What is a "Fair Share" of Taxes?

Steven Dutch, Natural and Applied Sciences, University of Wisconsin - Green Bay
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We constantly hear in political debates that this, that, or the other group isn't paying its "fair share" of taxes, but nobody seems to be able to define what a "fair share" is.

This is not about what we should be paying in taxes - opinions range all the way from people who think we should be like Sweden and take half or more of all income in taxes, all the way to libertarians who dream of abolishing taxes altogether. This is about what we are paying now.

Fortunately, there's a wonderful tool called the Statistical Abstract of the United States. It is to economic debates what the Guinness Book of World Records is to barroom trivia arguments. The most recent editions have gotten beyond the useless .pdf format of earlier on-line versions and now provide data in spreadsheet form as well. So we can look up some stuff in the 2007 edition. The most recent tax data are from 2003 (it takes a few years to collate everything).

Some Basic Information

What's Fair?

Part of the problem is that there are many definitions of "fair." Some of the most popular:

Per Capita Basis

Individual Federal Income Taxes

Total Federal Individual income taxes $748,017,000,000
Individual tax returns filed 2003: 130,424,000
Per Capita tax: $5735

But not all those returns paid taxes. If we actually look at the returns for which taxes were paid, there were123,462,000.
Per Capita Tax: $6058

All Federal Income Taxes

Total Individual and corporate taxes (Table 464): $925.5 billion
Total Individual and corporate tax returns (Table 471): 168,293,000
Per Capita Tax $5499

This isn't perfect because the numbers of returns are for 2005, but since there will be more returns in 2005 than 2003, the net effect is to reduce per capita tax slightly. The difference in individual returns between 2003 and 2005 is not very large so the effect is small.

Federal, State and Local Taxes

Total taxes- all levels of government (Table 418) $2,031.8 billion
Total Individual and corporate tax returns (Table 471): 168,293,000
Per Capita Tax $12073

This figure includes income taxes, sales taxes, property taxes, etc.

Proportional to Income

Gross Income

Gross personal income (Table 657): $9,169.1 billion
Total individual and corporate taxes - Federal (Table 464): $925.5 billion
Proportion of gross income: 10.1%
Total taxes - all levels of government (Table 418) $2,031.8 billion
Proportion of gross income: 22.2%

Adjusted Gross Income

Total Adjusted Gross personal income (Table 473): $6,207,109,000,000
Total individual and corporate taxes - Federal (Table 464): $925.5 billion
Proportion of Adjusted Gross Income: 14.9%
Total taxes - all levels of government (Table 418) $2,031.8 billion
Proportion of Adjusted Gross Income: 32.7%

Who Pays What?

To go any further, we need a breakdown of who makes what in income and pays out in taxes. Fortunately, that's in Table 474. The cumulative columns tally cumulative percents in both directions for the top of each bracket.

Income Bracket (AGI - 2003) Returns (1000) Cum % Taxpayers Up Cum % Taxpayers Down Total AGI $billion Total tax $billion Cum % Tax Up Cum % Tax Down Tax as % AGI Average Tax
Less than $1,000 3,525 0.1% 99.9% -80 -     (NA) (NA)
$1,000-$2,999 4,900 0.2% 99.8% 10 -     4 72
$3,000-$4,999 5,087 0.5% 99.5% 20 -     2 76
$5,000-$6,999 5,065 1.0% 99.0% 30 -     2 134
$7,000-$8,999 5,104 1.6% 98.4% 41 -     3 223
$9,000-$10,999 4,973 2.4% 97.6% 50 1 0.1% 99.9% 3 253
$11,000-$12,999 4,644 3.3%  96.7% 56 1 0.3% 99.7% 4 415
$13,000-$14,999 4,720 4.4% 95.6% 66 1 0.4% 99.6% 4 582
$15,000-$16,999 4,655 5.6% 94.4% 74 2 0.7% 99.3% 5 733
$17,000-$18,999 4,460 6.9% 93.1% 80 2 0.9% 99.1% 5 884
$19,000-$21,999 6,318 9.0% 91.0% 129 4 1.5% 98.5% 6 1,149
$22,000-$24,999 5,692 11.1% 88.9% 134 5 2.1% 97.9% 6 1,457
$25,000-$29,999 8,542 14.9% 85.1% 235 11 3.6% 96.4% 7 1,812
$30,000-$39,999 13,957 22.7% 77.3% 485 30 7.6% 92.4% 7 2,508
$40,000-$49,999 10,452 30.3% 69.7% 468 35 12.3% 87.7% 8 3,582
$50,000-$74,999 17,372 47.4% 52.6% 1,066 94 24.9% 75.1% 9 5,536
$75,000-$99,999 9,543 60.7% 39.3% 821 84 36.1% 63.9% 10 8,882
$100,000-$199,999 8,879 79.5% 20.5% 1,170 163 57.9% 42.1% 14 18,432
$200,000-$499,999 1,999 88.8% 11.2% 576 121 74.1% 25.9% 21 60,453
$500,000-$999,999 356 92.7% 7.3% 241 60 82.1% 17.9% 25 169,166
$1,000,000 or more 181 100.0% 0.0% 535 133 100.0% 0.0% 25 731,738
Total 130,424     6,207 748     13 8,412

