The Income Tax Turns 100 — Who Pays What?

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A man picks up federal tax form 1040 at a post office in Palo Alto, Calif. (AP Photo/Paul Sakuma)

Thursday marks the 100th anniversary of the federal income tax. That is, the income tax that we have today – the first US tax raised on earned incomes was a temporary one imposed to help pay for the War of 1812. Another helped pay for the Civil War, but was allowed to expire in 1872.

One of the most simplistic statements one can utter is, “taxes are too damn high.” The US has a complex tax system — there are many, many different taxes — so a more salient question than whether taxes are “too high” or “too low” is: who pays what?

The reality is that, overall, the US has one of the lowest tax burdens in the industrial world. If someone’s tax burden is too great to bear, that probably means that someone else isn’t paying a fair share of the cost of maintaining the public services that a modern nation-state requires.

For example, one can certainly say that state and local taxes are too high for poorer residents of Washington State. According to a recent study, those in the bottom 20 percent of the economic pile fork over almost 17 percent of their incomes to Olympia, while the middle 20 percent pay about 10 percent and those at the top – the wealthiest one percent of Washington households – pay less than three percent.

Contrast that with highly profitable corporations that pay nothing at all — their taxes surely can’t be considered “too high.” (Moyers & Company highlighted some of the worst offenders back in May.)

So the real game, if you can play it, is shifting the tax burden onto someone else.

When it comes to individual income taxes, you may have seen some charts like these from Mother Jones, which show that while the incomes of those at the top have spiraled upwards, the share of taxes they pay has dropped precipitously…

But it’s also true that the income tax burden has shifted from corporations to individuals. At the beginning of World War II, individuals and families paid 38 percent of federal income taxes, and corporations picked up the other 62 percent. That’s changed significantly — last year, individuals and families paid 82 percent of federal income taxes, and corporations kicked in just 18 percent.

Here’s something interesting about the chart above: since the mid-1960s, the top tax rates for both individuals and corporations have fallen significantly, but individual rates have fallen much further. Of course, the tax rate on the books isn’t important — it’s what one pays that counts (corporate lobbies often complain that the US has the highest corporate tax rates in the world, which is true, but our companies pay a much smaller effective tax rate — and it dropped by 58 percent between 1960 and 2012).

How is it that American corporations are paying a smaller share of federal income taxes when the rates paid by individuals dropped much further?  It’s simple: ordinary American families don’t have teams of lobbyists to win them loopholes or armies of tax accountants and attorneys to exploit them.

As Bruce Bartlett wrote this week in The New York Times, this reality has been of concern since the income tax was first established:

Even before the income tax was enacted, the issue of loopholes came up. An article discussing them appeared in The New York Times as early as April 13, 1913. By 1915, one congressman complained: “I write a law. You drill a hole in it. I plug the hole. You drill a hole in my plug.”

Of course, there’s a lot more than federal income taxes to consider when thinking about who pays what. Payroll taxes – which burden working people far more than the wealthy – have increased from around 10 percent of federal revenues in the 1940s to over 30 percent today (XL).

Courtesy of the Tax Policy Center

 

Joshua Holland is a senior digital producer for BillMoyers.com. He’s the author of The Fifteen Biggest Lies About the Economy (and Everything Else the Right Doesn’t Want You to Know about Taxes, Jobs and Corporate America) (Wiley: 2010), and host of Politics and Reality Radio. Follow him on Twitter or drop him an email at hollandj [at] moyersmedia [dot] com.
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  • Chmee

    Income taxes aren’t the only ones that get shifted more to the individual than corporations. One should also consider all of the “hidden” taxes that we all pay that are embedded in the cost of the goods that we buy, taxes on transportation (fuel and trucking), import/export duties, excise taxes on alcohol and tobacco, and more. Those costs get past on to the consumer though higher retail prices. So the effective tax rate is even higher than we see, and again as pointed out, affects the poor more than the rich.
    Payroll taxes really shouldn’t be included in the budget chart since in reality they are really a tax but an insurance premium, a payment towards Social Security, an annuity payment with (hopefully) a guaranteed amount for life, and Medicare, health insurance. We all too often see that number included in those nice pie charts that rather improperly show a disproportional amount of the national budget going toward those programs, estimated to be 64% by 2014. They are dollars from our paychecks that fund that so called mandatory spending, “entitlements” the detractors call it.

    Well of course they are mandatory and entitlements, because you and I are certainly entitled to receive back that investment. Yes, it is an investment, esp. for the annuity portion of it, and a paltry one considering that over time those same dollars, if invested merely in US Treasury bonds and notes, along with the matching amount our employers made would have yielded a far better return and provide a significantly higher income at retirement than what people are actually getting.
    If the Federal Budget pie chart was illustrated properly, the” Discretionary Spending” shown separate from the “Mandatory Spending”, then there would a drastic change of where the money is really going, one that would shock, and should anger all of us. Suddenly that 17% of expenditures that we are told that go to the military, already too high in my opinion, becomes 57%. And this is an amount in actual dollars that has almost doubled since the War on Terror began in 2001. So, when Congress and the Tea Party are looking for dollars to be cut, maybe they should be looking at where the money is really being wasted. It’s not on those of us that have been required to pay into our retirement system, to the poor or those in need, it’s on the Military Industrial Complex and it’s various offshoots, it’s on the corporations that profit from it, and because of the loopholes mention put little or nothing back into the system to justify their existence.
    Statistics and charts that I’ve quoted can be sourced at the National Priorities Project website http://nationalpriorities.org/budget-basics/federal-budget-101/spending/

  • Anonymous

    There is an odd quirk in the guaranteed payments we call Social Security – put there around 1980 to claw-back a portion of Social Security benefits in the form of an especially high income tax on Social Security recipients. This special tax kicks in for a couple collecting Social Security benefits when their total income (often just Social Security and IRA withdrawals, but also including any payments for work and any pensions, etc.) gets to somewhere around $60,000.

    The formula is a bit complicated, but many retirees find themselves paying the highest marginal income tax they have ever had to pay, even though their income is considerably lower than before they retired. It is not uncommon for a retired couple to be paying a marginal rate of 30% on an income of only $65,000 for example. A rate that high would not be imposed on a couple not collecting Social Security unless their income was near $200,000.