High-income earners pay a much higher federal tax rate than the middle class

By James D. Agresti
October 31, 2012

In a commentary entitled “Why America’s wealthy must pay more in taxes,” Robert Reich, a former U.S. Secretary of Labor under Bill Clinton, writes:

In fact, if you add up all the taxes paid — not just on income and capital gains but also payroll taxes (which don’t apply to income above $110,100) and sales taxes — most of us are paying a higher percentage of our income in taxes than are those at the top.

This statement, which is made in the context of federal taxes, is patently false. Reich and others arrive at such misleading conclusions by ignoring corporate income taxes, which happen to fall more heavily on the rich. They also use narrow measures of income that artificially inflate the tax burdens of lower-income households.

The truth is that when all federal taxes and all sources of income are accounted for, the wealthy pay a much higher tax rate than the middle class. Per the Congressional Budget Office’s latest estimates of federal tax burdens, households in the middle 20% of the U.S. income distribution paid an average effective tax rate of 11.1%, as compared to 28.9% for the top 1% of income earners.

The following graph displays the latest Congressional Budget Office data on federal tax burdens, which was published in July 2012. A measure of uncertainty is always inherent in such estimates, but there is not nearly enough uncertainty to make Reich’s claim even remotely plausible.

A recent poll commissioned by Just Facts found that 90% of people who are planning to vote for Barack Obama falsely believe that the middle class pays a greater portion of their income in federal taxes than the upper 1% of income earners. The same is true for 41% of people who are planning to vote for Mitt Romney. Such dramatic levels of misinformation stem not only from political rhetoric but also from a failure of journalists and educators to honestly inform the public. Relevantly, Reich is now a professor of public policy at the University Of California, Berkeley.

9 thoughts on “High-income earners pay a much higher federal tax rate than the middle class

  1. It would be interesting to drill down on the top, middle and bottom third of the 1% percent. Would there be any truth to the highest 1/3rd paying less than the other 2/3rds?

  2. “Be informed, not opinionated?” Really? How about the FACT that the highest income bracket in the U.S. make most of their income through capital gains, not income? And that capital gains is not taxed at anywhere near the rate that income is, and yet capital gains, as has been demonstrated in recent studies, does NOT create jobs? And how about the FACT that during the reign of Reagan (one of your favorite icons) tax rates for the wealthy were significantly higher? And that reagan rasied taxes some eight times during his sovereignty? Or that the tax rate was 91% per cent on the highest 1% during Eisenhower’s presidency, one of the periods of fastest growth and prosperity in U.S. history?

      • Corporations are people too! Why are you double dipping saying the wealthy are paying more taxes because they are paying it at the corporate rate as well as the individual? They chose that form of business, and knew the consequences – obviously, they are getting something valuable from that choice, or they would have made another one. The corporation is a separate entity from the individual. The corporation pays taxes (theoretically – most of the large ones do not), and the individual pays taxes.

        • You are quite mistaken. As explained by the Congressional Research Service, “corporations are not persons who can bear the burden of taxes, but merely legal entities through which individuals earn income.” Likewise, per the Congressional Budget Office, “Households also bear the burden of the taxes paid by businesses.”

          To summarize the above in plain words, every dime taken in taxes from a corporation is ultimately taken from its owners, workers, and customers. This why the CBO and other authorities on tax distribution account for the burdens of corporate income taxes, payroll taxes and excise taxes when determining individual tax burdens. The details of how the CBO does this are located here: http://www.justfacts.com/taxes.asp#distribution.

          Another way to understand this is by considering that the vast majority of corporations in this country are structured under tax laws that merge the business and personal incomes of their owners. In these cases, each owner’s business income and personal income are combined on the same tax return and are subject to the same tax rates. By law, corporations with more than 100 owners (like publicly traded companies) cannot be structured in this manner, but nonetheless, the income taxes remitted by these corporations are taken from (1) shareholders in the form of decreased profits, (2) workers in the form of reduced wages, and (3) possibly consumers in the form of higher prices. For documentation of these facts, see the link above along with this one: http://www.justfacts.com/taxes.asp#corporate.

    • TonyKo, please refer to the hyperlink in the article to gain a full understanding of effective tax rates, as they are what are actually paid, including income taxed as Cap Gains, etc.. You may also want to look at the history of effective tax rates elsewhere on this site.

  3. S Sdn/ In most cases, tax are the source of government revenue.every tax that is imposed put a burden on the tax payers , it reduces the payer’s income if it is impose on his income.It reduce the quantity of goods a tax payer can purchase with a given income. In fact taxes should be paid according to the level of person’s income.

  4. It is truly amazing how ill-informed so many are about basic economic principles and taxation. A pubic corporation is simply a legal construct for its owners and others. As stated, the tax burden ultimately falls on the owners. No different than the 14 year-old mowing grass for his neighbors, he/she has the burden. And if you are unsettled about the author’s facts you can also see them on the IRS website. BTW: this is one of the best blogs out there.

  5. Pingback: Freedom and Liberty are more than metaphors | Head Space

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