Ari Fleischer: Taxes and the rich -- Yes, they pay their fair share, and they will after tax reform, too

Of all the tall tales told about taxes, the tallest is that the rich don’t pay their fair share.

The Internal Revenue Service this month released its latest numbers and they show that not only do the rich, along with the middle-class, pay the most in income taxes, but their burden has been going up, not down.

Our tax system is unfair, at least if you measure fairness by the fact that a very small number of taxpayers carry almost all the income tax burden.

The top ten percent of earners, those making more than $138,000 in 2015, made 47 percent of the nation’s income, but they paid 71 percent of the nation’s income tax.  The top 1 percent, the people former President Obama decried the most, made 21 percent of the nation’s income in 2015, but they paid 39 percent of the nation’s income tax.

Not only are these people paying their fair share, they’re picking up other people’s shares as well. 

Roughly half the taxpayers in the U.S. pay no income taxes.  As a practical matter, most taxpayers need to make around $39,000 before they’re hit by the income tax.  All taxpayers pay the payroll tax, but according to a recent study by the Urban Institute, when workers retire, Social Security and Medicare give taxpayers their money back.  The less money you make, the more likely you are to get all your payroll taxes back, and then some.

When critics of tax reform claim it’s a tax cut for the rich, that’s of course because it’s only middle-income and upper-income people who pay income taxes. And it’s been that way for a long time.

Income taxes are different.  You don’t get them back.  They pay for the military, nuclear weapons upkeep, environmental protection, food stamps, housing assistance, welfare, Medicaid and a myriad of other services and transfer payments. 

There are 140,000 million taxpayers in the United States.  Half of them make less than $39,275, the cutoff point that divides the top 50 percent from the lower 50 percent.  Because taxes are so high on upper income Americans, that means that 70 million Americans – 50 percent of the country – pay 97 percent of the income tax.  The other half pay less than 3 percent.

When critics of tax reform claim it’s a tax cut for the rich, that’s of course because it’s only middle-income and upper-income people who pay income taxes. And it’s been that way for a long time.

In 2001, the top 10 percent made 43 percent of the money and they paid 64 percent of the income tax.  The top 1 percent made 17 percent of the money and paid 33 percent of the income tax.

The proposed tax reform pending in the Congress will likely continue this trend because the doubling of the standard deduction and the increase in the child credit mean more people will pay no taxes, shifting the burden even more to the few people who do. As for upper income people, so long as their share of the tax cut is in proportion to their share of the taxes they pay, it’s hard to argue that the tax cut is unfair.

But what about Warren Buffet’s secretary? Remember her?  We were told she pays a higher tax rate than her boss. Perhaps Mr. Buffet reduced his tax rate thanks to an abundance of charitable giving combined with other reasons, but examples like this, according to the IRS, are exceptions to the rule.  It’s bad policy to legislate by rare anecdote, especially when the facts run contrary to the anecdote.

The system is incredibly progressive. According to the IRS, in 2015, the top 1 percent paid an average tax rate of 27.1 percent, the top 10 percent paid an average rate of 21.4 percent, the top 30 percent paid an average rate of 17.4 percent and the top 50 percent paid an average rate of 15.7 percent.   The bottom 50 percent paid an average rate of 3.6 percent.

Average Tax Rate:

Top 1%

27.1%

Top 10%

21.4%

Top 30%

17.4%

Top 50%

15.7%

Bottom 50%

3.6%

Not only do middle-income and upper-income Americans pay the most, they make it possible for their fellow Americans to receive quite a bit of government largesse.  According to a study from the American Enterprise Institute, 60 percent of U.S. households, those making less than about $51,000, receive more in transfer payments than they pay in federal taxes.

The bottom 20 percent of earners, according to AEI, received $9600 in government transfer payments in 2013 and paid only $800 in federal taxes. They got back twelve times what they paid in.

The United States is a generous nation.  A small group of people pay an awful lot of money which gets redistributed to their fellow citizens.

As Congress considers tax reform, the best policy would be a new tax code with lower rates that stimulates the economy to create more jobs and lift wages.  When the economy booms again, fewer workers will need government payments and instead, they can join the ranks of taxpayers who earn enough to see the merits and fairness of income tax rate cuts.