Monday, April 25, 2011

The Rich get Richer - How Taxation in America Impacts Wealth

In mid-April, the Institute for Policy Studies released a publication entitled "Unnecessary Austerity, Unnecessary Shutdown" as their response to the debt crisis in the United States.  There are some very interesting observations in this publication relating to the concentration of wealth in America and the current debt issues facing the country.

The IPS opens with the observation that, while many say that the United States "is broke", the authors of the report state that the country is awash in wealth.  Corporations are holding trillions in cash and individuals (on average) are worth $236,213 per adult, up 23 percent over the decade.  The problem is two-fold; first, that the wealth has become concentrated in the hands of fewer and fewer individuals and corporations and second, the country is taxing those individuals and corporations at levels far below the tax rates of decades ago.  Over the past 50 years, federal tax law has shifted the tax burden from those who can most afford it to those who cannot.

On to the details.  First, the study looks at taxation on individuals followed by taxation on corporations.

Taxation on Individuals:

Between 1961 and 2011, the number of American taxpayers that took home more than $1 million in income rose by 968.4 percent from 15,753 taxpayers in 1961 to over 361,000 in 2011, far outpacing the country's population growth and the rate of inflation.  On top of that, those income millionaires in 1961 took home only 69 cents for every dollar that today's income millionaires take home.  As if that weren't enough, in 1961, the most affluent Americans were taxed at rates up to 91 percent; today, the maximum tax rate is 35 percent (and according to a report by MSNBC, the average federal tax rates for the 400 highest gross incomes in 2007 was 17 percent, down from 26 percent in 1992.  Forty-five percent of United States households will pay no taxes in 2010 according to the Tax Policy Center.  Fifty years ago, there were far more tax brackets for the affluent.  Looking back to 1961, the actual tax rate for taxpayers making between $200,000 and $500,000 was 26.6 percent of total income in federal income tax; this jumped to an average actual tax rate of 43.1 percent for those making over a million dollars in today's dollars.

Here is a chart showing the income brackets for income taxes in 1961 and 2011 with 1961 incomes being readjusted for inflation:

If today's millionaire income earners paid taxes at the same rate as their 1961 counterparts, the Treasury would collect about $488 billion in taxes, $231 billion more than they are estimated to collect for 2010.  If the same 1961 tax rates were applied to all Americans earning more than $200,000 annually, the Treasury would collect an additional $382 billion.  To put these numbers into perspective, the Treasury raised $900 billion from all individual taxpayers for the 2009 tax year.

Taxation on Corporations:

Until 1910, tariffs and taxes on corporate activities paid most of the country's federal tax bills.  In 1961, corporations paid $21 billion in federal corporate income taxes, accounting for 22.2 percent of the government's total tax receipts.  In 2011, the total take is estimated to be $198 billion in corporate federal taxes; while that seems to be a significant amount, in fact, it comprises only 9.1 percent of government revenues.  As a percentage of GDP, corporate taxes dropped from 4.0 percent of GDP in 1961 to 1.3 percent of GDP in 2010.  By comparison, taxes paid by individuals and small businesses dropped by a far lesser amount over the fifty year period, from 7.8 percent of GDP in 1961 to an estimated 6.3 percent of GDP in 2011.  Federal government revenues are increasingly sourced from individuals over corporations.

In 1961, corporations paid 50.25 percent tax on income over $25,000.  By 1986, this had dropped to 46 percent and to 35 percent in 2011.  To compare these corporate tax rates to the Eurozone countries, here's a table showing the recent individual and corporate tax rate history for all Eurozone nations noting that, once again, cuts to corporate tax rates are greater than cuts to personal tax rates:

The American corporate tax rate of 35 percent certainly looks high by comparison, however, the IPS report notes that the actual level of U.S. corporate taxation is among the lowest in the industrialized world.  Between 2000 and 2005, American corporations paid 13.4 percent of their income in taxes compared to 30.5 percent in Australia, 27.7 percent in the United Kingdom, 16.4 percent in Japan and 14.5 percent in Canada.  Among wealthy nations, only Germany (7.2 percent) and Austria (11.2 percent) have lower actual corporate tax rates.  In fact, according to the Wall Street Journal, corporate tax rates reached a low of 6.6 percent in 2009.

Here's a prime example of how the corporate tax world works in America.  In 2010, General Electric reported world-wide profits of $14.2 billion with $5.1 billion of that coming from its American operations.  Its total tax bill?  Zero. According to the New York Times, the company is claiming a tax benefit of $3.2 billion!  General Electric reported that its tax burden is about 7.4 percent of its American profits but even that amount is overstated because it includes taxes that would be owed if G.E. were to repatriate its overseas operations.  Changes to tax laws that allow American corporations to defer taxes on income earned outside of the United States have led to 81 out of the 100 of America's largest corporations establishing accounts in offshore tax havens.  Had these sheltered profits been earned inside the United States, an additional $37 billion in taxes would have been owed in 2002, the latest year data of this type is available.

