Top 0.1 Percent Pays More Income Tax than Bottom 80 Percent

9:27 AM, Sep 21, 2011 • By JEFFREY H. ANDERSON

In his recently released deficit plan, President Obama lays out the “Buffett Rule” (named, of course, for Warren Buffett, the famous investor and supporter of Obama). The rule, as Obama defines it, is “that people making more than $1 million a year should not pay a smaller share of their income in taxes than middle-class families pay.”

Obama’s clear inference, of course, is that this otherwise happens routinely; that the rich are shirking their citizenly duties while the middle class pays. Is this inference true? Or is it simply a political fiction, a straw man from which Obama hopes to make hay in 2012?

The Tax Policy Center (TPC), a center-left joint-creation of the Brookings Institution and Urban Institute, publishes federal tax statistics by income group (see, here, here, here, and here). The essential funding source (at least from individuals) for most of the general functions of government — defense, roads, national parks, federal law enforcement, etc. — is the income tax. It is almost entirely through the income tax that individual citizens contribute financially to the day-to-day functions of their government.

In 2010, according to the TPC, Americans in the lowest quintile of income-earners — the bottom 20 percent — paid minus-3.8 percent of the total federal income tax burden. In other words, they got more back, in income tax credits and the like, than they paid in. Similarly, those in the second quintile paid minus-4.3 percent of the total federal income tax burden — so they, too, weren’t paying into the income tax till but rather were taking out.

Those in the middle quintile — pretty much the center of the middle class (this quintile had an average income of $44,000) — paid 3.9 percent of the total federal income tax burden (about $1 of every $25 dollars in income taxes paid nationwide). And those in the fourth quintile — whose income ranged from $58,000 to $102,000 — paid 15.1 percent of the total federal income tax burden.

So, all told, the 80 percent of Americans whose income placed them in one of these first four quintiles of income-earners combined to pay 10.9 percent of the total federal income tax burden. Put otherwise, this 80 percent of the citizenry paid about $1 out of every $9 that was paid in federal income taxes nationwide.

Meanwhile, Americans in the highest 0.1 percent of all income-earners — these are the very rich, with incomes of at least $1.974 million — paid 16.4 percent of the total federal tax burden. Essentially, one out of every $6 paid in federal income tax was paid by this 0.1 percent of the citizenry.

In other words, the top 0.1 percent paid more toward the workings of government than the bottom 80 percent did. That’s despite the fact that the bottom 80 percent collectively made more than six times as much money as the top 0.1 percent did.

On average, a given member of the top 0.1 percent paid $1.1 million in annual federal income tax — $1,147,616, to be more exact. That’s more than 1,000 times what the average person in the middle quintile paid ($1,017). Yes, the very rich made a lot more money — but not anywhere near 1,000 times as much. In fact, only 12 percent of this gap in income-tax payments is attributable to the gap in income between the two groups. The rest resulted from the very rich paying a much higher percentage of their income — more than 8 times as high — in income tax.

Now, I don’t know how much Warren Buffett pays his secretary, or how much either of them really pays in income taxes. But when 0.1 percent of the population is collectively paying more in income taxes than 80 percent of the population is collectively paying, it’s clear that there’s not a whole lot of need for the “Buffett Rule.”

Again, the stats I’ve quoted — all of which are from the TPC — are for income tax. What if we were to include all federal taxes — including payroll taxes, which people pay and then (to a greater or lesser degree) get back in direct payments for themselves in the form of Social Security or Medicare? What if we were also to include employers’ share of these payroll taxes, crediting employees as if they had made these payments themselves (like the TPC does)?

Factoring in payroll taxes in this manner, those in the top 0.1 percent no longer paid more in taxes than the bottom 80 percent did last year (although they did pay more than the bottom 40 percent did — four times as much, in fact). But they still paid much higher rates. The average total federal tax rate for those in the top 0.1 percent was 30.7 percent. (That’s before factoring in any state or local taxes.) In comparison, the average total federal tax rate for those in the middle quintile was 12.8 percent. The average rate for those in the fourth quintile was 16.8 percent. And the average rate for those between the 95th and 99th percentile (those making between $204,000 and $509,000) was 23.4 percent. So even if Buffett’s secretary makes a cool half-million annually, he or she still likely pays a much lower total tax rate than the average person in the top 0.1 percent.

Certain prominent Obama supporters (Buffett, General Electric) do seem to be particularly good at avoiding paying taxes, but that doesn’t mean they’re the norm. The facts are clear: Our very richest citizens collectively pay for more of the day-to-day operations of our government than 80 percent of our citizens collectively do. The rich would already seem to be paying — as Obama likes to say — “their fair share.”