The SoapBoxers

There is no debate that the rich pay a disproportionate amount of income taxes in the United States. Whether this is fair or not is a political discussion that I won’t address in this article. I’m more concerned about the reliability of statistics that are floating around.

You’ve probably heard that the top 20% of earners pay 80% the taxes and that the rich pay half the taxes. Are these comments true?  What percentage of taxes do the rich pay?

To answer this question, let’s to go the authority on tax statistics – the Internal Revenue Service. The data used in this article comes straight from the IRS web site.

Before we get started, I’d like to make a few points:

• These statistics are based on returns, rather than people. The lower levels of income tend to have fewer people represented by a return (single people are over-represented in these levels). This means that you can’t say that 8274 EARNERS had an AGI of more than $10 million or more. This could be a dual income household where each spouse earns $5 million.
• Data is from tax year 2009. The is the most recent data available at the time this article was written.
• I’m not exactly sure what to make of the returns with no AGI. I have included this data for the sake of completeness, but this group likely includes a hodgepodge of exception statuses and the stats for this group might not make much sense. Caveat emptor!

Let’s take a look at the first table. This lists the percentage of returns for each income level, as well as the group’s percentage of the nation’s aggregate AGI ($7.6 trillion) and individual income taxes paid ($865 billion). Dollar amounts are in thousands. What data can we glean?

• The top 20.57% of returns – those with AGI of $75,000 or more – earn 62.37% of the nation’s AGI and pay 83.96% of the taxes. So the much quoted stat about the top 20% paying 80% of taxes is true (assuming it means 20% of returns).
• What about the rich paying half the taxes? This depends on your definition of “rich”, but returns with more than $200,000 in AGI represent 2.79% of all returns, earn 25.76% of AGI, and pay 50.14% of taxes.
• Returns claiming AGI of more than one million dollars represented 0.17% of all returns, but paid 20.49% of all taxes.

Here’s the data:

	# of returns	%	AGI (thousands)	%	Taxes paid (thousands)	%
All returns	140,494,127		7,626,430,723		865,948,695
No AGI	2,511,925	1.79%	-198,958,452	-2.61%	85,376	0.01%
$1 – $5,000	10,447,635	7.44%	27,218,608	0.36%	40,278	0.00%
$5,000 – $10,000	12,220,335	8.70%	92,407,278	1.21%	379,851	0.04%
$10,000 – $15,000	12,444,512	8.86%	155,465,805	2.04%	848,075	0.10%
$15,000 – $20,000	11,400,228	8.11%	199,017,560	2.61%	2,516,274	0.29%
$20,000 – $25,000	10,033,887	7.14%	225,167,737	2.95%	4,669,410	0.54%
$25,000 – $30,000	8,662,392	6.17%	237,994,230	3.12%	6,827,564	0.79%
$30,000 – $40,000	14,371,647	10.23%	499,879,773	6.55%	20,151,883	2.33%
$40,000 – $50,000	10,796,412	7.68%	483,088,798	6.33%	25,404,305	2.93%
$50,000 – $75,000	18,694,893	13.31%	1,149,068,817	15.07%	77,962,073	9.00%
$75,000 – $100,000	11,463,725	8.16%	990,337,913	12.99%	80,492,622	9.30%
$100,000 – $200,000	13,522,048	9.62%	1,801,446,897	23.62%	212,290,589	24.52%
$200,000 – $500,000	3,195,039	2.27%	905,347,402	11.87%	176,322,148	20.36%
$500,000 – $1,000,000	492,568	0.35%	332,037,478	4.35%	80,458,186	9.29%
$1,000,000 – $1,500,000	108,096	0.08%	130,149,237	1.71%	32,755,871	3.78%
$1,500,000 – $2,000,000	44,273	0.03%	76,148,200	1.00%	19,393,235	2.24%
$2,000,000 – $5,000,000	61,918	0.04%	182,986,391	2.40%	46,943,630	5.42%
$5,000,000 – $10,000,000	14,322	0.01%	97,493,167	1.28%	24,617,005	2.84%
$10,000,000 or more	8,274	0.01%	240,133,885	3.15%	53,790,324	6.21%

 

OK, but what rate does everyone pay? In the next table, I’ve simply divided the taxes paid by the AGI to determine the effective tax rate.

