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Running With One Eye Open

11/28/2012

Factoid-of-the-Day:   Averaging $161,579 per taxpayer — the most recent IRS data shows that the top 5% of income earners enjoyed 37.4% of all “adjusted gross income” but paid 59.1% of total Federal income taxes in 2010.

Political types take that as proof-positive that the highest marginal tax rates need to be reduced, and then they’re off-and-running.

Economic types take that as just another interesting data-point.

While the top 5% pay 59.1% of all Federal income taxes, what percentage of total taxes do they pay, including payroll taxes and sales taxes?   I think we all agree that workers earning salaries of $50,000 annually probably have less portfolio income (dividends & long-term capital gains) than workers making $250,000 annually.  It is important to note that portfolio dividend income pays lower income tax rates (15%)  AND that portfolio income pays no payroll tax, therefore producing more “take-home pay” than salary does.  So, why do we treat income earned from hard, sweaty work less favorably than income earned from merely owning?  (The trusty old bromide from the Supply-side school of economics is that owners or “job-creators” need lower taxes to create jobs.)

Shouldn’t we also consider the sales tax, which is truly regressive.  Since poor people must spend every single dollar and save/invest nothing, that means every dollar of their income is subject to sales tax.  Since “rich” people can afford to save and/or invest some of their income, they are sheltering income from the sales tax.  So, why should the poor pay a higher percentage of their income in sales tax than “rich” people?  (The trusty old bromide from the Keynesian school of economics is that “rich” people benefit more from police and fire protection services, which are funded by sales taxes, since the “rich” have more to protect.)

Some policy wonks argue we should end the reliance on taxing income and start taxing assets instead.  I personally know a large number of people who have millions in assets but need very little income.  Therefore, they dial-down their taxable income and have their portfolios managed for lower-taxed growth, instead of higher-taxed income.  (There is a trusty old bromide from the Austrian school of economics that “if you want less of something, tax it.”)

The point is NOT that the “rich” do or do not pay their fair share.  The point IS that a single factoid — like the top 5% paying 59.1% of the taxes — tells you precious little about the subject . . . unless you’re a politician, of course.

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