-

Recommended browser for this blog: Chrome

Follow Economystified on facebook
All posts by Dan Whalen,
Providence, RI (resume)

Thursday, May 24, 2012

One percent of what? (part 2)


            In my last post I talked about the confusion I have over the now iconic catchphrase “I am the 99%.”

It stems from the slogans ambiguity.  You are the 99% of what?  And who exactly is the “1%” that you don’t belong to?

Is “The 1%” the people with the 1% largest yearly incomes?  This would be a concrete list of individuals, the IRS records every working American’s income every year for taxation purposes. 

But what you do with your income is not a matter of public record.  Defining "The 1%" just in terms of yearly income would ignore how long an individual has been earning those millions, and how much wealth that income has allowed them to amass. 

So maybe “The 1%” refers to the 1% richest Americans (as opposed to just the 1% highest paid in the year)?  While that seems more like what the Occupy crowd is implying, “the 1% richest people in the country” is a pretty fuzzy group. 

No one is keeping track of what you do with the income you earn.  Did you save it?  Did you blow it all by years end?  Have you invested it and seen it grow?  There’s no national, official beancounter tabulating citizens’ assets - meaning “the richest 1% of Americans” is at best just a concept, not a list of names. 

We can estimate who they might be, and guess how much they’re worth, but we don’t actually know.  Finding "the 1% richest people" is especially tricky when you consider the fact that the value of some of your assets – like your house or investments – are subjective.

          I might think I have a million dollar idea and a million dollar house…but the rest of the world may disagree.  Which one of us is wrong?  How much am I actually worth?  At some point, we're just guessing.

That’s not at all the end of my issues here.  Are we talking about the 1% richest individuals, or the 1% richest households?  Or families?  Or businesses?  And why only be “The 99?”  What would have been wrong with “I am the 99.9%?”  Or the 98%, for that matter? 

And is any else but me moved by the irony of the fact that this movement started in the US, the home of the world’s “1%”?  Even the very poor in the US control more wealth than much of humanity's "middle class."

Of course, I am to blame for my own the chagrin over this.  I don’t think anyone ever meant for 5 words on a placard to be heavily scrutinized or taken literally.  The purpose of slogans are to appeal to people’s emotions or beliefs or values.  They aren’t meant to detail any specific plans for action. 

It’s “I am the 99%” that caught on simply because “income disparity is a thing I’m paying attention to right now” just doesn’t have “the Punch.”

ANYWAY as part of that post, I made reference to the IRS “Taxstat” webpage.  It’s a webpage that offers some pretty browsable, easy to understand data on incomes and taxes.  It’s a really great site and I strongly encourage you to visit and explore their data (if not for any other reason, because you paid for it...you taxpayer, you).

I have been browsing some data from the page recently and stumbled upon two odd facts that surprised me. 

(*Note - from here on out, when I say “The 1%”, I’m referring to the individuals who made the 1% largest yearly salaries in 2009, independent of any other money they had at the start 2009.  I use this because it’s the closest thing to “the 1% richest Americans” that actually exists in any solid data.)

1)      To be an earner of one of the top 1% biggest incomes in the US, you had to make a minimum of $343,927 a year.  But the highest paid people US can earn more than 2,000 times that!!  That means there’s just about as much income inequality within “The 1%” itself as there is between the 1% and the other 99% of us.

2)      Even though the 1% highest income earners pay – in my own opinion – worryingly low tax rates, their incomes are so large that they wind up paying an abnormally large portion of the total taxes collected in any given year.

To clarify the second point:

Imagine a country with only two citizens.  A farmer named Mr. Dirt, and a lawyer named Mr. Gold.

Let’s say that this year, Mr. Dirt had a total income of $1,000 and paid 20% of it in taxes.  $1000*.20 = $200.  So Mr. Dirt ends up paying $200 to the tax man.

Mr. Gold on the other hand pulls down $100,000 and only pays 15% of it in taxes.  $100,000*.15 = $15,000.

The government of the country collected $200 in taxes from Mr. Dirt, and $15,000 in taxes from Mr. Gold, for a total of $15200 in tax revenues.

So Mr. Dirt only paid a little over 1.3% of all taxes ($200/$15200=1.3).  The other 98.7% was paid by Mr. Gold. 

