Getting the Facts Straight on America's Tax Burden

Last week, the President put forward a detailed plan for jobs, controlling our deficit, and comprehensive tax reform. The President’s tax reform plan will abide by the principles of cutting rates, getting rid of inefficient and unfair tax breaks, and observing the Buffett rule – a simple rule of simple fairness that no household making over $1 million annually should pay less in federal taxes than middle-class families pay.

Yesterday in an interview with Senior Adviser David Plouffe on Fox News Sunday, host Chris Wallace used misleading statistics to argue against the President’s efforts to level the playing field for middle class Americans by requiring that the wealthiest pay their fair share.  In an effort to falsely assert that the President’s plan would place an unfair tax burden on the wealthiest Americans, Wallace said that, “1 percent of households with the highest incomes pay 38 percent of federal income taxes. The top 10 percent pay 70 percent of federal income taxes. Meanwhile, 46 percent of households pay no federal income tax at all.”  

These statistics are misleading and don’t tell the whole story. They leave out payroll taxes that every worker pays to make sure they will have Social Security and Medicare when they retire, which fall disproportionately on the middle class. And they don’t mention that the share of the nation’s income going to the highest earners grew rapidly in the past two decades – at the same time tax rates fell for the highest earners.

In fact, because of growing income inequality, the top 10 percent of American earners now earns 42 percent of the nation’s income, and when correctly calculated, pay about 50 percent of the federal income and payroll tax burden - not much larger than their share of earnings.

As we continue to have a robust discussion about the President’s plans across our country, it’s important to understand exactly how they will affect Americans – from the middle class to the highest earners.

We already took on several tax myths here (see “Buffett Rule Facts and Fictions,” by NEC Director Gene Sperling) but given that more misleading information continues to make the rounds, it is important to set the record straight.

Here are facts:

Claim: The top 10 percent wealthiest Americans pay 70 percent of federal income taxes.

Fact: This statistic presents a deeply misleading picture of the actual federal tax burden because (1) it fails to include payroll taxes, which every worker pays, and which fall disproportionately on the middle class, and (2) because it doesn’t reflect that high-income Americans earn a disproportionate share of income.     

• Payroll taxes account for 34 percent of federal revenues. They only apply to income earned on the job – not income from capital gains on investments, which make up a much greater share of the income of the top 10 percent. And payroll taxes for Social Security are capped at $106,800.
• For both of these reasons, wealthier Americans face a disproportionately lower burden from payroll taxes.   According to the independent, non-partisan Congressional Budget Office, the wealthiest 10 percent only pay 25 percent of all payroll taxes.
• Counting both payroll and income taxes, the top 10 percent only pay about 50 percent of that tax burden – not much larger than their share of our nation’s income (around 42 percent).
• The top 10 percent (households earning an average of nearly $400,000) has been earning a larger and larger share of our nation’s income. Twenty years ago, they accounted for 34 percent of our nation’s income. In the past twenty years – as tax rates have fallen for the highest earners – the income share of the top 10 percent has grown to 42 percent of our nation’s earnings.
• This aggregate figure also masks the fact that certain high-income Americans pay far less than others—and less than the middle class.  That’s what the Buffett Rule is meant to address.

Claim: The 1 percent of households with the highest incomes pay 38 percent of federal income taxes.

Fact: This statistic again ignores the payroll taxes that every working American pays, and the fact that incomes of the top 1 percent have increased rapidly in recent years.

• As with calculations about the tax burden of the top 10 percent, this claim ignores payroll taxes that every American worker pays, but fall much less on the highest earners.
• In fact, the top 1 percent of all Americans only pay 4.1 percent of the nation’s payroll taxes. Overall, they pay about one-quarter of federal income and payroll taxes.
• While this may seem like a high share, consider that over the past twenty years, the portion of our nation’s income going to the top 1 percent (households earning an average of nearly $2 million) has nearly doubled – from 11 percent in 1987 to 19 percent in 2007 (the latest year for which the CBO publishes tax burden data).
• While the top 1 percent pays about one-quarter of our federal income and payroll tax, they also earn 19 percent of our nation’s income. 

Claim: 46 percent of households pay no federal income tax at all.

Fact: Around 82 percent of Americans pay income or payroll taxes, and those who don’t are mostly elderly people.

• Ignoring payroll taxes presents a particularly misleading picture for middle income taxpayers.
• In fact, according to the independent, non-partisan Tax Policy Center, around 82 percent of Americans pay income or payroll taxes.
• As confirmed last week in a “Reality Check” article by the Washington Post, of the remaining 18 percent, 10 percent are elderly people who generally don’t earn salaries or wages, and 7 percent are people with incomes under $20,000 per year. As the article explains, of the people who pay no federal income or payroll taxes, “most are low-income workers or elderly living only on Social Security.”

Claim: The average taxes paid by millionaires is high enough to make the Buffett Rule unnecessary.

Fact: This is misguided on several grounds. 

Millionaires faced an average income tax rate of about 24 percent as of 2009 according to IRS data (and payroll taxes should add very little to that—in the range of 1 to 1.5 percentage points). 

However, the Buffett Rule is not about all taxpayers or even the average taxpayer making over $1 million. Instead, it is about those who are able to pay lower taxes than middle-class families.

Take IRS data on the taxes paid by the 400 highest-income households in 2008, all making over $110 million per year and making an average of $271 million per year. Some of those 400 taxpayers do pay their fair share, but according to that data, one-third of this group pays less than 15 percent of their income in taxes and 85 percent pays less than 30 percent.  

Indeed, a full 22,000 households making more than $1 million annually paid less than 15 percent of their income in taxes in 2009, according to  analysis of the IRS 2009 Statistics of Income file by the Treasury Department’s Office of Tax Analysis. And 165,000 households making over $1 million paid less than 30 percent of their income in taxes. 

Second, even looking at averages provides strong evidence of how unfair our tax code has become. That same IRS data shows that the average income tax rate for the most well off 400 earners was only 18.1 percent in 2008 and 16.6 percent in 2007. (This does not count the impact of the payroll tax, which is trivial for these taxpayers since only a tiny fraction of their income is subject to the payroll tax).  These exceptionally low effective tax rates paid by the most well-off do violate the Buffett Rule because they are lower, and at times significantly so, than the amount some middle-class families may pay in income and payroll taxes.  For example:  

• A single, self-employed business owner earns $70,000.  In income and payroll taxes, this middle class business owner pays about 28 percent of income in taxes. That’s 50 percent higher rate than the average tax rate on the top 400.  
• And, at the margin, a middle-class family can pay 15 percent, 25 percent or 28 percent of what they earn in income taxes — plus additional payroll taxes on top of that. That’s far higher than the less than 15 percent of income in federal taxes that some of the most well-off Americans pay. Does it seem right that an American who makes over $110 million pays an effective tax rate of about 18 percent, but if they had a fire at their house, those who would be risking their lives to put the fire out, could be seeing far more taken out of their every additional dollar earned while they are risking their lives?  
• For example, a nurse makes an average wage for her occupation of $68,000 and has one child. When she chooses to work overtime, her additional earnings are taxed at 25 percent by the income tax. And payroll taxes add even more.

Claim: This is a new tax rate on millionaires. 

Fact: This is not a new tax rate on millionaires; instead the rule should be incorporated as part of fundamental tax reform that lowers overall rates. Currently, the highest-income Americans pay far less than the top marginal tax rate. Therefore, reform that meets the Buffett Rule should focus on limiting the degree to which the most well-off can take advantage of tax expenditures and preferences. 

Dan Pfeiffer is White House Communications Director