July 2011

Can We Tax “The Rich” Enough to Pay Down the U.S. Debt?

by Amy K. Frantz

A staple of the many speeches given by President Obama is the call for “the rich” to pay just a little bit more in taxes as a means to alleviate our growing deficit and debt crisis. But are “the rich” truly not paying their share of the income tax burden in our country?  And do “the rich” have enough earnings to satiate the desire for more and more spending by President Obama and his liberal friends in Washington D.C.?

In an April 2011 speech on fiscal policy, President Obama had this to say about the tax burden in the U.S. “As a country that values fairness, wealthier individuals have traditionally borne a greater share of this burden than the middle class or those less fortunate.  Everybody pays, but the wealthier have borne a little more.”[1]  The implication, as anyone who has heard the President speak about tax and fiscal issues has deduced, is that the wealthy aren’t paying enough in taxes, and that is why our deficit keeps growing.  Never mind the nearly $800 billion stimulus spending package from 2009 and the “Cash for Clunkers” program, our troops fighting in two (or possibly three – with Libya?) wars, and any number of other new spending programs in recent years.

Do the facts support the President’s implication, that wealthier individuals just aren’t paying their fair share of the tax burden? No.  To begin with, we have now reached the point where just over half of all American households pay no federal income tax.  A new study from the Joint Committee on Taxation, a nonpartisan committee of the U.S. Congress, finds that “the percentage of U.S. households owing no federal income tax climbed to 51% for 2009.”[2]

The Tax Foundation looks at income tax data from the Internal Revenue Service to see which income groups are paying what share of the income tax burden. Their latest report finds that:

In 2008, the top 1 percent of tax returns paid 38.0 percent of all federal individual income taxes and earned 20.0 percent of adjusted gross income….The top-earning 5 percent of taxpayers… earned 34.7 percent of the nation’s adjusted gross income, but paid approximately 58.7 percent of federal individual income taxes.[3]

Additionally, the top 10 percent of tax returns paid 69.9 percent of all federal income taxes, and the top 25 percent of tax returns paid 86.3 percent of all federal income taxes.[4]

How do “the rich” in America stack up against other developed countries around the globe? “A 2008 study by the Organization for Economic Cooperation in Development, for example, found that the highest-earning 10% of the U.S. population paid the largest share among 24 countries examined, even after adjusting for their relatively higher incomes.”[5]

A recent Wall Street Journal article asked what would be the result if rather than asking the country’s top earners “to pay a little more” President Obama decided to make the top income tax rate 100 percent.  Here is what the article had to say:

Consider the Internal Revenue Service’s income tax statistics for 2008, the latest year for which data are available. The top 1% of taxpayers — those with salaries, dividends, and capital gains roughly above about $380,000 — paid 38% of taxes. But assume that tax policy confiscated all the taxable income of all the “millionaires and billionaires” Mr. Obama singled out. That yields merely about $938 billion, which is sand on the beach amid the $4 trillion White House budget, a $1.65 trillion deficit, and spending at 25% as a share of the economy, a post-World War II record.

Say we take it up to the top 10%, or everyone with income over $114,000, including joint filers. That’s five times Mr. Obama’s 2% promise. The IRS data are broken down at $100,000, yet taxing all income above that level throws up only $3.4 trillion. And remember, the top 10% already pay 69% of all total income taxes.[6]

Increasing the tax rates for “the rich” will clearly not provide enough funds to make a dent in the debt or deficit, if spending levels remain the same or continue to rise. The alternatives, absent reducing federal spending, are to continue adding to the deficit and debt levels or increase the tax rates for the middle class as well.  Neither option will help get our economy back on track.

Amy K. Frantz is Research Vice-President at Public Interest Institute.

The views expressed herein are those of the author and not necessarily those of Public Interest Institute or Tax Education Foundation.  They are brought to you in the interest of a better-informed citizenry.

[1] President Barack Obama, “Remarks by the President on Fiscal Policy,” George Washington University, April 13, 2011, <http://www.whitehouse.gov/the-press-office/2011/04/13/remarks-president-fiscal-policy> accessed on June 9, 2011.

[2] John D. McKinnon, “High-Earning Households Pay Growing Share of Taxes,” The Wall Street Journal, May 3, 2011, <http://online.wsj.com/article/SB10001424052748703703304576299560728821804.html> accessed on May 3, 2011.

[3] Gerald Prante and Mark Robyn, “Summary of Latest Federal Individual Income Tax Data,” The Tax Foundation, October 6, 2010, p. 1, <http://www.taxfoundation.org/files/ff249.pdf> accessed on June 9, 2011.

[4] Ibid, p. 3.

[5] McKinnon.

[6] “Where the Tax Money Is,” The Wall Street Journal, April 17, 2011, <http://online.wsj.com/article/SB10001424052748704621304576267113524583554.html> accessed on April 18, 2011.