Nash, Hop and Lang: Do the rich pay their fair share in taxes?

The distribution of the income tax burden in America is a surprising study, to say the least. Two recent studies produced by the National Taxpayers Union Foundation analyzes who pays the federal income tax burden and what the burden and cost of preparing income taxes really is.

The short version? Rich people do pay their fair share, and our tax code is outdated and burdensome.

In a June 2023 issue of "Barron’s," President Joe Biden, to gain support for his re-election bid, told a group of AFL/CIO workers in Pennsylvania it’s about time the super wealthy start paying their fair share of personal income taxes. He went on to rally the blue-collar crowd stating “if the investment bankers went on strike tomorrow, no one would much notice. But if union members walk off the job, the whole country would come to a grinding halt.”

Biden also went on to note the number of U.S. billionaires has climbed to more than 1,000 and they are paying an average of just 8% in taxes on their earnings. “They paid a lower tax rate than schoolteachers, than firefighters, probably anyone in this room.  Its time they paid a minimum tax.  I don’t mind them being billionaires. Just pay your fair share, man."

Biden repeated this 8% claim in last week's State of the Union address.

Conversely, fact checker Glenn Kessler calls the rate of 8% quite low in the Jan. 23 edition of The Washington Post.

On Feb. 13, the National Taxpayers Union Foundation released their annual policy paper on who pays taxes. This year’s paper was months behind due to final IRS data being delayed and available for 2021 returns. In the report titled "Who Pays Income Taxes: Tax Year 2021," Damian Brady makes a compelling case that rich people do pay taxes. 

Preliminary data from the National Taxpayers Union in "Who Pays Income Taxes: Tax Year 2021," points out that the top 1% of income earners had adjusted gross income of more than $680,000 or above, earned 26.3% of all adjusted gross income in 2021 and paid 45.8% of all federal personal income taxes.

They also had the highest tax rate to adjusted gross income of 1.74. 

Brady’s report goes on to note that the top 50% of all income earners in the U.S. made almost $47,000 or above in adjusted gross personal income. 

That top 50% earned 89.6% of the income, paid 97.66% of all taxes and had a ratio of personal income tax paid to adjusted gross income of 1.09. 

What is perhaps most notable is the bottom 50% earned $46,637 or less, for 10.4% of adjusted gross income, paid only 2.34% of federal personal income taxes and had a ratio of personal income taxes paid to adjusted gross income of 0.22.

It is also important to consider in 1980, the top 1% paid 19.3% of personal income taxes, with the highest marginal tax rate being 70%.  In 2021, the top 1% paid 45.8% of the total federal income taxes while the top marginal federal income tax rate was 37%. 

In 2019, the most recent tax year available, 37.36% of tax returns filed showed a federal tax liability of zero dollars (61.4 million returns). In the last five decades, the average percentage of tax returns filed with no federal income tax owed increased from 19.4%. 

In 2020, lower income filers received $148 billion in net refundable tax credits.  Not only did a large portion of the population not pay any federal income tax; they also received nearly $150 billion in transfer payments from those that did pay taxes, which is evident in Milton Friedman’s negative income tax at work.

In spite of the data above, a recent survey by the Pew Foundation found 60% of Americans still believe a large portion of wealthy Americans do not pay their fair share in taxes.  

The above reminds us of former New York Sen. Daniel Patrick Moynihan’s 1994 words: “Everyone is entitled to his own opinion but not his own facts.”

One of the most important tools in economics is the concept of opportunity cost, which teaches us to always measure what we give up or reject when making a decision. 

Using the loss of potential gain from other choices you reject as a barometer when an alternative is chosen is the heart and soul of opportunity cost. It is the hope of economics that rationally applying the theory of opportunity cost will allow us to minimize poor decisions while maximizing good ones. Therefore, leaving individuals, businesses, and even countries better off. 

The National Taxpayers Union Foundation (NTUF) on April 17, 2023, released another study entitled, "6.5 Billion Hours, 260 Billion Dollars: What Tax Complexity Costs Americans."  The following key findings raised by the NTUF are a clear outline of the opportunity costs Americans are burdened with when it comes to keeping track of income and expenses, whether it be individually or for a business to pay their fair share of taxes and avoid an audit. 

Americans spent an estimated 6.55 billion hours in 2022 preparing and filing their taxes, a time drain equal to $260 billion in private sector labor costs.

• Additional out-of-pocket expenses of $104 billion were estimated to have been paid for tax preparation, elevates the estimate of the tax compliance burden for Americans to $364 billion in 2022.

• Compared to the NTUF’s 2021 study, the time Americans spent on tax forms rose by 22 million hours and the tax compliance burden rose by $25 billion or an increase of 7%.

• The tax compliance burden fell for three straight years following the implementation of the Tax Cuts and Jobs Act (2017). However, it is important to note tax compliance burdens were on the rise in 2021 and 2022. 

• Taxes filed in 2022 were based on the U.S. tax code for 2021 (just like taxes filed this April, will be based on the tax code for 2023).  The tax code for 2021 was 4,138,788 words in length, which was up from 3.96 million words in 2020.

• Tax complexity is likely to rise soon due to a lower threshold for reporting 1099-K forms, as well as a new corporate alternative minimum tax and a stock buy-back tax. 

The data above indicates rich people do pay their fair share in taxes and lower tax rates drive greater job creation and more vibrant stock markets.

Most of us have known for a long time that our tax system is overly complex and burdensome.  Let’s take the time to talk with those we elect to Congress and let them know we demand change. We deserve an open and honest national discussion on government spending and taxation.

We should investigate the logic of our current income tax system relative to a simple flat tax or other alternatives.

Timothy G. Nash is director of the McNair Center at Northwood University. Mr. James M. Hop is chair of the Entrepreneurship Department at Northwood University. Mr. George Lang is a state senator and business owner from Ohio.