
If human beings didn't change their behavior when taxes were changed -- and the idea that they don't is one of the most persistent delusions of politicians -- we could see some very interesting changes in tax policy.
Suppose, for instance, that the average tax rate on the cash cows in the top 10 percent was increased from 18.6 percent to an average tax rate of 27.3 percent. The poor cash cows would be trapped into paying enough income tax so the other 90 percent wouldn't have to pay a cent.
Daring journalist that I am, I'd bet heavy money that more than 51 percent of all voters would be in favor of such a plan. Indeed, I can imagine the positive vote going to nearly 90 percent.
Then again, if you yanked an additional 8.7 percent from those fabulously well-off households that earn $99,112 or more, there's a good chance much of the income being taxed would mysteriously disappear.
So the bottom 90 percent would still have some income taxes to pay.
CULTIVATING THE TOP 10 PERCENT EARNER CASH COW
|
|
|
|
Year
|
Average Tax Rate
|
Percent of Taxes Paid
|
|
2004
|
18.60
|
68.19
|
|
2003
|
18.39
|
65.84
|
|
2002
|
20.51
|
65.73
|
|
2001
|
21.41
|
64.89
|
|
2000
|
22.34
|
67.33
|
|
1999
|
21.98
|
66.45
|
|
1998
|
21.42
|
65.04
|
|
1997
|
21.36
|
63.20
|
|
1996
|
21.55
|
62.51
|
|
1995
|
20.97
|
60.75
|
|
1994
|
20.48
|
59.45
|
|
1993
|
20.20
|
59.24
|
|
1992
|
19.13
|
58.01
|
|
1991
|
18.63
|
55.82
|
|
1990
|
18.50
|
55.36
|
|
1989
|
18.77
|
55.78
|
|
1988
|
19.18
|
57.28
|
|
1987
|
19.77
|
55.61
|
|
1986
|
22.64
|
54.69
|
|
Source: Internal Revenue Service
|
Needless to say, this is not the end of all tax discussion. Much could be said about the regressive impact of the employment tax. We could still worry about the long-term impact of the increasing concentration of income among the top earners, or the difficulty many workers have in increasing their real income.
The one thing we really can't talk about is whether the affluent are paying their fair share. They are.
ON THE WEB
SOI Tax Stats - Individual Income Tax Rates and Tax Shares
---------------------------------------------------------------------------------------------------------------------------
Personal finance writer Scott Burns is syndicated by Universal Press. His twice weekly column appears in newspapers from Boston to Seattle. He is the Chief Investment Strategist for AssetBuilder, Inc. Readers can register at
www.scottburns.com. Questions/comments can be posted directly. They can also be sent, without registration, to
scott@scottburns.com. Questions of general interest will be answered in future columns and on this blog.
Click on the "Archive" navigation to see other columns. All comments are welcomed and appreciated.
