As Tax Rates Fall, Wealthy Pay More
The Internal Revenue Service has released data on tax year 2003 that show the top 1 percent of taxpayers, ranked by adjusted gross income, paid 34.3 percent of all federal income taxes that year. The top 5 percent paid 54.4 percent of the whole, the top 10 percent paid 65.8 percent, and the top quarter of taxpayers paid 83.9 percent.
In 1980, when the top statutory income tax rate went up to 70 percent, the share of income taxes paid by the top 1 percent of taxpayers was just 19.3 percent. After Ronald Reagan's tax cut of 1981, which reduced the top rate to 50 percent--a massive giveaway to the wealthy, according to critics on the Left--the percentage of income taxes paid by the top 1 percent rose steadily.
By 1986 the top 1 percent of taxpayers' share of all federal income taxes had risen to 25.7 percent. That year the top statutory tax rate was further cut to 28 percent--another huge giveaway, we were told. Yet the share of income taxes paid by the top 1 percent continued to rise. By 1992, it was up to 27.5 percent.
Payroll Tax Trend Similar
It would be a mistake to conclude tax increases will not raise the wealthy's tax share, or that tax rate cuts always will. Nevertheless, it is remarkable that the percentage of federal income taxes paid by the top 1 percent of taxpayers almost doubled during a time when the top income tax rate fell by half.
A common retort of critics of these data is that they exclude payroll taxes, which are assumed to be largely paid by the poor. But including payroll taxes in the calculations has far less impact on the distribution of the tax burden than most people would assume, because the wealthy also pay a lot of those taxes.
In a 2004 paper presented to the American Statistical Association, IRS economists Michael Strudler and Tom Petska calculated percentiles data that included both income taxes and Social Security taxes. In 1999, the top 1 percent paid 23.3 percent of combined payroll and income taxes, the top 10 percent paid 52.2 percent, and the top 20 percent paid 68.2 percent.
True Elsewhere, Too
A number of foreign countries also have started publishing tax shares data. They show the same trend of higher burdens on the wealthy after tax rate cuts, even when the rates are reduced sharply.
According to Her Majesty's Revenue and Customs, the share of total income taxes paid by the top 1 percent of taxpayers was 11 percent in the United Kingdom in 1979, when the top income tax rate was 83 percent. Prime Minister Margaret Thatcher cut that rate to 60 percent, and by 1987 the share of income taxes paid by the top 1 percent had risen to 14 percent. The top rate was cut again to 40 percent, where it still stands, and the share of income taxes paid by the top 1 percent has continued rising to a current level of 21 percent.
Statistics Canada recently released a study looking at tax shares in that country. It shows the share of federal income taxes paid by the top 10 percent of taxpayers reached 52.6 percent in 2002--almost exactly the same as is paid by the top 10 percent in the United Kingdom. However, the top income tax rate in Canada is just 29 percent. (Provincial tax rates in Canada are substantially higher than among U.S. states.)
We also have data for Australia from the Australian Taxation Office. In 2003, those data show the top 5 percent of taxpayers paying 30.2 percent of all income taxes, the top 10 percent paying 41.8 percent, and the top 25 percent paying 63.8 percent. But the top income tax rate in Australia is 47 percent. Thus we see that the country with the highest top rate also brings in the least amount of total income tax revenue from its richest citizens, in percentage terms.
Bruce Bartlett (firstname.lastname@example.org) is a former senior fellow with the National Center for Policy Analysis and former deputy assistant secretary for economic policy at the U.S. Treasury Department, where he served from September 1988 to January 1993. A version of this article was published December 6, 2005, at Townhall.com. Used with permission.