In sharp contrast, small businesses are paying an increasing share of the tax burden.  Total taxes paid by these smaller businesses rose from $41 million in 1961 to an anticipated $956 million in 2011, up 23-fold.  Over the 50 year period, large corporations saw their tax bills rise from $21 billion to $198 billion, less than a 10-fold increase.

To put the entire corporate tax scenario into perspective, in 2010, United States corporations earned pre-tax domestic income of $1.241 trillion and paid $138 billion in corporate income taxes for an overall effective tax rate of 11.1 percent.  If corporations actually paid the 35 percent corporate tax rate, they would have remitted an additional $296 billion to the Treasury.  If corporations paid taxes at the 50.25 percent corporate tax rate from 1961, they would have remitted an additional $485 billion to the Treasury.

What has become apparent from the history of taxation in the United States is that tax laws have resulted in greater and greater inequalities both in society among individuals and between corporations and small businesses.  Rather than equalizing society, governments have shifted the burden of taxes from the wealthy to those of lower and middle income America, from large corporations to small businesses and from the federal government to the state and local government levels.  This has directly resulted in the concentration of wealth in the hands of individuals who occupy the highest rungs of the social ladder and who have benefitted the most from changes to taxation.  Tax law changes have also meant that individuals are bearing a greater portion of America's tax burden when compared to corporations, a situation that the Obama Administration proposes to make even worse.

While I believe strongly that increased taxation, particularly at the individual level, is not a good thing, the taxation playing field has to be levelled since, apparently, governments appear to be unable to control their spending habits.  The day of reckoning is coming where our federal debt of $14.3 trillion will have to be serviced.  Changes in tax law need to be made to reflect the ability of income millionaires to pay a fairer share on all of their income by reducing tax preferences for capital gains and dividends just as changes are needed to ensure that multi-national, highly profitable corporations don't use tax law loopholes to pad their bottom lines by moving profits to offshore locations, further enriching those who inhabit their executive offices.

It is sad that the federal government just doesn't seem to be able to keep its hands out of the cookie jar that contains OUR money.  Life would be so much simpler today if they had shown meaningful restraint on the spending side of the ledger a decade or more ago.


  1. Thanks for providing a good, relevant look at something I had suspected but didn't have facts and figures.

    But, I thought you were Canadian?

  2. You would be correct. By OUR I mean taxpayers in general.

  3. Looking at what portion of their profits American companies paid in 2010 is completely useless. A lot of companies lost money in 2008 and 2010, so they used that to offset their profits in 2010.

  4. It's hard to make an argument that the poor are being taxed unfairly when the wealthy are paying the majority of the taxes.

    From you can see that the taxpayers in the top 10% of income, paid 70% of the taxes collected.

    The bottom 50th percentile has 12.75% of the total income, yet they only paid 2.7% of the taxes collected.

    The top 0.1% had only 9.96% of total income, and yet they paid 18.47% of taxes collected.

  5. Dave (May 2) is correct. And it's even harder to argue that the poor are being taxed unfairly when over 40% of households pay NO net income tax AT ALL!

  6. Yes the top 10% did, but they control how much of the wealth? your argument is what now? So sad to tax a Someone making a billion and paying 150 million in taxes, my heart bleeds that he has only 850 MILLION to spend, what do you have, make 100k, home, car, ins, kids, some savings, GAS GAS GAS ENERGY, FOOD FOOD FOOD , MEDICINE, property tax(FL), whats left and take out 30 to 34k to start, my heart bleeds for the welathy, and corps after all the tax breaks they have 2.5Trillion on the sidlines, what is in your bank, these are profits, what are yours look at your bills and tell me they are over taxed.

  7. Anonymous (May 4th) - yes, 40% of households pay no federal income tax. They don't pay because they don't make enough money to meet the threshold. Those 40% of households do however pay local and state taxes that often eat up a substantial amount of their income. I bet a lot of those people wouldn't mind paying those taxes if they could get a job that put them over the federal threshold but with college graduates making $27000/yr I don't see that happening soon.

  8. I think you meant to say "you're a moron".

  9. The problem with people not paying taxes is the fact they don't care about how much Congress spends. If everyone paid taxes, maybe we wouldn't elect people who try to buy our vote by spending money needlessly. We have a spending problem not a tax problem.

  10. What do you all pay taxes for? To get out what you put in? Its redistributive. How great can a country be if it sets the safety net way too low? Pay more tax, and reap the rewards. I'm from the UK but have lived in the states, and as much as i love the country, the disparity between rich and poor is so obvious, so much more discomfiting than any northern European country i've been to; at least the high tax paying ones anyway....

  11. Just like third world countries, Tax laws benefited rich while price increases in colleges , health care, and energy pushing middle class to poverty. That is how third world countries became corrupted, and loss their freedom. Is that what we want. We certainly need to make choices.

  12. I have written a comprehensive analysis of US Income, Federal Taxation, and Economics from 1980-2007. I have posted in on under The Basics and am looking for feedback. If you have a moment, please visit and let me know what you think.