Thursday, August 18, 2011

Who pays taxes

800px-Buffett_&_ObamaRecently there have been a number of calls by liberals ranging from President Obama to Warren Buffett for the “wealthiest Americans” to pay their “fair share” in order to help the economy recover. According to this theory, taxes for the rich were cut to virtually nothing by President Bush. This led to the deficits and mounting national debt that we face today.

According to 2008 tax data, the most recent that is available from the I.R.S, in the Heritage Foundation 2011 Budget Chart the prevailing liberal view that rich Americans are getting a free ride is not accurate. The top one percent of wage earners paid 38 percent of all federal income taxes in 2008. When the view is expanded to include the top 10 percent of wage earners, the richest 10 percent of Americans paid almost 70 percent of all taxes. Conversely, the bottom 50 percent of wage earners paid less than three percent of all taxes in 2008. Democrats have not said what percentage of the tax burden they believe would constitute a fair share.

Interestingly, the charts show data back to 1980, so claims that tax cuts benefit the rich can be examined on a yearly basis. Under President Reagan, taxes were cut in by the Economic Recovery Act of 1981 and the Tax Reform Act of 1986. The tax data for the top one percent earners shows that their share of the tax burden rose after the 1981 tax cuts. In 1986, their tax burden rose over 1985, but declined in 1987. It rose sharply in 1988, before declining as the economy slowed to a recession in the early ‘90s. After falling with the recession of 2000, the tax burden of the top one percent rose to over sixty percent, an all-time high, in 2007 after the Bush tax cuts. The tax burden of the top one percent earners has doubled since 1980, in spite of several rounds of tax cuts.

When the bottom 50 percent earners are examined, the results are the opposite. The bottom 50 percent’s tax burden peaked in 1981 at 7.45 percent. Their tax burden declined slightly after the 1981 tax cuts, but fell sharply in 1986 and after. In 2008, the tax burden of the bottom 50 percent was less than half of the amount of their 1980 tax burden. This is because many low-income families have been totally removed from the tax rolls. An astonishing 47 percent of Americans don’t pay any federal income tax at all according to Yahoo Finance.

Because of the system of tax withholding, many people may not even realize that they don’t pay taxes. These people may have federal income taxes deducted from their paychecks, but then get a refund of all income taxes paid when they file a tax return. Unless a taxpayer examines their tax return closely, they will not know how much they actually pay in taxes, or whether they pay them at all.

The Tax Foundation publishes data which examines the net cash flow to the federal government from the states. The most recent data is from 2005. The states that send the most tax revenue per capita to the federal government were Connecticut, New Jersey and Massachusetts. The states that paid the fewest taxes per capita were West Virginia, Louisiana and Mississippi.

The states that pay the most taxes do not receive the most federal spending however. The states with the highest ratios of federal spending to tax dollars per capita were New Mexico, Mississippi, and Alaska. The states with the lowest ratios were Connecticut, Nevada, and New Jersey. In practice, this means that blue states with high wages and high costs-of-living are subsidizing red states.

Georgia, which ranks 29th in taxes paid and 40th in federal funds received, has historically received federal funds that are approximately equal to the taxes that it sends to Washington. Georgia ranked 34th in the ratio of federal spending per taxes paid.

When Warren Buffett tells says that millionaires don’t pay their fair share, he isn’t telling the whole story. Much of Buffett’s income is from capital gains and dividends, which are taxed at 15 percent. But this money has already been taxed once as corporate income, which is currently taxed at 35 percent, the highest corporate tax rate in the world. Second, Buffett uses the charity deduction to avoid paying taxes on much of his income. He is a generous giver to a variety of charities and, in 2006, made the largest donation to charity ever given by an individual, a $37 billion donation to the Bill and Melinda Gates Foundation. This gift was tax-deductible.

Buffett’s company, Berkshire Hathaway owns several Georgia companies including Berkshire Hathaway Homestate, an insurance company in Alpharetta. Shaw Industries, the world’s largest carpet manufacturer which is headquartered Dalton, is a Berkshire Hathaway company. Berkshire Hathaway is also heavily invested in other companies that many Georgians recognize including Wal-mart and Costco.

Far from being an answer to the country’s spending problem, the Wall St. Journal reports that millionaires are an endangered species. Between 2007 and 2009, the number of millionaires fell from 390,000 to 237,000. This is a decline of 39 percent. With fewer millionaires to “share the sacrifice,” Democrats will have no choice but to turn to the middle class to finance their spending spree unless federal spending is cut sharply.

Photo credit:  Pete Souza/Public Domain

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