Top 20% of Earners Pay 84% of Income Tax | Hacker News Reader

Top 20% of Earners Pay 84% of Income Tax

wsj.com

35 pointsdrussell66 comments

The 20% figure has no value out of context, since what matters is their share of income, not their share of the population. Happily the WSJ article does include that figure: the top 20% earn 51.3% of the income.

It also goes on to say that "The share of tax paid by the top 20% of Americans also changes when such social-insurance levies [Social Security and Medicare] are included: It drops from more than 80% of income taxes to about 67% of all federal taxes."

Why shouldn't they? In the US, the top 20% do have something around 80% to 85% of the wealth.

http://i.imgur.com/1Thy8LJ.jpg

Because we tax income, not wealth?

I'll bet there are plenty of people in the 20% that owns 80% of the wealth and pay no tax at all.

Plenty of people of people in the lower 50% do pay taxes.

Exactly.

Let's say you are born with a $20M trust fund and never work. You never get taxed on it (yes, I know sales taxes, property taxes and so on..., but we are talking income taxes).

If you play one year in the MBA make the same $20M all that seame year and get injured and cannot work anymore, you get taxed much more than someone making the same $20M during their life time.

The issue is that there is not an easy way to tax people on their wealth (which is really what the state warranties through police, justice, infrastructure, defense, etc...). So we use income as a proxy for wealth (which is a really bad proxy and benefits disproportionately people that are already wealthy). There is an argument to be made that you where already taxed when you made that money, but the problem is that you don't stop benefiting from the state warranties after making that money.

One of the issues with taxing wealth, which is fairer in my opinion, is that it is very difficult and prone to gaming evaluating anyone's wealth. Not even talking about how politically viable it would be to propose taxing 2% of each american's wealth each year instead of a much larger percentage on their income.

Personally, I think it would the right thing to do if viable, because the tax would be proportional to how much the government and its institutions are warranting your property (aka, how much you have at stake).

that's why taxing consumption, not income is one of the most efficient ways of taxation. Consumption is a proxy for wealth, doesn't require us to measure wealth precisely and doesn't penalize productive investments

Consumption is a very bad proxy for wealth, even worst than income.

If you live hand to mouth, you get taxed on 100% or your wealth. If you make $100M a year and have $10B in the bank, you only get taxed on the $15M or so that you spent this year.

really? what happens to all that wealth? what form is it in? is it sitting as gold coins in the basements of the rich? or is it invested? because if it is invested, those investments are taxed in all kinds of ways

It's true that the US taxes transfers of wealth, not wealth itself (except real property), but should we tax wealth?

Some countries (I've heard, for example, Norway, Switzerland, and the Netherlands) do.

Generally speaking, an economy that depends on such a small number of participants for financing is setting itself up for unpredictable revenue stream, which results in pretty rough times when some of those guys decide to take the rest of the year off, or "spend more time with the family".

US wealth calculations are also so heavily biased towards real estate prices that any year house prices head downwards, the balance of wealth shifts towards the top. Any time the housing markets stabilize and grow, everybody is suddenly more equal.

The chart shows that the top 1%, which the 3 million people making over $615K/year, pay 45.7% of the income tax.

For people with $1 million/year or higher of income, most of the income is from sources other than salaries and wages. http://www.taxpolicycenter.org/UploadedPDF/2000134-compositi... .

If all 3 million people decided to take a year off then the worst case would be a 20% drop in income tax or 10% drop in the US tax revenue.

More than likely, some of the people under 99% would suddenly have new jobs, with a higher income.

I find it hard to think of 3 million people as a small enough number to be in the unpredictable range for a ~1 year fluctuations. 300? Certainly. 30,000? Maybe. But the 1% is still the population of Iowa.

> If all 3 million people decided to take a year off

Well, the risk here is over-dependence on capital gains. Not only it's a voluntary tax with people choosing simply not to sell, or sell less than they originally intended to, economic downturns bring in capital losses, which can be deducted against the gains, which then accounts for dramatically volatile shifts in capital gains revenues.

You're right, though, the situation is much more distributed within that 1%, and thank you for the graph.

And we know the work they were doing will not be filled by anyone else.

Sure, the revenue structure based on the assumption "10 guys, most of them hedge fund managers, will make over a billion dollars, guaranteed" seems sustainable.

