Are tax rates fair in the U.S?

There is no doubt that tax will remain one of the hottest topics of the 2012 election.

Specifically, the question will be whether the individual income tax rates are fair among the top, the middle and the working class.

Democrats and President Obama will quickly point to the case of Warren Buffet—a billionaire who claimed he paid his income tax at a rate of about 17%—and his secretary paying 31% to convince you that the rich should pay more. This is nothing but their effort to create “class warfare” to win votes for 2012.

Let’s use actual IRS numbers, facts and calculations and then decide whether the rich are paying their fair share of income taxes—though you must admit that the words “fair share of taxes” are quite objective.

Part I Are Tax Rates Fair in the U.S.?

Let’s examine the following data from IRS for the tax year of 2009:

2009

Group’s Share of Income Taxes

Average (Effective) Tax Rate

AGI Share

Total Tax Returns Filed (thousands)

         

Top 1%

36.7%

24.01%

16.93%

1,380

Top 5%

58.7%

20.46%

31.72%

6,899

Top 10%

70.5%

18.05%

43.19%

13,798

Top 25%

87.3%

14.68%

65.81%

34,496

Top 50%

97.7%

12.50%

86.52%

68,991

Bottom 50%

2.3%

1.85%

13.48%

68,991

Source: Internal Revenue Service

(Notes: 1) The Group’s Share of Income Taxes is defined as the group’s total tax paid as a percent of the total tax collected by the Fed.  2) Average Tax Rate is the average effective tax rate by the group and not the same as the tax bracket rate set by the IRS.  3) AGI Share (adjusted gross income) is defined as the group’s total share of the total AGI.  4) Total Tax Returns Files (in thousands) the number of tax returns filed for each group)

Based on this table, the top 1% group paid their 2009 income tax at an average rate of 24%, and contributed about 36.7% of the total income taxes.

On the other hand, the bottom 50% group paid their 2009 income tax at an average rate of 1.85%, and contributed about 2.3% of the total income taxes.

As a test, use your copy of 2009 tax return, take the total amount of tax that you paid, line 55 of 2009 tax form 1040, and divide by your AGI, line 38. What was your rate in 2009?

Are the rates fair? You decide.

Much has been talked about Warren Buffet paying income tax at the rate of 17%, while his secretary’s rate was about 31%. Let’s estimate how much is she making at his secretary. First, when he made this claim, we will have to assume that his secretary has been filing as single or head of house hold—only her income has been on the tax return.

2010

Head of Household  

Low end

High End

%

$373,650

35%

$190,550

$373,650

33%

$117,650

$190,550

28%

$45,550

$117,650

25%

$11,950

$45,550

15%

$0

$11,950

10%

            Source: http://www.moneychimp.com/features/tax_brackets.htm

Looking at the tax brackets data for 2010, if she paid at 31% like Buffett claimed, her AGI would be at least $190,550. Assume that she made no itemized or standard deduction at all, then her salary would be at least $190,550—her income will be much higher if she claimed some deduction or contributed to a 401K plan.

For a billionaire like Warren Buffet, I have no doubt he can afford to have a high paid secretary.  But if his secretary made over $190,000, she could afford a tax rate of 31%.

On Part II, we will discuss about Buffet’s tax rate of 17% which is more believable than his secretary’s rate of 31%.

During the first two years of his administration, President Obama had control of both the Senate and the House of Representatives and he could pass any tax reform laws he wished to. But he chose not to make any changes in the tax laws. Why do you suppose that he’s decided to talk about tax now, in an election year? 

It’s simple. There are 131,083,000 tax returns that are not in the top 5%—that is a potential base of about 131 million voters. So is he fighting for tax fairness or for votes only?

Ch3 Nguyen

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