Wednesday, July 30, 2008

Top 25% of Earners Paid 85% of All Taxes in 2006

The numbers the IRS released regarding tax burdens in 2006 is stunning. Basically, the top 10% pay 68% of all income taxes. That means if you're making less than $108,904, your contribution to the pool is fairly small in comparison, and if you're making more, well, thank you.

Income Category
2006 AGI
Percent of All Income
Percent of Income Taxes Paid
Top 1%
Over $388,806
Top 5%
Over $153,542
Top 10%
Over $108,904
Top 25%
Over $64,702
Top 50%
Over $31,987
Bottom 50%
Under $31,988

The above chart is from Kiplinger's:

This reminds me of a joke I read on Greg Mankiw's ( blog. He told a story about a group of four friends who went out drinking. At first, they divided the bill equally, each paying 10 dollars for a pitcher of beer. Then, the four friends realized that one only made $10/hr, while another made $90/hr. They agreed the higher-earning friend should pay 20 dollars as a "fair" share. The friend agreed, everyone else paid about 7 dollars each, and everyone was happy. Everything was going well, until the other three friends demanded that the higher earner pay 30 dollars as his "fair" share. The friend got ticked off and moved out of the city. The next time the three friends went out for beers, they all paid about 14 dollars each, more than if they had been nicer to the higher wage earner.

The lesson? People will move or take other measures to avoid taxes if they are too high or unreasonable, leaving everyone else with a higher bill.

Update on April 13, 2009: more on income taxes here and here.

Update on August 10, 2012: more on overall tax burdens here:  (David Wessel, August 6, 2012, The Numbers Inside a Hot-Button Issue)

"In the 1980s, the top 5% averaged 22.6% of income and paid 28.5% of taxes.

In the 1990s, the top 5% averaged 25.3% of income and paid 34.3% of taxes.

In the 2000s, the top 5% averaged 28.4% of the income and paid 40.3% of the taxes."

"Average tax rates have come down for everyone. On average, the tax bite on the rich is bigger--except for those whose income mainly comes from capital gains and dividends."

"The share of taxes paid by the bottom 40% of the population has been shrinking along with their share of income." 

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