What is a Fair Share of Taxes?
A lot of news and politicians have been talking about “Fair Share” with regards to citizens paying taxes, particularly the so-called Top 1%. Many of these are based on the belief that Wealthy People aren’t paying their “Fair” share of taxes. Americans, maybe more so than many other nations, have an ethos of fairness and doing the right thing. Americans root for the little guy, the underdog. We take special pleasure when there is an upset and the underdog triumphs – who didn’t like Rudy or the Miracle on Ice? We often view the juggernaut as bad or evil, even though in some aspects we look up to their excellence, and dominance, but we still don’t root for them. Often the longer someone is on the top, the more hated they become, often through no fault of their own other than their continued success. Whatever the psychology behind it, maybe our national pastime of taxation and income class wars is rooted in these same notions of fairness.
So at the Tax Project, we wanted to use data and facts to understand this a little better, to see if some groups really are not paying their “Fair” share of taxes.
The first question you have to ask is what is the definition of “Fair.” Immediately, this is challenging as it is subjective and has as many definitions as there are people, but let’s assume for this exercise we can have a general consensus so that we may approach this question. Here is how it is defined, and given that “Fair”, we’ll focus on the definition in context of the question as a place to start.
Definition
Webster’s
A marked by impartiality and honesty : free from self-interest, prejudice, or favoritism
a very fair person to do business with
B conforming with the established rules : ALLOWED (2)
: consonant with merit or importance : DUE a fair share
C open to legitimate pursuit, attack, or ridicule fair game
Dictionary.com
adjective,fair·er, fair·est.
- free from bias, dishonesty, or injustice:
- a fair decision;
- a fair judge.
Challenge defining Fair
Right away you see the challenge, nobody is free from bias or completely impartial, and no matter how many facts or how much evidence you use there is always some bias. Some may, rightly or wrongly, feel there has been an injustice performed no matter what based on wealth or contribution disparities. Including some that question why we have billionaires altogether, seemingly asking a philosophical question versus any means of requiring the state to eliminate them in a free society. We have all heard of the story of the Billionaire who paid no taxes. So let’s acknowledge up front that we aren’t going to change how people feel, their bias, or what they think – we hope to inform based on the data and let people come to their own conclusions.
Data
The first place to start is the Data, and if you research this you understand that outside of a few leaked individual reports this is Macro data, meaning it looks at the larger picture of taxes by Income group, and does not look at individuals and their returns. So while a deeper dive into more nuanced analysis would be great to really see the outliers and those that are escaping the tax system, reporting like this is not possible with public data. This information is maintained by the IRS for privacy reasons, and there is no research that is allowed that allows the viewing of individual returns for public release. In fact, wider research is limited, for a variety of factors including privacy and the IRS strict restrictions on protecting individual privacy, so what is often available is data on studies done and released by authoritative sources. In this case, an authoritative source is a data source that is a direct source, is credible, accurate, and reliable. The IRS is the authoritative source for individual tax return information, and they come out with macro data on various topics, including Individual Taxes by income group (not an individual’s return) that break down the data in various formats. For our analysis we will focus on Income, and Taxes paid by different tax brackets as grouped by the IRS in their study, for example the Top 1%, Top 25% of Income earners, etc. from the IRS Individual Tax Returns Statistics of Income studies2. This study analyzed over 150 million tax return submissions, across all income groups from which this analysis is derived.
Definitions of “Fair”
As we talked about above, the definition of what is “Fair” varies, but we can come up with a few different buckets. Some people’s definition of Fairness may have nothing to do with how much they are taxed, more that their income is so much higher than a normal person and that in itself is not fair to this group. However, if we stick purely to definitions that can be applied to what is a “Fair” for a Citizen to contribute to society we can group them into a few buckets based on either the rate of taxation or the absolute amount of taxation.
- Apportioned (Equal) – Rate Regressive and Amount Equal
Prior to the passing of the 16th Amendment in 1913, taxes had to be “apportioned” meaning equally divided. In this case you would take the total amount required in taxes, divide it up amongst the constituents and each would pay the same or “equal” amount. For some, Equal amounts is their definition of “Fair” and in many contexts most people think of this as “Fair.” For example, if you order a Pizza, and someone else orders the same Pizza, you are charged the same amount regardless of your Income and this is considered “Fair” in context. This would be similar to some Flat tax proposals if deductions were eliminated. - Absolute Amount – Rate Regressive, Amount Progressive
In this case, you look at the total contribution made by an individual, and not necessarily pay the same rate. Using the Pizza example customer A would pay $25, and customer B would pay $50 for the same Pizza. In this case customer B is paying twice the amount for the same Pizza, which they may not see as “Fair”, however they are willing to contribute more based on the fact that they make 4 times the income as customer A. Customer A knowing that customer B makes 4 times the income, and pays only twice the absolute amount may not think this is “Fair” as this would be a regressive tax (i.e. the tax rate decreases as the tax amount increases) and they would be paying a lower Rate even if their Absolute Amount was double what they paid. - Share of Income – Rate equal and Amount Progressive
In this case, you would pay the same rate, regardless of Income, and the more income you made the more you paid, but you would pay at the same rate as all other taxpayers. So if customer A made $50,000 in income and paid 20% in taxes they would owe $10,000. If customer B made $200,000 in income and paid 20% in taxes they would owe $40,000 in taxes. In Absolute terms customer B is paying 4 times more than customer A but the same rate. Again, customer B may not think this is “Fair” but customer A may think this is a better definition of “Fair.” - Progressive – Rate Progressive and Amount Progressive
In this case, you would pay a progressively higher rate as you made more, and a progressively higher absolute amount. So if customer A made $50,000 in income and paid 20% in taxes they would owe the same $10,000. However, if customer B made $200,000 and they paid 40% in taxes they would owe $80,000. So both the Rate and the Absolute amount are Progressively higher. In this case customer B would be paying twice the rate as customer A and 8 times the Absolute amount. In this case many more customer B’s are less likely to think this is “Fair.”
