A couple of days ago a friend posted a chart about the top US marginal tax rate (see below). I like the chart, but I soon realized it doesn't present a full picture. This finding led me to question several other common assumptions about the tax code.
I compiled this list because I couldn't find a single source that answered these particular questions, questions that I find essential to the debates about the tax code.
Here's that chart I was talking about.
Q. The purpose of this chart is to imply that raising the top marginal tax rate back to 39.6% wouldn't be a big deal, right?
Q. So why not raise the rate back to 91%? It seems like the economic growth in the 1950s was great. If we raised it again to 91%, would we have the equivalent of what was happening in the 50s?
A. Not quite. Today, the top marginal tax rate affects a wider group—those making over $397,000. In the 50s the top bracket only affected those who made the equivalent of over $2.3M (see below).
This means that someone who made the equivalent of $3M in 1955 would have only been taxed 91% on the portion that was above $2.3M, but someone making $3M today would be tax 91% on everything above $397,000. That's an enormous difference—the difference between making $700,000 and $2.4M a year (excluding all other taxes, credits, deductions, etc.).
So things are not as simple as the graph above lets on because the income level for the top bracket have shifted many times—and often dramatically!
Still, the differences between tax brackets from 1993 to 2011 aren't very large, so if the top marginal rate were to rise back to 1993 levels, it would be nearly equivalent to what it was then.
Q. Okay, I see. There's something else I'm wondering about: The chart above only focuses on rates, which is totally different from what people actually paid (taking into account all the shifting tax credits and deductions). No one really paid 91%, right?
A. I think that's right. I had a hard time finding a chart I could trust on this one. If anyone knows where to find the amount each bracket actually paid, I would love to see it.
Until then, here is this chart that shows the effective rate—including payroll, estate, and other taxes—for each segment of income distribution.
Q. So according to this chart, nobody had an effective rate of 91%.
A. Right, remember the 91% just referred to the marginal rate—the rate that the income above a certain threshold is taxed. This chart shows the effective rate.
Also, this chart gets around the problem about shifting tax brackets by splitting everything according to segments of income distribution (not according to arbitrary brackets).
Q. What exactly is meant by the Bush tax cuts?
Q. Since Obama continued these cuts, why aren't they now called the Obama tax cuts?
A. Good question.
Q. I hear Republicans say that it won't matter if we raise taxes because tax revenues average around 20% pretty much no matter what we do. They show charts like this one.
A. It's true. Even though tax rates have changed pretty dramatically 1945-2010, revenue as a percent of GDP hasn't changed much. I don't know all the reasons for this (though I suspect it has to do with certain tax cuts in certain years, or certain recessions, or both), but I don't buy that getting above 20% would be impossible for the US. After all, look at where the US lands on this chart.
Most of these countries get far more revenue as a percent of GDP than the US does. There are tradeoffs for this, obviously, but it certainly wouldn't be impossible for the US to get more tax revenue if it wanted to.
(And if we want to continue to expand our warfare/welfare state, we probably will need to eventually raise rates to European levels.)
Q. How much does the lowest income bracket pay in taxes?
A. It depends on how you break it down. Here are a few key data points that emphasize just how much the richest actually end up paying.
But these charts don't factor in all taxes—sales tax, gasoline tax, payroll tax. When you factor those things in, the share each bracket pays is fairly close to the share each bracket earns.
And the effective tax totals for each bracket aren't quite so unequal as the earlier charts seem to indicate.
Particularly when you factor in income inequality.
Q. Okay, okay. Just one more question. Why does any of this matter?
A. There are several reasons, but the biggest reason is that the long-term health of the United States depends on its citizens really understanding this issue. Right now we're a little confused:
And we're heading into a strange place:
We're fooling ourselves if we think we can keep heading in this direction.
A. Well, mathematically speaking, the problem isn't tough. We need to cut warfare and welfare spending, and raise tax rates across the board, for everyone. That's it. Do it over a ten year period, but do it.
The problem is that team politics—the constant left vs. right chatter—will never allow us to seriously move forward on simple mathematical necessities.
But we can gather the best data we can find, create a better dialogue about these issues, and then hope for the best.
How we pay taxes: 11 charts
Who pays taxes in America
Income tax in the US
Who pays taxes 2012
History of tax rates
Another excellent inequality study
Dear Government: Please Hurry Up and Compromise Because If You Don't This Country is Screwed
Added! A chart suggestion from Dallin in the comments section, showing the share of people paying taxes by age. This is from March 2008, and while things certainly looked different through the recession, it shows that many of the people who don't pay federal income taxes are young or old.