by Howard Stephenson
Wealthy Americans pay the lion’s share of federal income taxes according to a report by The Tax Foundation, a non partisan research organization based in Washington DC. Based on data from the Internal Revenue Service, the Tax Foundation reported that the share of total federal income tax paid by the top 15% of wage earners increased from 25.2% in 1989 to 36.2% in 1999.
In 1999, the top 5% of earners paid 55.5% of all federal income taxes, up from 43.9% in 1989. The top 10% of all earn ers paid two thirds of total federal income taxes, up from 55.8% in 1989. The bottom 50%, on the other hand, paid 4% of total income taxes in 1999, down from 5.8% in 1989.
REASONS FOR THE LOPSIDED TAX SHARE DISTRIBUTION
High income earners are paying an increasingly larger share of the federal tax burden for two reasons. First, due to the progressive nature of the federal income tax code, high income earners pay a much higher effective tax rate than low income earners, and the disparity in effective tax rates between the two groups has actually widened during the 1990s. The effective tax rate for wage earners in the top 1% increased from 23.3% in 1989 to 27.5% in 1999 while the effective tax rate for the bottom 50% of wage earners decreased from 5.1% to 4.5% during the same time period. The total average tax rate for all taxpayers increased from 13.1% in 1989 to 14.8% in 1999. The second reason high wage individuals are paying a larger share of the federal tax burden is that high income individuals are earning a larger share of total in come.
From 1989 to 1994, the share of total income earned by the top 1% decreased from 14.2% to 13.8%. Between 1995 and 1999, the stock market run up was especially beneficial to higher income individuals. However, due to the market correction that began in March 2000, the share of income earned by the top 1% may have actually declined in the past two years, although hard data are not yet available.
WHO PAYS UTAH STATE INCOME TAXES?
According to the Utah Taxpayers Association top earners also pay a disproportionate share of Utah state income taxes. In 2000, Utahns earning more than $250,000 comprised 1% of all state income taxpayers. Nevertheless, this income group earned 17.1% of the state’s total adjusted gross income and paid 21.9% of all state income taxes. Utahns earning less than $50,000 per year comprised nearly three quarters of all taxpayers. This income group earned one third of total adjusted gross income and paid slightly less than one quarter of all income taxes.
Even though a small portion of Utah wage earners pays the majority of Utah’s state income tax, Utah’s tax is far less progressive than the federal income tax. Most observers attribute this difference to the state’s failure to index state income tax brackets for inflation. Federal income tax brackets have been continuously adjusted for inflation for more than twenty years while Utah’s state income tax brackets have been adjusted only once since 1973. As a result, Utah’s top bracket begins at $8,626 while the average state has a top tax bracket of approximately $60,000. Since Utah’s top bracket starts at $8,626, one of the lowest thresholds in the nation, most income in Utah is taxed at the highest rate, 7%. Consequently, the effective tax rate on high income Utahns is only slightly higher than the effective tax rate on low income Utahns. Additionally, Utahns bear an income tax burden that is 22% higher than the national average since most income is taxed at the highest rate.
TAX CUTS EXPLAINED: WHY SOME GET LARGER TAX CUTS THAN OTHERS
Are “The Rich” being treated preferentially by the Bush tax cuts? The following example illustrates why some people will be receiving larger tax cuts than others.
Everyday, ten men went to lunch. Diner number one had the lowest earnings while diner number ten earned the most. The lunch bill totaled $100. If this lunch tab were paid in the same proportion Americans pay taxes, the first five men would pay 80 cents each; the next four would pay $7.50 dol lar each; the tenth diner would pay $66.
The ten men ate lunch in the restaurant every day and seemed quite happy with the payment arrangement until the restaurant owner decided to reduce the cost of the lunch by $20. Lunch would now cost $80, which raised the question: how would the bill be paid now? Splitting the $20 savings evenly among the ten men would mean that the lowest paid five men would actually make a profit by eating lunch because they would be receiving $2 each when they had been paying only 80 cents each.
The restaurant owner suggested that it would be fair to reduce each diner’s bill across the board 20% since the total lunch price had been reduced by 20%. Consequently, the first five men were expected to pay 64 cents each. The next four would be expected to pay $6 each while the wealthiest diner was asked to pay $52.80.
However, once the men left the restaurant, they began to compare their savings. The five lowest paid men noticed that they had only received a savings of 16 cents each while the wealthiest diner had received a savings of $13.20, which was 1,550% more than what the five lowest paid men received combined.
The five lowest paid diners complained that the wealthy diner received most of the savings. In a similar fashion, some complain that the tax system is “unfair” when the “wealthy” receive the biggest benefit from tax cuts, but those who pay the most taxes receive the most benefit from tax reductions.