President Obama argues that the “rich” are not paying enough income taxes. He contends that raising the tax rate on workers earning more than $200,000 is not only fair but will shift the income distribution in a healthy direction. Unfortunately historical income and tax data undermine both of his claims. Ignoring the data, President Obama, and many public policy wonks, argue that undertaxing the “wealthy” has caused the income distribution to shift dramatically in favor of high salaried workers.
While it is true that high wage workers have experienced superior income growth over the past three decades, it is a false that higher income earners have enjoyed relatively lower tax burdens. The latest tax data from the Tax Foundation show the top 5 percent of taxpayers, those making more than $160,000, paid 59 percent of income taxes which was up dramatically from the their 43 percent of income taxes paid in 1986. The same data indicate that the bottom half of taxpayers, individuals making less than $33,000 paid only 2.7 percent of income taxes and well down from their 6.5 percent of federal income taxes paid in 1986. Thus between 1986 and 2009, the top 5 percent of wage earners dramatically increased their percentage of federal tax payments while the bottom half of earners significantly reduced their share of federal tax collections.
Has the shift in the tax federal income tax burden from low income to high income workers produced a more equitable income distribution? The answer is an unambiguous NO. In 2009 the top 5 percent of earners took home 35 percent of total taxable income, a significant improvement from their 24 percent share in 1986. From 1986 to 2010, the bottom half’s share of income dropped from 17 percent to 13 percent. In summary, data show that extracting a larger proportion of federal income collections from higher income workers has failed to moderate income differences. In fact, one could argue that placing a rising share of the nation’s tax burden on top earners has resulted in growing income inequality. However, calculating a more precise association between the distribution in income and income taxes goes well beyond the scope of this essay.
But if the income tax burden is not the culprit in rising income inequality, what is? The most significant contributor to mounting income inequality has been differences in educational achievement. In 1980, bachelor’s degree holders earned 60 percent more than workers with only a high school diploma. Almost 30 years later, the income gap has widened to the point to where those with a bachelor’s degree earned double that of a high school graduate. In 2009, compared to the high school dropout, workers with a bachelor’s degree earned almost $50,000 more. Additionally, December 2010 showed unemployment rates of 15.7 percent for workers without a high school diploma, 9.8 percent for workers with a high school diploma, and 4.6 percent for college educated workers. Government data show a clear association between education levels and income, and the correlation has been growing stronger.
However, facts have not stopped a parade of politicians from railing against the “rich.” In the name of fairness and deficit reduction, President Obama has proposed to raise taxes on families with yearly earnings of more than $250,000, and individuals making over $200,000. There are three problems with such a policy. First politically speaking, a large number of low income individuals (the 95 percent) can vote to inflict even higher taxes on the supposed rich (the 5 percent) in the future. The latest IRS data show that approximately 52 million Americans filed tax returns that used exemptions, deductions and tax credits to completely wipe out their federal income tax liability. This cohort represents a large voting block that can transfer even more of the federal income tax burden to the “rich.” Second, such a policy shifts the cost of government to a small proportion of the population and thus encourages government overspending on subsidies for individuals with no tax liability. Third, and most important, it will not result in a more equitable distribution of income.
In fact, past data show that it is more likely to contribute to greater income inequality and slower economic growth.