Most of such income is off one-time events http://www.forbes.com/sites/robertwood/2013/12/20/mark-zucke... You can hope they're repeatable, and that works during the boom years, but during the bust years it becomes a "California double whammy" - not only your projections are over-blown, but the high-income tax events (which tend to be IPOs or big hedge fund wins, judging by the caliber of people stuck with multi-billion dollar tax bills) have also been eradicated by a stagnating/falling economy.

Note the word "income" - this kind of "X% of earners pay Y% of income taxes quote" deliberately excludes what are called "payroll taxes" in the U.S. Payroll taxes (basically Social Security and Medicare taxes) are regressive (fall more heavily on lower incomes). They're also paid as a percentage of income (like income taxes) so it's easy to think they would naturally be part of "income" taxes.

You should exclude SS and Medicare when talking about income tax rates. Both of these are basically forced-savings, not taxes. You pay in (save) when working, you get the money back when you retire in the form of SS payments and medicare coverage. Obviously that's a bit of simplification as todays payroll deductions directly fund today's retirees, but the general idea is correct. Unlike taxes, you will more-or-less get back what you put in when you retire. You can't lump income tax and these two force-savings together when talking about tax burden.

Why does it matter when the tax payer gets something back? And do I get nothing back from the income taxes I pay today? If I pay income taxes today to buy a ship for the U.S. Navy, and that ship is used 10 years later to defend the port where I work, does that change how I view the income tax paid today?

I'm pretty sure they're taxes either way.

No, we should definitely include SS and Medicare. You're correct about retirement programs, but the reality is that people lump income taxes and these "forced savings" into "stuff taken out of my paycheck". When you claim the rich pay 84% of taxes, the implication is that their "stuff taken out of my paycheck" contribution is five times that of the average schmuck, and that's not the case.

If people are confused about "stuff taken out of my paycheck", then the answer is education, not more muddying of the waters by mixing two completely different deductions.

You're never going to educate away the intuitive identification of payroll deductions proportional to income with the phrase "income taxation".

Just so. It's either stupid or deliberately misleading to only look at the distribution of one tax in isolation.

As I recall, the total tax rate including all types of taxes is almost equal across income groups. Poor people pay a smaller percentage in income taxes but a larger percentage in things like sales taxes.

The article does address this. It says "The share of tax paid by the top 20% of Americans also changes when such social-insurance levies are included: It drops from more than 80% of income taxes to about 67% of all federal taxes."

What about the large number of other taxes people pay?

Note also that 67% is getting close to the proportion of total income commanded by the top 20%, and that's without including other regressive taxes.

The title is flamebait, the actual key point of the article is that the US (federal level) is making 51% of its revenue from the same source, which fiscally speaking does seem risky. For example, other countries extract much tax from actual use of money (consumption tax)

The fact that the top 20% pays 84% of income tax is of little interest not knowing how much they make (i.e. they could make 95% of all the income or 35%), how much of a burden the tax actually is (i.e. 83% of not a lot is still not a lot)

note: I made the mistake of quickly scanning the article and then it was paywalled when I tried properly reading it, leaving just the title - which I suppose will be reused verbatim to justify all sort of fancy idiotic discussion in the weeks to come.

This is an example of the Pareto Distribution, and it's entirely expected.

[0] http://en.wikipedia.org/wiki/Pareto_distribution

No, the Pareto Principle explains why the top 20% earn 51.3% of all income. An extremely progressive tax policy explains why the top 20% pay 83.9% of all income tax. There's nothing naturally occurring about our tax policy.

They earn 51% of income but own more than 84% of wealth, especially the means of production. Also, talking about fifths of the economy skews the conversation in the wrong directions, because its only the top .001% of income earners that are outliers. The 80-99.9% quartile is paying a fraction of taxes and controls a fraction of wealth, and the 200k above them are skewing that entire bracket hugely.

If you are in the top "10%" (ie earning around 200k) you are not paying magnitudes more in tax than everyone else, relative to your wealth. You are just being grouped in with extreme outliers that make these statistics pointless.

Even if you want to make a war between the 80-99.9% and the other 80%, the alternative perspective is that the poor are so poor they have no money to pay in income tax. If median wages have not been stagnant or declining in the US for half a century the bottom 99.9% of income earners would be paying a larger percentage share of the tax burden.

Just look at all the investigations into how SV companies conspire to keep developer income down. The real value of a lot of engineers, especially the industry veterans, is way beyond the 200k they are often paid, but just because you are doing "so much better than the average" engineers in those income brackets are condemned for asking their fair share, when the real problem is that 99.9% of people are not getting their fair share because of a systemic loss of labor organization.

