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Monday, January 25, 2016

The Tax Burden

Alan Viard writes at The Sacramento Bee (via AEI):
A few weeks ago, the IRS released new data showing that the average federal individual income tax rate on the richest 400 jumped more than a third, to 22.9 percent, in 2013.
The increase in their tax burden is no mystery. Top income tax rates on both ordinary income and capital gains rose in 2013, at the same time that a new 3.8 percent tax on investment income earned by high-income households took effect.
If the 16.7 percent tax burden was the problem, it’s been solved.
Of course, 22.9 percent may still seem too low a tax burden for our society’s wealthiest members.
And, many find it troubling that capital gains and dividends face lower individual income tax rates than other types of income.
But, that’s only part of the story. Although stockholders pay lower individual taxes on their dividends and capital gains, that income is also taxed at the business level – corporate income tax is taken out before the money reaches the stockholders.
Relieving double taxation is no loophole. Recent computations by the Congressional Budget Office add up the total federal taxes, including corporate income taxes and payroll taxes, paid by different income groups.
Although CBO doesn’t break out the taxes paid by the top 400, it computes the tax burdens on the top 1 percent and other groups, ranked by the market income they earn before paying taxes and receiving government benefits.
In case you’re wondering, CBO counts the entire payroll tax, including the employer’s half, as part of workers’ tax burdens – that’s the right approach because the employer tax drives down workers’ wages.
CBO’s most recent data, for 2011, show that the average household in the middle 20 percent paid $8,100 in federal taxes, less than 15 percent of its $55,400 market income. The average household in the top 1 percent paid $422,700 in federal taxes, more than 29 percent of its $1,447,500 market income. Even before the 2013 high-income tax hikes, the rich bore a much higher total federal tax burden than the middle class.
Of course, including federal benefits would further reinforce the tilt toward the middle class. CBO found that the average household in the middle group received $10,700 in federal benefits, $2,600 more than the taxes it paid. The average household in the top 1 percent received $9,600 in federal benefits, a tiny fraction of its tax payment.