A couple of observations:

• Returns with an AGI of $10 million or more have an effective rate significantly lower than several other income levels. Why? Capital gains. Note that this income level doesn’t have an upper bound, and the more extreme outliers are generally going to be the result of capital gains. It’s much more difficult to earn $1 billion in wages than $1 billion in capital gains (I’m speaking in relative terms; both are extremely difficult to do).
• There’s a noticeable jump between the 100-200K group and the 200-500K group. Not only are there some rate increases in these levels, but you will also see the effect of phase-outs of certain itemized deductions.

Here’s the data:

	# of returns	%	AGI (thousands)	Tax paid (thousands)	Effective rate
All returns	140,494,127		7,626,430,723	865,948,695	11.35%
No AGI	2,511,925	1.79%	-198,958,452	85,376	-0.04%
$1 – $5,000	10,447,635	7.44%	27,218,608	40,278	0.15%
$5,000 – $10,000	12,220,335	8.70%	92,407,278	379,851	0.41%
$10,000 – $15,000	12,444,512	8.86%	155,465,805	848,075	0.55%
$15,000 – $20,000	11,400,228	8.11%	199,017,560	2,516,274	1.26%
$20,000 – $25,000	10,033,887	7.14%	225,167,737	4,669,410	2.07%
$25,000 – $30,000	8,662,392	6.17%	237,994,230	6,827,564	2.87%
$30,000 – $40,000	14,371,647	10.23%	499,879,773	20,151,883	4.03%
$40,000 – $50,000	10,796,412	7.68%	483,088,798	25,404,305	5.26%
$50,000 – $75,000	18,694,893	13.31%	1,149,068,817	77,962,073	6.78%
$75,000 – $100,000	11,463,725	8.16%	990,337,913	80,492,622	8.13%
$100,000 – $200,000	13,522,048	9.62%	1,801,446,897	212,290,589	11.78%
$200,000 – $500,000	3,195,039	2.27%	905,347,402	176,322,148	19.48%
$500,000 – $1,000,000	492,568	0.35%	332,037,478	80,458,186	24.23%
$1,000,000 – $1,500,000	108,096	0.08%	130,149,237	32,755,871	25.17%
$1,500,000 – $2,000,000	44,273	0.03%	76,148,200	19,393,235	25.47%
$2,000,000 – $5,000,000	61,918	0.04%	182,986,391	46,943,630	25.65%
$5,000,000 – $10,000,000	14,322	0.01%	97,493,167	24,617,005	25.25%
$10,000,000 or more	8,274	0.01%	240,133,885	53,790,324	22.40%

 

As a whole, the aggregate effective tax rate is 11.35%. For each $100 of AGI, the government will collect $11.35 in taxes. The 100-200K group is basically right at this level, but the other income levels drift far away from this baseline. What percent of the “expected” taxes are paid at each income level (based on the expectation of $11.35 in taxes paid on each $100 of AGI).

I’ll let you peruse this data without any observations, other than pointing out that 100% would be equal to the expected 11.35% effective rate.

All returns	% AGI	% tax	% baseline
No AGI	-2.61%	0.01%	-0.38%
$1 – $5,000	0.36%	0.00%	1.30%
$5,000 – $10,000	1.21%	0.04%	3.62%
$10,000 – $15,000	2.04%	0.10%	4.80%
$15,000 – $20,000	2.61%	0.29%	11.14%
$20,000 – $25,000	2.95%	0.54%	18.26%
$25,000 – $30,000	3.12%	0.79%	25.27%
$30,000 – $40,000	6.55%	2.33%	35.50%
$40,000 – $50,000	6.33%	2.93%	46.31%
$50,000 – $75,000	15.07%	9.00%	59.75%
$75,000 – $100,000	12.99%	9.30%	71.58%
$100,000 – $200,000	23.62%	24.52%	103.79%
$200,000 – $500,000	11.87%	20.36%	171.52%
$500,000 – $1,000,000	4.35%	9.29%	213.41%
$1,000,000 – $1,500,000	1.71%	3.78%	221.65%
$1,500,000 – $2,000,000	1.00%	2.24%	224.30%
$2,000,000 – $5,000,000	2.40%	5.42%	225.94%
$5,000,000 – $10,000,000	1.28%	2.84%	222.38%
$10,000,000 or more	3.15%	6.21%	197.28%