>An extremely progressive tax policy

Except for the fact that effective tax rates on "money received" (income + cap gains + net carried interest) is extraordinarily regressive, with people paying <10% on tens of millions earned per year (cf., most famously, Warren Buffet).

These 20 % get a lot in return for the taxes they pay. In general taxes are good because the are dues we pay to enjoy the numerous vital benefits that government provides for our society.

You're right. Its weird how little people think that the infrastructure provided by government for civil society benefits them. Contract enforcement and property protection come to mind. The 20% in question benefit greatly from the taxes they pay.

Contract enforcement and property protection? That accounts for what? Less than 1% of total government spending? Unless of course you consider the military "property protection".

The interventions in the Caribbean and Latin America were explicitly that.

There's quite a bit more... roads, disease eradication, and research that is considered too financially risky for the private sector... it goes on.

About 2/3 of the federal budget goes to Social Security, Medicare, Medicare, military, and interest on the debt.

So you are arguing that someone in the 39.6% tax bracket gets 164% more "in return for the taxes they pay" than someone in the 15% tax bracket? (Or infinitely more than someone who pays no income tax at all?)

Sure. The people getting taxed at 39.6% of income over net income over $430k are almost certainly in some sort of business, whose profitability almost certainly depends on the prosperity of the 99.5% of Americans making less money.

That argument is absurd. It's like saying that an employee has some kind of moral obligation to their employer because without the employer, they wouldn't have a job. The reality is that in a market economy, people voluntarily exchange goods, services, labor, whatever, when the exchange is mutually beneficial. Nobody owes anyone anything in the sense you are talking about.

I'm not trying to be offensive, but that simplifies the human condition to an almost cartoon-ish degree. People aren't really the simple rational economic actors that are useful in theory. I know that sounds trite, but it is true.

Now I'm not a supporter of calling taxes a good thing - they are violent theft after all - but for better or worse those 39.6%ers would have had 164% less of anything without the taxes in the first place.

No society on the planet has organized without violent taxation, and there is no way those less fortunate could foot more of the bill. You can of course argue about reducing that bill - I am all for it - but arguing that the affluent are not benefiting their share from taxes is insane - they are only wealthy because those taxes exist.

Depends how you look at it. If it's a "survival of the fittest" state of nature, which is what humans emerged from, remember that those with a lot have a lot to lose, those with nothing have nothing to lose. We'd either fight it out, or come to an understanding about how to share limited resources while cooperating for the betterment of all.

This is the social contract, google and wikipedia are your friends ;)

IMHO everybody has to contribute as much as he can. That's the only way a society can survive.

My first post about my conservative relatives quoting this was downvoted to invisibility.

My point was really to illustrate the way what is essentially a class issue where the defense of one class is taken up by people who aren't even remotely members of that that cohort. There is a great deal of emotional investment in the idea that some out-group is benefitting heavily without contributing back.

I just wonder what the utility of that belief is.

You do realize that both sides play that game, right? One side tells people the government is taking their money and the other side tells people that rich people are taking their money. The reality is that both are wrong because this stuff is not zero-sum.

Agreed. There is a difference however in claiming that its somehow immoral or wrong to expect people who benefit the most to pay the most to pay the most tax and the claim that people with the least access to capital, employment, and influence have some superior position that they not only haven't earned but are actively stealing.

The former is an argument based on a principal I disagree with...the latter is a fear that the social compact where work is rewarded is somehow invalid. I think people probably sense this somehow and default to distrust of out-groups rather than thinking through the implications of their unease.

I'm really just rambling and kinda thinking out loud...

Interesting game theory question: if we assume that "both sides" of the political spectrum always play that game, how should politicians respond? By being more honest (and still be assumed to be playing that game) or by being less honest (because they'll be assumed to be playing that game anyway)?

From the very last paragraph of the article:

>The share of tax paid by the top 20% of Americans also changes when [Social Security and Medicare taxes] are included: It drops from more than 80% of income taxes to about 67% of all federal taxes.

I would love to see the tails of this distribution. My bet is that the top 20-2% of earners pay almost all of this 84% of income tax (adjusted for income), and the the "real money", that is, the last 2%, pay a vastly diminishing percentage of their income in tax. I suspect obfuscation: trying to give a free pass to the mega rich 2% by amalgamating them into the successful and hard working upper middle classes who are being soaked on both ends.

