We often hear — especially as an election draws near — some politicians and candidates cry about the wealthy having to “pay their fair share.” But what is a fair share?
To help find an answer to that question, one should turn to the data compiled annually by the Congressional Budget Office in which Americans are asked how much they earn and how much they pay in federal taxes. It’s relatively easy then to figure the percentage of people’s income they pay to the IRS.
In 2017 — the last year for which data is available — the average household income among the top 1% of Americans, the middle 20% and the bottom 20% was $2 million, $61,700, and $15,900, respectively. After allowing for the various accounting gymnastics to reduce tax burdens, those three groups paid 32%, 17% and less than 2% of their incomes in federal taxes.
In other words, the average 1-percenter household earned about 125 times what the average bottom 20-percenter household earned but paid over 2,000 times the federal taxes.
But Antony Davies, an associate professor of economics at Duquesne University, and James Harrigan of the Center for the Philosophy of Freedom at the University of Arizona, wanted to take it a step further.
They rightfully point out that while the federal government takes with one hand — via taxes — it gives with the other. The government assistance comes in the form of Medicaid, CHIP, SNAP, Temporary Assistance for Needy Families, housing assistance, income assistance, energy assistance, and child nutrition programs, plus earnings-tested transfers like Social Security benefits, unemployment insurance and workers’ compensation.
“Transfers are largely things the government does to help lower-income households. But regardless of the intention, transfers are negative taxes. Subtracting transfers from taxes yields net federal taxes paid,” the two recently wrote.
The results are eye-opening.
In 2017, the average household among the top 1% paid $620,000 in federal taxes and received $1,300 in transfers, for an effective net tax rate of 31%. The average middle-income household paid $10,500 in taxes and received $16,800 in transfers for an effective net tax rate of negative 10%. The average household among the bottom 20% paid $300 and received $20,300 in transfers for an effective net tax rate of negative 126%.
“Our tax and transfer system has become so progressive that, on average, only the top 40% of households pay more in taxes than they receive in transfers,” the two wrote.
What does that mean? Almost by definition, every tax cut is a tax cut for the rich because those are the only households that are net payers.
Calls for the rich to pay “their fair share” likely will never end because proponents actually don’t mean “fair” at all. They really only mean “more.”