Budget & Tax

Wendy Warcholik, Ph.D. | July 29, 2014

The rich are already paying their ‘fair share’ — and then some

Wendy Warcholik, Ph.D.

President Obama has repeatedly called for the so-called rich to pay their “fair share” as he strives to attain his stated goal of tax fairness. He defines as wealthy those individuals making $200k or married couples making more than $250k.

But these earners are far from the millionaires that most would envision as America’s elite. Many of these individuals are small-business job creators. In fact, while only 20 percent of all workers in America are self-employed, two-thirds of all millionaires are self-employed. These job creators must re-invest profits in their businesses, deal with the ramifications of Obamacare, and somehow pay more in taxes than they already do.

Moreover, constant references by lawmakers to the amorphous term “fair share” creates more uncertainty in job creators’ minds as to how much tax revenue will be extracted from them in the future. As a result, they are less willing to invest and hire, which is bad news for both capital and labor.

IRS data from 2009 (the most recent data available) show that the top one percent of earners pay 37 percent of all federal income taxes, while the top five percent of earners pay 59 percent. Even more startling is the fact that the top 50 percent of earners paid almost all taxes collected (98 percent) and the bottom half (about 41 million filers) paid only two percent. Even more compelling is the fact that, according to economist Mark Perry, the top one percent paid 19 percent of taxes in 1980 but now pay 37 percent of taxes.

In short, the rich seem to be paying their fair share — and then some. So if the goal is to reduce income inequality, as President Obama says, then increasing taxes on top earners is not the best way forward.

As American Enterprise Institute scholar Michael Strain recently remarked in The Washington Post, “In the aftermath of the Great Recession, it is easy to see why the fortunes of the top one percent would receive so much attention. The public has the sense that folks at the very top — including many who got us into this mess — are making out like bandits, while the rest of us are suffering. And in general, it’s hard for many Americans to understand why the top one percent ‘deserve’ their extremely high incomes.” However, he says that if one is truly concerned about income inequality, the facts demand that you focus on the bottom 99 percent instead of the top one percent, as it is the skills gap driving income inequality.

Strain provides a persuasive illustration: “The economist David H. Autor finds that if the gains of the top one percent between 1979 and 2012 were redistributed to the bottom 99 percent, each household would receive a one-time payment of about $7,000. This is a large sum, but not nearly as large as the increase in the skills premium. For example, Autor calculates that the earnings gap between a college educated and a high-school educated two-earner family increased by about $28,000 between 1979 and 2012 — an amount four times as large as our hypothetical redistribution from the one percent to the rest. In 2012, this earnings gap was about $58,000.” From a policy perspective, the focus on taxing the one percent will do nothing to reduce income inequality.

Aside from shouldering the bulk of taxes paid in the U.S., the wealthy exemplify several other characteristics important for economic advancement. For example, in surveys of millionaires, Dr. Tom Stanley (author of The Millionaire Next Door) reports that, unlike the media’s promotion of the lavish lifestyles of Hollywood stars and professional athletes who easily earn $5 million or more in a single year, the bulk of millionaires earn one-tenth of $5 million a year. It is millionaires’ prodigious budgeting and investing that is responsible for their accumulation of wealth. And the path is long; most never become millionaires until they are 50 or older.

Another overlooked phenomenon of wealth creation is family structure. Most millionaires have been married to the same woman their entire adult life. Indeed, millionaires interviewed by Stanley say that having a frugal spouse setting the family’s monthly budget before, during, and after their wealth accumulation has been critical to their success.

So, as calls come from President Obama and Democrat governors like Pat Quinn in Illinois to enact targeted tax increases at the federal and state level on top earners, let’s review the facts.

First, the top five percent of earners already pay 59 percent of all federal taxes, and the bottom 50 percent of earners only pay two percent. Second, as seen in the data on millionaires and in my work on the marriage premium in this month’s issue of OCPA Perspective, marriage stability and prodigious frugality are critical elements to achieving wealth.

If those politicians who rage on about income equality truly want to help those in the middle-income strata, they should promote both marriage and education. It would be also be helpful if they acted like millionaires and demanded that the government spent within its means.

Wendy Warcholik, Ph.D.

OCPA Research Fellow

Wendy P. Warcholik (Ph.D., George Mason University) is an OCPA research fellow. She formerly served as an economist at the U.S. Department of Commerce’s Bureau of Economic Analysis, and was the chief forecasting economist for the Commonwealth of Virginia’s Department of Medical Assistance Services. She is a co-creator (with J. Scott Moody) of the Tax Foundation’s popular “State Business Tax Climate Index.”

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