Well, what percent of income to they make? Article is behind paywall.

51.3%

Google the title of the article and you can read it for free.

Fix the Gini coefficient[1] and this will be fixed. Also if you want to pay less taxes there is a simple way of just earning less, etc. Cause it's so much better to be poor and/or have no job, right?

[1] https://en.wikipedia.org/wiki/List_of_countries_by_income_eq...

https://en.wikipedia.org/wiki/Gini_coefficient#Limitations_o...

The Gini coefficient has a lot wrong with it. A country where everyone is uniformly poor would rank higher than the US even if the poorest person in the US is better off.

The Gini coefficient explains why the top 20% earn 51.3% of the income. It doesn't explain why they pay more than 80% of the income tax. The reason for the latter is an extremely progressive income tax code.

Of course wealthy people make up the bulk of the total income tax payments. Even a constant tax rate would result in the wealthy making up the bulk of the payments. Take a simple example of two people, both taxed at 15%. One makes 100 (pays 15 in taxes) and the other 1000 (pays 150 in taxes). Of the total taxes (165), the rich person pays ~90%, yet they are both taxed at the same rate.

Except that this article gives both of the relevant numbers -- the top 20% earn 51.3% of the income, but pay more than 80% of the income tax.

Which isn't unexpected, given that that's the whole point of marginal tax rates.

It's also worth noting that high earners pay exactly the same tax on their first $X as low earners.

The US government derives a disproportionate amount of its revenues from income taxes compared to other developed countries, which rely more on consumption taxes. http://www.wsj.com/articles/tax-proposals-would-move-u-s-clo...

stupid question, in table http://si.wsj.net/public/resources/images/BF-AJ529A_11txr_16... it states that the share of income tax paid by the bottom 20% is "-2.2%" - how do these people pay a negative tax rate?

The Earned Income Tax Credit (EITC). It's an example of a negative tax rate.

It's not actually a stupid question. It's actually nice to never have been in a position to find out (you have to work but make very little money).

The paywalled article seems, from what I saw of it, to be discussing income tax. The super rich, especially those who inherited their wealth, don't pay income tax at all, because they don't have jobs and thus have no income to tax. Their "income" is mostly from investments in securities and consequently taxed at a much lower capital gains rate. This is why you see some billionaire CEOs making of a show of taking a $1 salary.

It's taxed at a different rate but still included in the "income" tax that the article is discussing.

This isn't surprising. The income tax is currently the most progressive it has been since the 1970s. http://www.nytimes.com/2013/01/05/business/after-fiscal-deal...

That's a good start. The wealthy need to pay more. The marginal utility of money declines rapidly as you move up the income scale. $1,000 matters a lot less to me than $100 does to an average schmuck who's struggling to pay his bills. If I pay only $500 while he pays $100, the taxation system is unfair.

Cool. Let 'em pay even more.

Okay, that was meant to be flippant, but in my view, there is still a healthy gap between the highest bracket in the US, and how high it could be. Tax revenue could still be increased substantially by shifting the brackets higher.

Pareto principle at its best.

Deleted comment

There is substantial difference between income and wealth. I work in tech in the Bay Area, so I have good-to-great income, but I have not accumulated much wealth.

The people I think offend you are the (seemingly idle) rich who make most of their money on capital gains => very little taxes actually paid (and I'm sure there is a lot of history behind long term cap g, but from a regular wage worker perspective it can be hard to not perceive that as skewed, yes).

Pretty much all seriously wealthy people are of course in the top 20% income wise as well, but so are most people on this forum who have started their careers.

So I would call myself a producer. And I'm not getting the sense that I'm getting a dollars worth of return for every dollar spent on taxes.

So let's clean up the tax code (and let's stop using the word "fair" - nothing is ever fair in taxes, nor in death, certain as they may be), and make government more efficient and effective.

Then I'll be a little more excited about April 15.

You might not see a dollar's worth of return in a dollar's tax, but that's probably because you've never lived in a failed state (like Syria is sadly now).

If you live in the U.S. and have the time and energy to post comments here, your home (whether you rent or own) is probably safe, you can put your money in a bank and expect to get it back when you ask, if you are accused of a crime you have an opportunity to defend yourself, if you are the victim of a crime you have a reasonable expectation that the state (e.g. police and prosecutors) will help you, when you retire you have health insurance a little income (Social Security) ... etc.

These are a very few of the benefits of living in a civil society. They all cost money, which we pay in taxes.

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