Tax Shares for Rich and Poor

The Tax Foundation provides a nice summary of the latest Internal Revenue Service income tax data here.

Pundits are always interested in tax data for particular income groups. For example, they want to know whether Bush has favored the highest-income 1% of taxpayers.

A good way to find out is to look at average tax rates over time. By “average tax rates” I mean total federal income taxes divided by adjusted gross income. The following figure shows average tax rates for six income groups in 1990, 2000, and 2005. 

The income groups refer to percentiles of tax filers ranked from those with the highest AGI to those with the lowest AGI. The figure shows the highest-income groups on the left and the lowest-income groups on the right.

1990 was before the Clinton tax increases of 1993. 2000 was after the modest tax cuts of 1997, but before the Bush tax cuts of 2001. 2005 was with the Bush tax cuts in place. 

Observations

Tax rates on those with high incomes are far greater than for other Americans. Folks at the top pay about 25% of their income in federal income taxes, which compares to less than 5% for half of the population at the bottom end.

For the top two groups, the tax rate in 2005 was about the same as 1990. Essentially, the Bush tax cuts just reversed out the Clinton tax increases on these folks.

The Bush tax cuts substantially reduced tax rates for people in every income group. Indeed, those at the bottom had the largest relative reductions in their tax rates.

This is a little wonky, but let’s compare average tax rates in 2000 to 2005. For the top group, the rate fell from 27.45% to 23.13%, a reduction of 16%.

Now consider the middle-income “top 26-50%” group, for example. Their tax rate fell from 9.28% to 6.93%, a reduction of 25%.  

Those at the bottom have paid little, and now they pay even less, due to legislation under both Clinton and Bush. Indeed, these data do not include the tens of billions of dollars sent to lower-income families as a result of the earned income tax credit, and thus it overstates taxes paid by the bottom group.

I’m for lower taxes for everyone, but I wish people would look at the actual data first before carping about the rich supposedly being specially favored by recent tax cuts.