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Feb 16, 2015
Presented by
Lee Ohanian
Do the rich pay their fair share of taxes? It's not a simple question. First of all, what do you mean by rich? And how much is fair? What are the rich, whoever they are, paying now? Is there any tax rate that would be unfair? UCLA Professor of Economics, Lee Ohanian, has some fascinating and unexpected answers.

The top 10% of all earners in 2012 paid a stunning 70% of all federal income tax—a far higher percent than they earned.

  • America’s progressive tax system is the most progressive—higher rates for higher earners—in the developed world.View Source
  • The top 10% of all earners in 2012 paid 70% of all federal income tax, while earning only 48% of all national income.View Source
  • In 2012, the top 1% paid 38.1% of all federal taxes, but took home only 21.9% of all income earned.View Source

The “One Percenters” in America are far fewer and make far less on average than most people think.

  • The average income for a household in the top 10% in 2012 was about $150,000.View Source
  • The annual income for the top 1% was $400,000.View Source
  • According to Forbes, at the start of 2016 America had fewer than 2,000 billionaires.View Source

Spending is a better measure of standard of living than income. In other words, a progressive tax is less fair than a consumption tax. 

  • Economists generally agree that consumption, rather than income, is the best measure of standard of living, suggesting that a progressive tax—which taxes income, not consumption—isn’t the fairest possible tax system.View Source

The top 1 percent of earners in America pay a larger share of taxes than the bottom 90 percent.

  • In 2012, the top 1% paid 38.1% of all federal taxes, but took home only 21.9% of all income earned.View Source
  • In 2012, the top 1% paid a larger share of taxes (38.1%) than the bottom 90 percent (29.8%).View Source
  • The top 10% of all earners in 2012 paid 70% of all federal income tax while earning only 48% of all national income.View Source
  • Read UCLA economist Dr. Lee Ohanian and tax expert Kip Hagopian on income inequality and fair taxation.View Source

When tax rates for the rich are too high, the economy suffers, which hurts the poor the most.

  • Academic studies indicate that high taxes have a significant negative impact on economic growth.View Source
  • The poor suffer the most when the economy suffers, and these negative effects can be long-lasting.View Source
  • Read UCLA economist Dr. Lee Ohanian on taxes and economic growth.View Source

The average income for a household in the top 10% in 2012 was about $150,000 —far less than most people believe. 

  • The average income for a household in the top 10% in 2012 was about $150,000.View Source
  • The annual income for the top 1% was $400,000.View Source
  • According to Forbes, at the start of 2016 America had fewer than 2,000 billionaires.View Source
  • Read UCLA economist Dr. Lee Ohanian and tax expert Kip Hagopian on income inequality and fair taxation.View Source

The rich already pay more than their fair share. Having them pay more would hurt them a little bit, but it would hurt the poor a lot.

  • America already has the most progressive tax system in the developed world, in which the rich pay far more than the percent of the wealth they bring in.View Source
  • Expanding this already heavily progressive tax system would have a significant negative impact on economic growth.View Source
  • The most negatively impacted are the very people progressive income taxes are supposed to help: the poor.View Source
  • Read UCLA economist Dr. Lee Ohanian and tax expert Kip Hagopian on income inequality and fair taxation.View Source

America’s tax system is already more progressive than even those in progressive “role model” countries like Sweden and Germany.

  • The U.S. tax system is substantially more progressive—higher rates for higher earners—than even those in places like France, Denmark, Sweden and Germany.View Source
  • Read UCLA economist Dr. Lee Ohanian and tax expert Kip Hagopian on income inequality and fair taxation.View Source

The rich pay more than their fair share of Social Security and Medicare taxes.

  • Social Security and Medicare payroll “taxes” are really an insurance payment that guarantees future services.View Source
  • Social Security benefits are capped, meaning higher-wage workers get back less as a percentage of what they paid in than lower income workers receive.View Source
Here's a question you're likely to hear whenever the subject of taxes comes up: Do the rich pay their fair share? There are two parts to this question: Who is rich? And, what is fair? Let's start with who is rich: Nearly everyone assumes that a person who is among the top ten percent of all income earners qualifies as rich. But according to 2011 data, a top ten percent household makes around $150,000 or above in gross annual income -- that's income before deductions and taxes. Now, $150,000 is a nice living, but it certainly doesn't make you rich. OK, then. What about the top 5%? You get into this percentile if your household makes around $190,000 or above. That's a nice bump. But it hardly puts you in the rich category. How about the top 1%? That's $500,000 or above. A great income, but remember, most people only get to that level after many years of hard work and, quite possibly, the accumulation of serious debt to fund their education or build their business. Of course, there are people who make more than $500,000. And there are some who make many millions, even billions. But the number who do is very small. Now, let's talk about fair. Fair would seem be that the group of taxpayers who earn 10% of the country's income would pay 10% of the country's taxes; the group who earned 20% would pay 20% of the taxes and so on. But what If I told you that, according to IRS data, the top 10% of all earners -- the people making $150,000 and above -- pay 71% of all federal income tax while earning only 43% of all income. If anything, the top ten percent pay more than their fair share. So, as it happens, do the much reviled top 1%. They earn 17 percent of all income, but pay 37% of all federal income taxes. And what about those at the other end of the income scale, the lower earners? Are we squeezing them? Hardly. Those who make $45,000 or less, 47% of all earners, pay little and often no income taxes. Ah, but what about payroll taxes -- the money we pay to fund Social Security and Medicare? That takes a bigger bite of the paycheck of lower earners than higher earners. Isn't that unfair? Consider two points: First, it's misleading to call the Payroll Tax a tax. It's really an insurance payment that guarantees we receive social security and Medicare after we turn 65. Second, the benefits we receive from Social Security are capped, no matter how much we have paid in. This means that the payroll taxes of high earners actually help subsidize the social security and Medicare benefits that low earners receive at retirement. How do all these numbers stack up against other countries? The US income tax system is substantially more progressive - meaning that income tax rates rise as income rises -- than other advanced countries, including Germany and Sweden. So, if you think that our tax system is unfair because it coddles high earners, then you must conclude that tax systems in these other countries are even more unfair. So how high are tax rates on Americans today? Well, throw in federal tax increases mandated in 2013 and state taxes, and top earners face a tax rate of more than 50 per cent in California and New York. Other states like Maryland and Connecticut are not far behind. Do you think a tax rate of greater than 50% is fair? If so, is there any rate that wouldn't be? Nobody is calling for bake sales for anyone in the top ten percent of earners. And no one wants to minimize the struggles of those at the lower income strata. But to say the "rich," however you might define them, don't pay their fair share is simply wrong. Finally, numerous academic studies, including ones that I have done, show that when tax rates are too high, investment, risk taking by entrepreneurs, and therefore job creation all decline. And when that happens it's the poor who suffer, not the rich. The rich do fine. It may feel good to take even more money from the top ten percent, but it doesn't do good. And it sure isn't fair. I'm Lee Ohanian, Professor of Economics at UCLA, for Prager University.

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