Even though Mr. Gold’s tax rate was 5% less than Mr. Dirt’s, almost all of the nation’s tax revenue came from Gold, since his income is so much larger than Dirt’s by comparison.


Mr. Dirt
Mr. Gold

Income
$1,000
$100,000

Tax Rate
20%
15%

Taxes paid
$1,000*20% = $200
$100,000*15% = $15,000
*Total taxes paid in all the country: $15,000 + $200
= $15,200
Total tax contribution
$200/$15200 =
~1.3%
$15000/$15200 = ~98.7%


Well, we have a similar situation here in the US!  Most of us are paying an income tax rate between 12.5% and 18.05%.  The 1% highest income earners paid an average of 24.01% of their incomes in taxes (See row 155), not a much higher rate.

But because their incomes are so astronomically huge, the amount of money the top income earners paid to the Federal Government in taxes is disproportionately large!  A small percent of a huge income is still more than a large percent of a small one.


Percent of total income tax revenues paid by “The 1%” and “The 99%”.

          (And remember that every individual in the US pays a different rate on their income taxes, due to the huge number of credits, deductions, etc. that were have.  There are 99%ers that pay more than 18.05%, and 1%ers that pay less then 24.01%)

            Now of course, income tax isn’t the only type of tax out there, nor is it the only source of revenue for the government.  But I do want to point out a very bizarre rock and hard place were are stuck between:

            If you take away, say, 25% of a middle class guy’s income, he’ll be poor.  If you take away 25% of a super rich mega gazillionare’s income, he’s still now just a rich gazillionare. 

It’s only fair to tax the rich at higher rates then the rest, since the pinch wouldn’t be as painful for them as it would be for the rest of us.  Going from "middle class" to "poor" would suck.  Going from "super rich mega gazillionare" to just "rich gazillionare" isn’t awful.

I'd say today the US isn’t taxing the top income earners as much as it should be.  No question.

BUT BUT BUT!!  The top income earners make so much already that their modest tax rates still make their tax contributions disproportionately large.

The result:

We're becoming financially dependent on the taxes collected from the top handful of income earners.  “The 1%” are already footing most of the America’s bills.  A small increase in taxes for "The 1%", and the nation will become more and more dependent on fewer and fewer people’s tax payments.  

 Right now, “The 1%” largest incomes are earned by just 1,379,822 individuals.  Raise top tier tax rates, so that they're more in line with where they should be, and we end up with a tax system that hinges on what it collects from less than a million people (or 0.3% of the US population, if you're keeping score).  

What kind of democracy is that?  It does not sound like a healthy situation, not for the government, not for "The 99%", and not for "The 1%" either!

BUT if we don’t raise their rate, we’re being complacent to an inequitable tax system!  And THAT’S no good either!!

2 comments:

  1. Isn't the problem of having a tax system completely dependent on a few mega-rich individuals the expected result if you have an economy with a huge disparity in income? It seems like the only 'solution' is to somehow undo the disparity, which (based on your previous articles) is apparently just an act of waiting...

    ReplyDelete
  2. Youre absolutely right, with the level of income inequality we have going on today, whether or not taxes on big incomes are high or low won't matter. The rich will still be sharing the brunt of funding the country as long as we fund it so heavily through income taxes (for example, about 85% of the Federal govt's revenues, and 40% of New York State's comes from income and payroll taxes).

    I guess the urgency to do SOMETHING is a product of the fact that its really hard to smooth out incomes, but really easy to change tax policy. Which makes me feel like Congress SHOULD address the issue through the tax code - though it might not be a particularly effective way of doing so.

    When it comes to fixing the income inequality issues we have, there's no magic wand to wave. And it isn't something that can be accomplished in the short-run. Any policy geared toward that goal would take years to execute and there's no way of knowing it would work.

    Tax policy, on the other hand, yeah there is a magic wand to wave. Just pass a law to alter the tax code. Of course, that would require Congress to cooperate, so many I shouldn't call it an "easy task."

    So yeah, it is kind of an irrational reaction on my part. But man its hard sometimes to just sit back and "let things work themselves out" and not feel uneasy!

    ReplyDelete