The graph above shows the impact of Federal Government’s tax and transfer policy on each fifth of the population and on the top 1 percent. “Transfers” include social security, welfare, etc. (Source: CBO)
Taken together, federal taxes and transfers are progressive — they increase the net income of the bottom 60% with the most impact on the bottom 20%. And they reduce the net income of the top 20%.
The dark parts of the “Highest Quintile” bars show the top 20% except for the top 1%. And the full-height of these bars shows the top 1%.
Note that the difference between the green and maroon 1% bars is not much, maybe 14%. So in effect, that is the average tax rate on the top 1%, and they keep about 96% of their income. (Note that this is all about “income per year” and not about total wealth, which is much more unequal.)
This is a graph of the marginal tax rate, not the average tax rate, which is lower. For example, if the tax rate on your first $100,000 is 20% and on your second $100,000 is 40%, then on average you pay only 30% (not real tax rates, just an example).
As we saw above, it looks like the top 1% pays only about 14% on average.
Note that in the 1960s, when our economy was growing the fastest since WWII, the top rate was just over 90%. Nothing terrible happened. The rich stayed rich and the government collected more money. But there is some evidence that 90% is too high, not because it’s unfair to the rich, but because it makes it worthwhile to spend so much on lawyers to dodge taxes that the government doesn’t collect any more money than with a top tax rate of 70 to 80%.
For now, 70% would be a good target. It gives us a better chance of success and we lose very little.
“Supply-side” (Voodoo) economics claims that high tax rates hurt economic growth, and low tax rates spur economic growth. The graph above shows that even huge changes in the tax rate do not make a noticeable difference in the growth rate (source).
Also, note (by looking at the top-marginal-rate graph) that the tax rate on the rich was cut dramatically right before the great depression, and that it was highest from the end of WWII through the mid-1960s which was a period of high growth.
Ripped Apart
