NCPA - National Center for Policy Analysis

FAIR TAXES? DEPENDS WHAT YOU MEAN BY "FAIR"

July 17, 2007

Do the rich pay their fair share in taxes?  This is likely to become a defining question during the presidential campaign, says N. Gregory Mankiw, a professor of economics at Harvard UNIVERSITY.

The best source for objective data on the distribution of the tax burden is the Congressional Budget Office.  The C.B.O.'s most recent calculations of federal tax rates show a highly progressive system (the numbers are based on 2004 data, but the tax code has not changed much since then):

  • The poorest fifth of the population, with an average annual income of $15,400, pays only 4.5 percent of its income in federal taxes.
  • The middle fifth, with income of $56,200, pays 13.9 percent.
  • The top fifth, with income of $207,200, pays 25.1 percent.
  • And the richest 1 percent has average income of $1,259,700 and forks over 31.1 percent of its income to the federal government.

One might wonder how people like billionaire investor Warren E. Buffett get away with a tax rate of only 17.7 percent, while a typical millionaire is paying so much more:

  • Most likely, part of the answer is that Buffett's income is made up largely of dividends and capital gains, which are taxed at only 15 percent.
  • By contrast, many other top earners pay the maximum ordinary income tax rate of 35 percent on their salaries, bonuses and business income.

The distinction is crucial for understanding how much the rich pay.  Indeed, the share of top incomes coming from capital is much lower now than it has been historically. According to Emmanuel Saez, an economist at the University of California, Berkeley, for the richest Americans -- those in the top 0.01 percent of the distribution -- the percentage of income derived from capital fell to 25 percent in 2004 from 70 percent in 1929.

Source: N. Gregory Mankiw, "Fair Taxes? Depends What You Mean by 'Fair,'" New York Times, July 15, 2007.

For C.B.O. report:

http://www.cbo.gov/ftpdocs/77xx/doc7718/EffectiveTaxRates.pdf 

For text:

http://www.nytimes.com/2007/07/15/business/yourmoney/15view.html

 

Browse more articles on Tax and Spending Issues