Whenever the subject of income taxes comes to the forefront in debates on taxation, there is always a lot of gnashing of teeth and strong opinions about who pays the most and who pays hardly any. One can hear tales of the middle class (who knows what the definition of that is) getting squeezed, or the poor paying too much, or Warren Buffet saying he pays less than the garbageman down the street (he is one of only a few people on the entire planet that can live off of capital gains, yet he hoists that story to the public year after year).
Also, in the heat of campaign season for the Democratic Presidential primary, Senator Bernie Sanders loves to throw fuel on the fire by demonizing businesses and billionaires for not paying enough in taxes (while enjoying a net worth himself of over several million dollars thanks to free market capitalism).
Recently, the Tax Foundation in Washington D.C. published a detailed report on the subject on the federal side of things that provides some interesting sunlight into what the actual facts are when it comes to federal income taxes. The report takes data from the IRS based on individual income taxes that were paid in 2017.
One often hears the claim that the wealthy do not pay their fair share of income taxes. However, looking at the 2017 data from the IRS, one finds that the bottom 50% of taxpayers (those with Adjusted Gross Income of less than $41,740) paid roughly 3% of all federal income taxes in 2017. Consequently, the top 50% of taxpayers (those with Adjusted Gross Income of more than $41,740) paid 97% of all federal income tax in 2017.
Moving up the income spectrum, the share of the amount of taxes paid continues to increase. Those in the top 5% of income brackets paid over 58% of the total federal income taxes to the tune of $928 billion. For those that might have missed a few days of math class that is just short of $1 trillion dollars. If one contrasts that with the $49.8 billion that the bottom 50% pay, the top 5% are paying almost twenty times ($928 billion vs $49.8 billion) more in taxes than the bottom 50% in total dollars paid.
Aside from the argument of whether this is fair or not, the data makes a few things clear. First, the vast majority of tax revenue that the government relies upon to fund its operations and programs comes from high income individuals. Second, if politicians want to keep the funding in place to pay for all of their bright ideas, they need to think twice before demonizing free market capitalism, businesses and the wealthy. As history and piles and piles of data show, capital and those that produce income for themselves and others tend to flee cities, counties, states and even nations that chase them away with escalating tax rates and punitive tax policies.
One of the other complaints that many level at those in higher income brackets is that they pay lower tax rates than everyone else. The graph below illustrates why this is a false statement. Once the various tax deductions, exemptions and credits that most taxpayers have, the ACTUAL tax rate (typically called the effective tax rate) they pay is far below what is commonly understood. Once your income rises to a certain level, policymakers penalize success and “phase out” or take away those deductions, exemptions and credits. Consequently all of that higher income is taxed at the full marginal rates.
As the chart above shows, taxpayers in the bottom 50% of income pay an average ACTUAL income tax rate of 4.0% after factoring all of the deductions, exemptions and credits. The top 1% pay an ACTUAL tax rate of 26.8%, which is six times higher than those in the bottom 50%. One can see how it applies to their own situation by looking at their recent tax returns and seeing their “effective rate”. It is typically much lower than most people think.
There is an indisputable fact when it comes to the results on imposing high and punitive income taxes: it drives away population, jobs, businesses and economic prosperity. These effects can be seen as clear as day in the net migration statistics among the fifty states. For many years now, population, jobs and capital have been fleeing high tax states like California, New York and New Jersey. California’s top marginal tax rate on income now sits at a whopping 13.3%, while New York’s is 8.82% and New Jersey’s is 8.97%. According to the US Census Bureau, from 2006 to 2015, the state of New Jersey saw over 525,000 people leave the state, while California lost more than 1.1 million residents and New York lost more than 1.3 million.
Thankfully, policymakers in Utah have consistently worked towards lowering the income tax rate in Utah. That has been one of the major factors in setting Utah at the top of the heap for economic growth for more than a decade. The Utah Taxpayers Association will continue to fight for the best tax policy to keep Utah there.