Taxing the Rich – Do They Pay Enough?

One of the great political debates throughout history revolves around how much we should be taxing the rich.  More to the point:

  1. What tax rate is reasonble for different levels of income?
  2. Who is under-taxed and who is over-taxed?

There are plenty of opinions, but no easy answers. The federal government and most city and state governments are running a deficit, which means sooner or later we either need to raise taxes or cut spending.

The two most popular positions are:

  1. Raise taxes…on the other guy, not me. Or…
  2. Cut spending, but not on the programs I care about.

Should we be taxing the rich more?

Many people feel we should be taxing the rich more. After all, it is well-documented that the rich are getting richer and the middle class and poor are doing progressively worse.

Taxing the rich was the signature proposal of Bill De Blasio in his successful candidacy for New York City Mayor in 2013. De Blasio spoke of a tale of two cities, one for the rich and one for everyone else. He proposed raising taxes on everyone making more than $500,000 and using the funds to roll out universal preschool (Pre-K) programs. Universal pre-K is a worthy program, but De Blasio’s campaign got me wondering whether the rich really are under-taxed? I thought it was an interesting topic to explore.

What are the top tax rates and who pays them?

Individuals reach the top federal tax bracket (39.6%) if they are single with taxable income over $418,400, or married couples with income over $470,700 (See 2017 Federal Income Tax Brackets). The state you live in may also tax your income (See 2017 State Income Tax Brackets). California for example, one of the highest tax states, would charge the same taxpayer 11.3% for state income tax.

A few other important notes:

  1. Individuals earning over $200,000 and couples earning $250,000 or more also pay an additional 3.8% surtax on investment income
  2. Itemized deductions begin to be phased out once your income exceeds $259,400 for individuals or $311,300 for couples
  3. Workers also pay Social Security payroll taxes on their first $118,000 in wages at 7.65% if they are employees or 15.3% if they are self-employed. The rates quoted are just the taxes on income. There are also sales and property taxes, but we’ll save those for another day.

How much do the top 1% pay?

For tax year 2014, the top 1% of U.S. taxpayers are projected to have paid 45.7% of all federal income tax. The bottom 60% of taxpayers are estimated to pay less than 3% of federal income taxes collected (source: Tax Policy Center). That statistic alone definitely makes it seem like the rich are paying at least their share. However, an analysis by Business Insider found that tax rates are low relative to the top tax rates of the past century (the top rate was over 90% from 1944 – 1963), and there is no conclusive evidence that higher tax rates hurt the economy or make people lazy.

Sadly, I am not in the top 1%, but I certainly do not begrudge those who are (see how much you need to make to be in the top 1% in your state). I appreciate high earners. They are paying for a lot of roads, bridges, and libraries. It seems to me that they are paying their share, so I say, “Let’s not kill the golden goose,” but I am open to other opinions. What do you think? should we be taxing the rich more?