By Christopher Gable
The president has proposed that the solution to our budget problem is that "millionaires and billionaires" pay more in income taxes.
My investment hero, Warren Buffett, suggests that rich people should pay income taxes at a higher rate than their secretaries.
Others say they're Taxed Enough Already and that too many pay too little. The Tax Facts publication, which is available on the Web, presents a summary of Internal Revenue Service data for 2008. The information is useful in this debate.
About 140 million federal income tax returns were filed in 2008 with positive Adjusted Gross Income, the basis for income tax calculation.
The lower 50 percent of returns earned less than $33,048, representing 13 percent of total AGI, and paid 3 percent of total income taxes. Please note that AGI does not include all government transfer payments received by this group, which could include Social Security, welfare, unemployment or any other government cash payments.
The top 10 percent earned in excess of $114,799, representing 46 percent of total AGI, and paid 70 percent of total income taxes. The top 5 percent earned in excess of $159,619, representing 35 percent of total AGI, and paid 59 percent of total income taxes.
The top 1 percent earned in excess of $380,354, representing 20 percent of total AGI, and paid 38 percent of total income taxes.
The data suggests that tax incidence is progressive.
The lowest 50 percent paid an average tax rate of 3 percent, the top 10 percent paid an average of 19 percent, and the top 1 percent, paid an average of 23 percent.
Buffett's peers, the top 0.1 percent earned 10 percent of total AGI and paid 18 percent of total income taxes. Their average tax rate of 22.7 percent was only slightly less than the top 1 percent rate. The data also suggests that most of the tax burden falls on higher income returns. Their tax is roughly twice their proportionate share of income.
Further, the top 10 percent of earners pay 70 percent of all income taxes paid, and the lower 50 percent pay virtually none.
However, I would also argue that the lowest 50 percent of returns should not be asked to pay any more either.
Therefore, if the U.S. has a large budget deficit and if tax incidence looks reasonably fair, then we do not have a problem of too little taxation, but rather a problem of too much spending.
The notion that taxing millionaires and billionaires a little more would solve our budget deficit is incorrect. The deficit is too big and there is not enough income to tax. Confiscating 100 percent of AGI of the top 1 percent would not even cover the deficit for one year - but it would have a disastrous effect on incentives to work and take business risk in future years.
Buffet's assertion that he pays a lower income tax rate than his secretary may be true in his case but is clearly not true for his peers as a group. Buffett's peers pay almost 23 percent while his secretary likely falls into the upper 25 percent and that group pays an average of 16 percent.
The president's assertion that the "rich" should pay more "because they can afford it" sounds very much like the theory of a 19th century political philosopher. The philosopher was Karl Marx. The philosophy was Socialism. The famous slogan was: "From each according to his ability and to each according to his need." Socialism failed.
As Margaret Thatcher once quipped "The problem with Socialism is that, sooner or later, you run out of other people's money."
Christopher Gable lives in Altoona.