The Real Tax Gap
Wealthier Americans pay a record share of federal taxes, but voters (and President Joe Biden) believe they're freeloading.
After listening to President Joe Biden or looking at polls of the general public, you might come away thinking that this weekend's federal income tax filing deadline is a holiday for America's wealthiest residents.
And, more to the point, you might be left with the impression that solving the country's fiscal problems is as easy as raising their taxes.
Neither is true. In fact, the wealthiest Americans are now paying a higher share of federal taxes than at any time in the past 40 years.
Still, the persistent gap between what Americans (including the current occupant of the White House) believe about the federal tax code and the reality of who shoulders most of the burden is a problem. It muddies the debate over how to address chronic budget deficits and how to best manage the insolvency of Social Security and Medicare. More generally, it contributes to a phony sense of class warfare that boosts populist politicians of all stripes.
Biden, who was historically more of a centrist, has leaned harder into that message since becoming president. A common refrain in his speeches is a claim that American billionaires pay an average tax rate of just 8 percent—a claim The Washington Post's Glenn Kessler thoroughly debunked earlier this year. There's also the more generic claims, like Biden's promise in last month's State of the Union address to "protect and strengthen Social Security and make the wealthy pay their fair share."
Polls bear out a similar point of view. A recent Morning Consult/Bloomberg poll of voters in seven swing states found that 69 percent support raising taxes on Americans earning more than $400,000 annually—a rather arbitrary threshold, but one that Biden has used as a measuring stick to determine wealth. Meanwhile, a Pew Research Center poll conducted last year found that 82 percent of Americans are bothered "some" or "a lot" by the feeling that the wealthy are not paying their fair share in federal taxes.
Other surveys show that many Americans have a low level of tax literacy. A recent survey conducted by the Tax Foundation found that "most Americans are not just unhappy with the current tax code but also do not understand it." One commonly misunderstood aspect is how much the wealthiest Americans pay in taxes every year. In the Tax Foundation survey, 78 percent of respondents did not know the share of taxes paid by the wealthiest 1 percent of Americans—but, tellingly, 65 percent of respondents said their own taxes were too high.
The most straightforward conclusion here is hardly a surprising one. Americans want someone else—preferably someone richer—to pay for the cost of government.
Here's the good news: That's already happening!
"The top 1 percent of earners, defined as those with incomes over $682,577, paid nearly 46 percent of all income taxes" in 2021, according to federal tax data crunched by the National Taxpayers Union Foundation (NTUF), which advocates for lower taxes. That's the highest percentage of taxes paid by the top 1 percent of earners in any year since 1980.
Other wealthier Americans are also contributing heavily. "The top 10 percent of earners bore responsibility for 76 percent of all income taxes paid, and the top 25 percent paid 89 percent of all income taxes," the NTUF report found. Meanwhile, the bottom 50 percent of all earners paid just 2.3 percent of federal income taxes in 2021.
The sense that the wealthy aren't paying as much these days might stem from the fact that the top marginal tax rates have steadily fallen in recent decades. The top federal income tax bracket charged 70 percent in 1980, but today demands 37 percent from those lucky enough to qualify for it. Despite that, the tax code has grown significantly more progressive during the same period. The top 1 percent of earners paid less than 20 percent of all income taxes in 1980, and well more than double that amount now.
"Over the past several decades, lower income earners' share of income taxes has steadily grown smaller as the burden was shifted more and more to the wealthier," writes Demian Brady, NTUF's vice president of research. "On the other end of the spectrum, our highly progressive tax code ensures that low-income earners are afforded protection from income taxes through exemptions, deductions, and credits."
The gap between perception and reality in the federal tax code has important implications for some big decisions that federal policymakers will have to make in the near future. The first of those big decisions will hit next year, when many of the provisions of the 2017 Tax Cuts and Jobs Act expire. Among other things, Congress and the winner of this year's presidential election will have to decide whether to allow personal income tax rates to climb back to pre-2017 levels.
Then, there is the question of Social Security's looming insolvency. The old-age entitlement program is set to run a $2.8 trillion deficit over the next decade. Since both Biden and former President Donald Trump are steadfast in their refusal to touch Social Security benefits, hiking taxes is likely to be part of the preferred political solution. When that idea starts gaining steam, keep in mind that working Americans are already "on the hook to finance $164 trillion in Social Security and Medicare benefits for seniors" over the next three decades, as the Manhattan Institute's Brian Riedl pointed out in an analysis published this week. Hiking taxes to protect entitlements means asking younger Americans to foot an even larger bill.
None of these decisions will be free from painful tradeoffs—but without a better understanding of the burdens of the current tax code, many Americans will be unable to appreciate those trade-offs. Demagoguery about taxing the rich might produce a political pay-off in the short term, but it has created a political culture that's less well-equipped to tackle the serious questions about who should be paying what to cover the annual cost of our $7 trillion (and growing) federal government.
The wealthy are already paying record levels of federal taxes. How much more will be enough?
