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  • Top 1 Percent Pays Effective Tax Rate Nearly Three Times That of Middle Class

    File photograph of Berkshire Hathaway chairman and CEO Buffett in Sun Valley


    New data from the Congressional Budget Office (CBO) show that President Obama’s much-discussed Buffett Rule, which would require families earning more than $1 million a year to pay an effective tax rate of 30 percent, is basically in effect.

    The data also show that President Obama’s premise for pushing the tax—that the rich pay a smaller share of their income in taxes than the middle class—is faulty. The top 1 percent of income earners pays almost three times as much tax as a percentage of their incomes as the middle class.

    According to CBO, the top 1 percent of income earners—families earning more than $613,700 in 2010 (the latest year of available data)—paid an effective tax rate on all federal taxes of 29.4 percent. They paid 24.2 percent of all federal taxes while earning just under 15 percent of all income.

    The middle class—families earning more than $71,400—paid an effective tax rate of 11.5 percent. They paid 9.1 percent of all federal taxes and earned 14.2 percent of income.

    CBO also estimated that the top 1 percent will pay 33.6 percent of their income in federal taxes this year—well above what the Buffett Rule calls for.

    As a result of the President’s policies, the top 1 percent of income earners will pay four percentage points more of their income in federal taxes in 2013 than they did in 2010—before the President signed his long-sought tax hikes into law. That is a 14 percent increase in their effective tax rate.

    President Obama is likely to keep pushing to raise taxes even higher as part of his campaign to reduce income inequality.

    But the CBO data show that taxes significantly compress the income difference between those at the top of the income scales and the rest. In 2010, the top 20 percent of income earners saw their share of income fall after taxes compared to before taxes, while the bottom 80 percent of earners all saw their after-tax shares of income rise.

    Improvement to government policies is necessary to make it easier for low-income earners to rise up the income scales, including improved fiscal and regulatory policies. But raising taxes on the rich would reduce the incentives for high-earners to work and take risk, which would reduce opportunity for lower-income workers because it would result in less job creation.

    It is time to shift the tax debate from soaking the rich yet again—which would only hurt economic growth and reduce opportunity for Americans at all income levels—to reforming the tax code to reduce the substantial disincentives it creates for engaging in productive activities such as working, saving, investing, and taking on new risk.

    Tax reform is stalled in Congress for the rest of this year. Hopefully for those longing for new opportunity, it will regain steam in 2014.

    Posted in Capitol Hill, Economics, Front Page [slideshow_deploy]

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