Income vs tax rates


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This short presentation observes the average tax rate for different income group tiers. It relies on the US IRS data.

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  • Income vs tax rates

    1. 1. Income vs Tax Rates using IRS Data Gaetan Lion October 4, 2011 1
    2. 2. Let’s Tax the Rich• This has become a favorite mantra in the current political climate.• Even the Rich (one anyway) want to tax the Rich more (Warren Buffet wanting to be taxed at a higher rate than his secretary).• It is true the Rich benefit from two major advantages: 1) their investment income is taxed at lower capital gains rate; 2) they exploit tax deductions the rest of us can’t (accelerated depreciation on real estate, etc…). 2
    3. 3. Perceptions…• The Rich are taxed at a lower tax rate than the middle class (their secretaries, etc…). This would not be surprising given lower capital gains tax rates vs ordinary income tax rates.• The Rich do not pay their fair share. Now, let’s examine the actual data (IRS) to confirm whether those perceptions are based in reality… 3
    4. 4. Average Tax Rates Source: IRSAs shown, the Rich tax rate is actually far higher than the one for therest of us (bottom 90%). Average tax rate is simply: taxes paiddivided by income. This is the most accurate representation of 4taxation.
    5. 5. Tax Rate: Top 1% vs Bottom 90% Source: IRSThe multiple of the tax rate on the top 1% vs the bottom 90% has rangedfrom 2.5 to 3.5 times. It is currently (as of 2008) near the very top of thatrange. 5
    6. 6. Income Tax Share by Income Percentile Source: IRSWhile the top 5% contributed about the same share of taxes as the bottom90% in the late 80s (both around 45%); now the top 5% contribute twice asmuch as the bottom 90% (60% vs 30%). Similarly, over the same period theshare of the top 1% was far lower than for the bottom 90% in the early 80s;now it is far higher. 6
    7. 7. Perceptions revisited• The Rich are paid at a lower tax rate than the middle class (their secretaries, etc…). That’s wrong.• The Rich do not pay their fair share. That’s wrong too. 7
    8. 8. But the Rich make a lot more money now Source: IRS… That’s true as their share of Income has risen relative to the bottom90%. This trend results from several causal factors: globalization,technology, deregulation, weakening of labor unions, manufacturing offshoring, etc… Thus, this is not just a tax related phenomenon. 8
    9. 9. However Taxes are still very Progressive The Rich all experience a high multiple of Share of Taxes paid divided by Share of Income. That multiple has been volatile and sensitive to Bubbles and crises in real estate and stocks. But, the long term trend is flat. Source: IRS Meanwhile, the trend for the bottom 90% is steadily downward from 0.70 in 1986 to 0.55 in 2008. The combination of the above trends confirm that taxation has remained very progressive. In other words, the Rich share of taxes has remained far higher than their share of income. Meanwhile, for the not so rich their share of taxes has steadily declined relative to their share of income. 9
    10. 10. The Real Issues…• It is not Tax the Rich. It is more like tax everybody including the Rich.• The US is currently running a Budget Deficit equal to 9% of GDP. With upcoming fiscal pressures of rising Social entitlement costs (Social Security & Medicare) raising taxes for everyone (not just the rich) appears inevitable.• Reducing spending is another imperative. 10