Note to redditors who have linked to my article and are whining about how it supports the tea partiers, it does NOT. Let me be clear. Thesis: The graphs from the Tax Foundation are misleading. The trend in tax burden is perfectly reasonable given the data and not unfair. My own personal opinion: Income has become more stratified and the top 1% are making a ridiculous portion of the total income.
Lord. Read, folks! This article explicitly states how the graphs from the Tax Foundation on personal income tax are misleading. It specifically states that it is perfectly reasonable for the top 1% to be paying more taxes than the bottom 95% because of the increase in the percent of total national income they account for. Please stop inundating me with comments calling me a teabagger. Now… on with the show:
So, the Tax Foundation recently released their Fiscal Fact 183, which itself is a piece of responsible journalism if you read the entire thing and digest the data for yourself, but that which surrounds it is not. In fact, now going to the top three pages of google items on “top 1% of taxpayers”, the rage is all about how the top 1% of taxpayers now pay more in taxes than the bottom 95% of taxpayers:
Now first of all, let me say: this is 100% true. However, this statistic, though true , is profoundly misleading. Here is the graph as it was released on the Tax Foundation’s blog (not part of Fiscal Fact 183, but rather an opinion post of one of their bloggers):
So what’s wrong with this chart, exactly? Well, first we’ll start with the title. It’s very clear what they want to show you, that’s true. There’s also the question of where 4% of the taxpayers are. Why do we not select them? Because using their methodology, and using the bottom 99% of taxpayers, the lines wouldn’t cross. Take the top 5% instead of the top 1% and their argument doesn’t sound as convincing. They wouldn’t be able to use their snappy title. Oh, and let’s define tax burden vs. tax rate.
- Tax Burden: The amount of taxes one group of people pays vs. the total amount of taxes paid by everyone.
- Tax Rate: The amount of taxes one group of people pays vs. the amount of income they declare.
Now for the less obvious things: psychological impressions I get looking at this graph. It’s not like they had staff psychologists analyze this graph for effect, because if they had it wouldn’t be so ugly, and because that would be just plain conspiracy theory. No, but the lines along with the text of the blog post this is embedded in make it look like there’s been a conscious shift of burden from the bottom 95% to the upper 1%. In fact, what they want you to believe is that things are more unfair in 2007 than they were in 1987 (back in the halcyon days of Reagan).
In fact they never say why the tax burden has gotten so much higher. Even the Tax Foundation, which originally released the report never goes so far as to link the tax burden with anything else, even though they mention it in the same sentence with adjusted gross income. They say, and I quote:
In 2007, the top 1 percent of tax returns paid 40.4 percent of all federal individual income taxes and earned 22.8 percent of adjusted gross income. Both of those figures—share of income and share of taxes paid—are significantly higher than they were in 2004 when the top 1 percent earned 19 percent of adjusted gross income (AGI) and paid 36.9 percent of federal individual income taxes.
God knows why they picked 2004 as opposed to any other year. I can’t figure it out, statistically. That aside, look how they very definitely didn’t say that the two figures track each other, and they make no mention of the tax rate. For that, we have to go back to their source data.
A couple of notes first before I explain the graphics. I’ve changed the methodology somewhat from the Tax Foundation’s methodology. Like I said, using their methodology but adding the other 4% to compare 99% versus the top 1% would mean that there was no crossing of the tax burden lines. My methodology preserves the crossing even though I’m using 99% and 1% respectively. Specifically the change I’ve made is that I use the numbers from the IRS SOI here, same as they do, but I take AGI, income tax minus credits, taxable income, and highest tax rates only from the raw list of the “Taxable returns” columns on the IRS data.
Now to explain the charts and table. In the table are the percentages of the total AGI, taxable income, and taxes paid declared by the top 1% of taxpayers and the bottom 99%. This means, for example, that in 1997, the top 1% of taxpayers collected 21% of the total Adjusted Gross Income declared by all Americans filing taxable returns. The other 99% of taxpayers collected 79% of the Adjusted Gross Income. The final row of the table has the percentage change from 1997 to 2007. That calculation is: figure at 2007 / figure at 1997 * 100 – 100.
The left chart shows as a percentage of that declared by all taxpaying Americans:
- In yellow, percentage of total Adjusted Gross Income declared by 99% of taxpayers, for each year 1997-2007
- In red, percentage of total income tax minus credits declared by 99% of taxpayers
- In green, percentage of total income tax minus credits declared by the top 1% of taxpayers
- In blue, percentage of total Adjusted Gross Income declared by the top 1% of taxpayers.
Note that the green and blue graphs (the 1%) track each other exactly, as do the yellow and red graphs. The tax burden has decreased directly with the proportion of income collected by the bottom 99% of taxpayers. The tax burden of the top 1% has increased directly with the proportion of income they collected. In fact, as we look at the chart on the right, the actual top tax rate on each group has remained relatively flat — there’s been a very slight drop in both groups’ top tax rates. The top 1%’s has decreased more than the other 99%, but that’s not too disturbing given that they’re already nearly 10% more taxed than the rest of the taxpayers. In fact, if the tax foundation and tea-partiers were trying to get us properly indignant, they might point that little fact out rather than trying to mislead the public into thinking that the tax burden on the wealthiest Americans has increased wildly out of proportion with economics.
Methodology change or not, the shapes of the trends do not change. Income proportion and “tax burden” as defined by the Tax Foundation and its adherants are directly related. The changes are not wildly out of proportion, as they’d have you believe; but directly in proportion with changes in income. If anything seems out of proportion to me, it’s the change in the ratio of income declared by the top 1% vs the income declared by the bottom 99%. Surely the bottom 99% of taxpayers are not all of a sudden that much less productive that they should be collecting 14% less of the money earned by all taxpayers now than they were in 1997. What economic force is in play there?