Fiscal Cliff 2013: The Rich Already Pay Their Fair Share of Taxes

The political rhetoric and gamesmanship in Washington on the eve of the fiscal cliff deadline is reaching epic levels. The spin, assertions, and denials are all over both sides and very confusing to average Americans. Unfortunately, the only thing not evident in the halls of Congress is bi-partisanship. This is a function of Obama’s election victory and the continuing Republican control of the House of Representatives.

The Senate is effectively stymied as well, as Democrats do not have a filibuster-proof majority. Although President Obama is trying to lead, boasting of a clear-cut mandate from the American people, the effective division of power in the nation’s capital has not changed with the election.

The president continues to obsess about the advantages of the rich as compared to the other 98% of Americans. He continues to proselytize and look for new recruits for his class warfare. Frankly, Obama’s efforts have begun to feel more like a fanatical religious jihad that is based more upon ideology than reality. Yet, if you look at the hard numbers, it becomes clear the wealthy are actually paying too much, not too little in income taxes. Other options, like eliminating tax benefits, focusing on capital gains, and getting everyone back to work also need to be econsidered to balance the budget.

Our leader’s philosophical approach has completely torn the nation apart, something that was not necessary after his successful campaign for the White House. He could have taken the high road and offered real compromise as great American leaders have done so often in the past.

This essay provides facts that can be used to debate the continuing rift between Liberal and Conservative perspectives. It will provide fodder for those who would like to reassess the direction of this country. To this point, our nation has stubbornly refused to give up on capitalism and exceptionalism. The ultimate outcome of the fiscal cliff debate could have a significant impact on whether the country reverts to socialistic tactics such as the redistribution of wealth through excessive taxation.

It is worthwhile to consider the facts about taxes and spending, something our leaders and legislators might also find interesting. Consider the following chart that summarizes federal income tax data from 2010 (the latest available information).

Summary of Federal Income Tax Data, 2010

 

Number of Returns*

AGI ($ millions)

Income Taxes Paid ($ millions)

Group's Share of Total AGI

Group's Share of Income Taxes

Income Split Point

Average Tax Rate

All Taxpayers

135,033,492

$8,039,779

$949,144

100.0%

100.0%

-

11.81%

Top 1%

1,350,335

$1,517,146

$354,810

18.9%

37.4%

$369,691

23.39%

1-5%

5,401,340

$1,199,053

$205,839

14.9%

21.7%

 

17.17%

Top 5%

6,751,675

$2,716,199

$560,649

33.8%

59.1%

$161,579

20.64%

5-10%

6,751,674

$915,165

$109,670

11.4%

11.6%

 

11.98%

Top 10%

13,503,349

$3,631,364

$670,319

45.2%

70.6%

$116,623

18.46%

10-25%

20,255,024

$1,799,588

$156,477

22.4%

16.5%

 

8.70%

Top 25%

33,758,373

$5,430,952

$826,796

67.6%

87.1%

$69,126

15.22%

25-50%

33,758,373

$1,664,728

$99,986

20.7%

10.5%

 

6.01%

Top 50%

67,516,746

$7,095,680

$926,782

88.3%

97.6%

$34,338

13.06%

Bottom 50%

67,516,746

$944,099

$22,363

11.7%

2.4%

<$34,338

2.37%

Source: Internal Revenue Service

*Does not include dependent filers.

The data reveals that 135 million tax returns yielded $949 billion of tax revenue, and the average federal tax rate was 11.81%. The top 5% of Americans paid $559 billion, or 59.1% of the total federal income taxes paid at an average rate of 20.64%. The bottom 50% of Americans paid $22 billion, or 2.4% of total federal income taxes at an average rate of 2.37%. Does this seem slightly out of balance?

Setting aside political rhetoric for a moment, how could anyone look at these figures and conclude that the most affluent among us are getting a fair deal? In my opinion, it is not a case of whether the rich are paying their fair share. Rather, they are paying too much.

The country has become too reliant on the wealthy to subsidize over 50% of the country. A skeptic might ask, "what are the lower 50% contributing to the country, if not taxes?" How are they making America a better place to live? Unfortunately, this simple observation and query is not politically correct. The affluent must just pay their damn taxes and the people in Washington will use it as they see fit.

The debate about raising taxes on the rich has completely distorted the truth. Americans want a progressive tax code, and they have it already, big time. It spans a 35% marginal tax rate for the wealthy, to close to zero for over 50% of the population. There’s not much room to make it more progressive if America is going to remain a capitalistic society.

Tweaking the tax rates for the wealthy 5% of the country, who already pay 60% of the taxes is another issue. But, it should not be the principal argument for concluding that the group is not paying its fair share.

The irony of the current negotiations is that the president is not receptive to using other sources of revenue when addressing the fairness of the tax code. He wants to increase the federal income tax rate, while repeatedly saying the other revenues such as reducing tax benefits don’t add up. Well they do add up if you eliminate enough of them. Consider the following chart.

 

If the benefits that accrue to the affluent from this list were eliminated or reduced, it is highly likely that the president could get to a trillion dollar plus contribution from the rich without increasing the marginal tax rate. It is impossible for me to assess just how much can be extracted from these items. Yet, capital gains afford some insight into this analysis.

While it is true that effective tax rates for the affluent have declined in recent years, it is not because the highest marginal rate is too low. A huge benefit accrues to the wealthy from the tax rate assessed on long-term capital gains and corporate dividends. Currently, capital gains, defined as “the difference between what you paid for an investment and what was received when you sold that investment,” are taxed at 15%, compared to the highest marginal tax rate of 35%.

So, if a high earner bought stock for $100,000 and sold it for $150,000 after 12 months, he would pay capital gains tax of $7,500 ($50,000 times 15%). Without the capital gains benefit, and at the marginal tax rate, taxes payable would be $17,500 ($50,000 times 35%).

If Congress wanted to target a tax benefit that is directed at the “.1%” , which consists of only 315,000 Americans, capital gains would be an ideal choice as 50% of the capital gains benefit goes to this group alone. Most of the balance goes to the next 4.9% of the highest income earners. The aforementioned chart indicates that capital gains alone, excluding the dividend income benefit (which is also 15%), will cost the federal government $258 billion over the next five years.

As I have written before, the tax benefits in this chart represent very “juicy” sources of revenue for the federal government. The benefits could easily be taken from the highest earners exclusively thereby sparing the middle class any tax hikes. Of course, legislators would have to navigate through the plethora of special interest groups and lobbyists to capture these revenues. But, they would be more palatable to Republicans in the current negotiations.

So, is it really necessary to increase the tax rates of the wealthy? Probably not if revenues can be found from other sources. Are the rich paying their fair share? The answer to this question depends upon whether you want to live in a capitalistic or a socialistic society. If you value merit pay and exceptionalism, the former is for you. If you want to bring down the wealthy and use the proceeds to pick up the lower classes, socialism is your cup of tea.

Personally, I would like to elevate the middle and lower classes without destroying the wealthy class. I have an idea in this regard: a job for every able bodied American.