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The Evil 1% And Failure To Pay Their Fair Share

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    April 17, 2015

    Throughout this article I will be addressing statements made by the current administration about taxation and the “rich.” I am NOT MAKING a political argument about the adminstration; the statements are the foundation of the “tax the rich” debate.)

    Throughout the course of his Presidential term, President Obama has repeatedly suggested that the “wealthy” need to pay their “fair share.” While such a claim certainly resonates with the average working-class American, the real question is such a statement actually true?

    Robert Frank recently penned:

    “Yet while the report is sure to spur calls for higher taxes on the rich, its findings paint a misleading picture of the broader taxes paid by Americans, rich and poor included.

    First off, Americans pay federal, state and local taxes. Federal taxes account for two-thirds of the taxes that Americans pay. So while it’s true that state and local taxes by themselves are regressive, Americans pay far more in federal taxes, which are far more progressive with the rich paying a higher share—both of their own incomes and of total taxes.”

    (Note: Not all states are created equal. While it is very true that state and local taxes weigh more heavily on lower income households, the data is somewhat skewed by heavily populated states with high state and local income taxes such as New York and California.)

    Thanks to the data compiled by the Tax Policy Center, which is a joint project of the Urban and Brookings Institutes, we can look at the last completed fiscal tax year (2013) to wit:

    “Based on the recent completed tax year, 2013, federal revenues came from four major sources: individual income tax (47 percent), payroll taxes (34 percent), corporate income tax (10 percent), and excise taxes (3 percent). Estate and gift taxes, customs duties, Federal Reserve earnings/losses, and miscellaneous receipts accounted for 6 percent.”


    If we take the total federal revenues and break it down by quintiles of income earners, we find a very different picture emerging as to the “who pays what” question.


    With the top 20% of cash income earners paying 66.7% of all federal taxes collected (including after tax credits, employee and employer Social Security and Medicare Taxes, and excluding customs duties and excise taxes) it become much harder to suggest that the “rich” aren’t paying their fair share.

    However, it is really the top 1%, and more specifically the top 0.1%, of the cash income earners that have been the focus of the current administration for “pulling their weight.” If we take a more granular look at the top quintile, that claim quickly begins to fade.


    With the top 1% of cash income earners paying nearly 30% and the top 0.1% paying more then 15%, of all federal taxes it is hard to point fingers and claim they need to pay more.

    This is particularly the case when the bottom 60% of income earners receive more in “transfer payments” than they pay in federal taxes that are entirely financed by the top 20%. This was a point made by Mark Perry via the American Enterprise Institute:

    “Some additional analysis and commentary will be provided here that reveal a yet-to-be discussed major implication of the CBO report – almost the entire burden: a) of all transfer payments made to American households and b) of all non-financed government spending, falls on just one group of Americans – the top one-fifth of US households by income. That’s correct, the CBO study shows that the bottom three income quintiles representing 60% of US households are “net recipients” (they receive more in transfer payments than they pay in federal taxes), the second-highest income quintile pays just slightly more in federal taxes ($14,800) than it receives in government transfer payments ($14,100), while the top 20% of American “net payer” households finance 100% of the transfer payments to the bottom 60%, as well as almost 100% of the tax revenue collected to run the federal government. Here are the details of that analysis.”


    The Most Foul Four Letter Word

    The US has the single most progressive tax system, and arguably the most complicated, tax system among all OECD countries. As stated by the Tax Policy Center:

    The progressivity of the federal tax system means that high-income taxpayers bear a high share of taxes. In 2013, the top quintile of the income distribution received 51.5 percent of income and paid 66.7 percent of federal taxes.”

    So, if the “rich” are indeed pulling their “fair share” of their weight, then what is the problem?

    Oh…you mean that “other” foul four letter word. BUDGET.

    When President Obama ran for office in 2007, he blamed President Bush for increasing the national debt to over $9 Trillion.

    Today, the Federal Debt has exceeded $18 Trillion and continues to climb. It is currently estimated that it will require an additional $1.1 Trillion to fund the government through the end of September which concludes the current fiscal budget year.

    I reiterate, the government is currently expected to spend $1.1 trillion over the course of one fiscal year. While we have gotten used to throwing around a billion dollars here and there, we have become desensitized to the magnitude of a trillion dollars. Let’s put that into perspective:

    If you spent $1 a second it would only require 31,709 years to complete. Yet our government will exceed that task over the course of 365 days.

    Here is the problem. In 2015, according to a recent CBO study, while the “rich” will pay more than ever in federal income taxes, it still won’t be enough to cover the current spending.

    “In the first six months of fiscal 2014, the government took in approximately $1,323,000,000,000 in revenue, according to CBO. In the first six months of this fiscal year, it took in approximately $1,420,000,000,000—an increase of $98,000,000,000.

    Meanwhile, the federal government spent approximately $1,736,000,000,000 in the first six months of fiscal 2014. It spent approximately $1,851,000,000,000 in the first six months of the fiscal year—an increase of $115,000,000,000 over last year.

    Last year, the government ran a deficit of $413 billion in the first six months of the fiscal year. This year, it ran a deficit of $430 billion—a $17 billion increase over last year.”


    So, while it may be politically advantageous to point the “fingers of blame” at the wealthy for not pulling their weight, the reality is that you could tax the top quintile at a 100% tax rate and still not solve the real problem of overspending.

    But then again, there is a huge difference between running for President on the platform of budgetary discipline and actually doing it. Cuts to defense spending at a time when wars are still being waged on several fronts, reform of social welfare and entitlement programs and spending cuts across a litany of other federal agencies are not really palatable to either politicians or their constituents.

    The one solution that seems to be missed between the “tax more” arguments of the left and “spend less” opposition of the right, is simply reform. Unfortunately, after six years of the lowest borrowing costs in history, trillions of dollars of financial support, and a variety of other interventions to stabilize a post-financial crisis economy, nothing has been accomplished. The opportunity to refinance government debt and reform entitlements has been squanderd.

    Maybe we will do better after the next crisis?

    Images: Flickr (licence attribution)

    About The Author

    Lance Roberts – Host of StreetTalk Live

    After having been in the investing world for more than 25 years from private banking and investment management to private and venture capital; Lance has pretty much “been there and done that” at one point or another. His common sense approach has appealed to audiences for over a decade and continues to grow each and every week.

    Lance is also the Chief Editor of the X-Report, a weekly subscriber based-newsletter that is distributed nationwide. The newsletter covers economic, political and market topics as they relate to the management portfolios. A daily financial blog, audio and video’s also keep members informed of the day’s events and how it impacts your money.

    Lance’s investment strategies and knowledge have been featured on Fox 26, CNBC, Fox Business News and Fox News. He has been quoted by a litany of publications from the Wall Street Journal, Reuters, The Washington Post all the way to TheStreet.com as well as on several of the nation’s biggest financial blogs such as the Pragmatic Capitalist, Zero Hedge and Seeking Alpha.


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