The Taxman Cometh

Well, here's an oddity.

As I was doing research for a class I'm teaching this quarter, I ran across an article on the accumulation of wealth in America.

The sociologist was trying to show that most of the wealth (stocks, land, etc) in the country was held by a very small subpopulation (top 1%). 

Darned Plutocrats!

So, he built the first three columns of the two tables below: Total Net Worth and Financial Wealth.

As I studied the tables, I wondered how the amount of taxes paid by the top 1%, 20% and bottom 80%  corresponded to Total Net Worth and Financial Wealth. So I added the last three columns to each table and did a quick Google to try to find the numbers.

I couldn't find the exact numbers, but I found some approximations.

I plugged the rough numbers into the appropriate slots in the left-most columns of each table.

That's why many of those cells are blank - I couldn't find all the data I wanted.

Now, there's a couple of interesting things here.

One:

The politicians and the pundits on both the left and the right seem to be misrepresenting the situation.

The left insists the rich don't pay enough.

The right insists the rich pay 'way more than their fair share.

But if you look at just these rough numbers, on a per dollar wealth/tax ratio, it looks like the current federal tax code is actually not that far off from essentially fair.

The top 20% own 85% of the wealth and pay about 87% of the taxes.
The bottom 80% own 15% of the wealth and pay about 15% of the taxes.
Yes, I know the percentages don't exactly add up correctly, but I'm working off other people's rounding errors, so we can only do ball-park work here.
But even so, you can't ask for much better than that.

Of course, these numbers only account for federal tax, not state, local or - worst of all - sales tax.

All of that would definitely affect the tables, and probably not in a good way for the poor.

But as far as the federal tax goes, it actually works.
Of course, we're not done yet. 

Two:

At least as far as the federal tax goes, another interesting thing seems to be happening.

It looks like the MORE the rich pay in taxes:

(a) the WEALTHIER the rich get and 

(b) the LESS the lower 80% share in the wealth.

Look at the table below.

In 1983, the top 1% owned roughly 34% of the country's wealth, but paid only 19% of the taxes. 

In that same year, the bottom 80% owned nearly 19% of the country's wealth.

But, by 1989, when the federal taxes paid by the top 1% went up to 25%, the bottom 80% saw their share of the country's wealth drop to just 16.5%. 

Today, the top 1% own nearly 35% of the country's wealth and pay 40% of the taxes.

Meanwhile, although the bottom 80% pay less taxes than they ever have, they also own less of the wealth than they ever have.

Now, call me crazy, but I find that somewhat counter-intuitive.

If you're rich, paying more taxes makes you richer.

If you're poor, paying less taxes makes you poorer.

Now, you could argue that I have it exactly backwards - the rich pay more because they are rich, and the poor pay less because they own less to tax. 

Unfortunately, from the few numbers I've been able to find, that interpretation doesn't really fit.

For the 25 years covered in these tables, the rich have always owned between 33% and 38% of the country, but the actual percentage of taxes they pay has fluctuated anywhere between 19% and 40%.

There's no obvious correlation between the two. A low rate of taxation (the 19% in 1983) yields a wealth ownership for that top 1% that is not much different from a high rate of taxation (the current 40%). 

That is, the percentage of wealth held by the top 1% doesn't really change regardless of how much you tax them. 

Instead, what does change as a function of taxation on the rich is how much wealth the rest of the country has. The more taxes the wealthy pay, the less wealth everyone else has. I don't have all the numbers, but all the numbers I have show that effect.

It's almost like Reagan was right about this whole "trickle-down economics" thing. 

It's also got very obvious repercussions for the political arguments over taxes that currently shake the airwaves.

It makes me yearn for a low rate of taxation on federal income and corporate tax... say something around 9% for each...

In the United States, wealth is highly concentrated in a relatively few hands. As of 2007, the top 1% of households (the upper class) owned 34.6% of all privately held wealth, and the next 19% (the managerial, professional, and small business stratum) had 50.5%, which means that just 20% of the people owned a remarkable 85%, leaving only 15% of the wealth for the bottom 80% (wage and salary workers). In terms of financial wealth (total net worth minus the value of one's home), the top 1% of households had an even greater share: 42.7%. Table 1 and Figure 1 present further details drawn from the careful work of economist Edward N. Wolff at New York University (2010).

Table 1: Distribution of net worth and financial wealth in the United States, 1983-2007

	Total Net Worth
	Top 1 percent	Next 19 percent	Bottom 80 percent	% Fed Tax Paid by Top 1%	% Fed Tax Paid by Top 25%	% Fed Tax Paid by Bottom 80%
1983	33.8%	47.5%	18.7%	~19%
1989	37.4%	46.2%	16.5%	~25%
1992	37.2%	46.6%	16.2%
1995	38.5%	45.4%	16.1%
1998	38.1%	45.3%	16.6%
2001	33.4%	51.0%	15.6%	~38%	~83%	~20%
2004	34.3%	50.3%	15.3%	~37%	~85%
2007	34.6%	50.5%	15.0%	40.42%	87%	~15%
	Financial Wealth
	Top 1 percent	Next 19 percent	Bottom 80 percent	% Fed Tax Paid by Top 1%	% Fed Tax Paid by Top 25%	% Fed Tax Paid Bottom 80%
1983	42.9%	48.4%	8.7%	~19%
1989	46.9%	46.5%	6.6%	~25%
1992	45.6%	46.7%	7.7%
1995	47.2%	45.9%	7.0%
1998	47.3%	43.6%	9.1%
2001	39.7%	51.5%	8.7%	~38%	~83%	~20%
2004	42.2%	50.3%	7.5%	~37%	~85%
2007	42.7%	50.3%	7.0%	40.42%	87%	~15%

Total assets are defined as the sum of: (1) the gross value of owner-occupied housing; (2) other real estate owned by the household; (3) cash and demand deposits; (4) time and savings deposits, certificates of deposit, and money market accounts; (5) government bonds, corporate bonds, foreign bonds, and other financial securities; (6) the cash surrender value of life insurance plans; (7) the cash surrender value of pension plans, including IRAs, Keogh, and 401(k) plans; (8) corporate stock and mutual funds; (9) net equity in unincorporated businesses; and (10) equity in trust funds. Total liabilities are the sum of: (1) mortgage debt; (2) consumer debt, including auto loans; and (3) other debt. From Wolff (2004, 2007, & 2010).