We have 181,000 returns with over a million dollars in AGI for a total of 535 billion dollars. That's an average of just under $3 million each. So millionaires earn about 100 times as much as people in the $30,000 range but pay 300 times as much tax, or three times higher taxes in proportion to their income.

There may be some people every year with a million dollars who pay no tax. There are 181,000 who pay an average of $731,738 - a quarter of their income - in taxes. The top 10% of taxpayers pay a quarter of all income tax, the top half pay 3/4.

I've used the issue of millionaires who pay no tax as an illustration of the fallacies inherent in anecdotal evidence for three decades. The pattern does not change significantly regardless of which party is in power or how much people complain about tax cuts for the rich.

How much is missing because of tax writeoffs? That $-80 billion AGI in the $1000 or less range almost certainly reflects losses for tax purposes, and other taxpayers in other brackets also had their AGI reduced by losses.

Discretionary Income

Now, let's give a free pass to everyone earning $30,000 or less a year and keep Federal tax receipts the same. That will leave 62,739,000 individual taxpayers. Since we still want to collect $748 billion in taxes, the per capita share becomes $11922. As a percent of total AGI, that becomes 14.0%.

Let's take out $30,000 a year for bare survival. For the 62,739,000 taxpayers still in the pool, that comes to $1,882 billion, leaving $4,325 billion as discretionary income. $748 billion in taxes thus amounts to 17.3% of discretionary income.

Since all taxes at all levels come to $2031.8 billion, the per capita share, eliminating everyone earning below $30,000 a year, is $32,571. With $4,325 billion of discretionary income, taxes of all kinds amount to 47% of discretionary income.

What's Hiding?

It would be nice if the Statistical Abstract reported gross income rather than adjusted, because some things don't have to be reported. Still, we can get a ballpark figure. Total Personal Income in 2003 (Table 657) was $9,169.1 billion. Since AGI came to $6,207 billion, up to about a third of all income might not be showing up on tax returns. Let's follow the money.

So, of total personal income:

How much goes to the "fat cats" depends on much more detailed accounting and judgment calls. Some of the employee compensation goes to inflated CEO salaries, and a proprietor could be a small farmer or someone renting out a couple of houses all the way up to a large landlord. And while someone who lives off his stock portfolio is an archetypical "fat cat," a large proportion of that interest and dividend income goes to pension funds and IRA's.

Looking at it another way:

Some of that remainder is tax-exempt interest, much of it is business and farm losses.

Government social benefits to persons come to $1,313.5 billion. Divided among 168,293,000 taxpayers, individual and corporate, that comes to $7804 per taxpayer (not per recipient). That doesn't exactly square with the widespread feeling that the government isn't doing enough to help people.

Bottom Line

What's fair depends on definitions. Excluding the completely venal and self-serving definitions of fair, I suggest that if you are paying:

...that a little humility might be in order before complaining about other people not paying their fair share.


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Created 27 February, 2006;  Last Update 02 June, 2010

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