| Fair Share | Rate | Absolute Amount |
|---|---|---|
| Apportioned (Equal) | Regressive | Equal |
| Absolute Amount | Regressive | Progressive |
| Share of Income | Equal | Progressive |
| Progressive | Progressive | Progressive |
Your Perspective on Fair
So as you can see, the interplay of Rates and Absolute Amounts may change a person’s opinions on what is “Fair” and it generally depends on that person’s perspective, which often depends on which end of the Income spectrum they fall. A Taxpayer that is paying significantly above the average in taxes may consider that unfair, but someone in a lower income bracket may assume that people in the higher incomes can and should shoulder larger shares of the overall burden.
What is the Reality?
So, we now understand that there are some choices as to how taxes could be applied and very different lenses in which individuals may view taxes from. However, removing feelings, individual bias, and differing perspectives, what does the data show?
Micro View and Exceptions
Well, the answer is that it is definitely nuanced. In the micro view where you look at individual cases there are reports, including famously from ProPublica, that analyzed the taxes of Wealthy Billionaires that showed extremely low overall tax rates, albeit at substantially higher absolute amounts than most Americans pay.1 While the IRS and no other US government agency releases this type data, so the Tax Project could not confirm it, we do believe it is likely that their anonymous sources, presumably from leaked or hacked IRS data, do show that Billionaires, and those at the the very top of the income brackets pay lower rates (fractions of the Top 1%). Editorial side note: While we applaud the transparency of these types of reports and it is important to understand how our Taxes are constituted, publishing private Individuals data is an ethical line we will not cross at the Tax Project regardless of the Transparency value. This and many other similar reports have been the basis for much of the rhetoric regarding “Fair” share. Again, based on your definition of “Fair” it may change your perspective, but we would venture to guess a larger number of individuals would not think of this as a “Fair” share. While some may or may not think this is “Fair,” often it is legal. Meaning, these individuals were utilizing what the law allowed. The reasons are many as to why this may be the case, but in general wealthy people, especially those with businesses and other assets, have access to more deductions, and may derive much of their money and wealth from non income sources. For example Elon Musk may be wealthy on paper because he owns large portions of Tesla, but he may derive relatively little income and only generates taxable income if he sells shares that generate taxable capital gains which are taxed at lower rates than ordinary income. He could live entirely off of borrowing money from banks against the value of his Telsa assets which would generate NO taxable income whatsoever. Based on this, it is not surprising that they have lower tax rates. Reality though, this is more of a legislative challenge in closing loopholes for deductions, and how and which income streams are taxed, especially when it comes to taxing Wealth and not income. That is a whole different philosophical debate, taxing wealth, which we will not discuss in this article but clearly brings in many more ethical questions on top of the “Fair” share questions we attempt to review here.
Macro View and the True Aggregate Data
On the other side of the coin is the Macro view, and for this we have clear data with the aggregate data of over 150 million returns across every income group from authoritative sources. So rather than the statistical blip of a few leaked Billionaire returns, we have what each income group is actually paying and you can make your own assessments if they are paying their “Fair” share.
Review of Macro Data
From the Figure 1 above we can see that the United States has a very Progressive Tax system with the Top 25% of income earners paying more than 89% of income taxes, and the Bottom 50% of income earners paying less than 3% of income taxes. So on a macro basis, clearly the Top 25% of income groups are paying much higher taxes in both percentage rate of income, and overall tax amount. In fact, the rates and amounts go up progressively with each tax group with the exception of the very top of the income brackets where the rate begins to dip. However, we see that the Top 1/10,000 of 1% of tax filings, representing less than 2000 returns of the extremely wealthy, paid 4.7% of income taxes with income shares of 3%. Compared to the Bottom 50%, representing half of the 333 Million Americans (round it to 150 Million Americans) paying 2.3% of income taxes with income shares of 10.4%. While you may not like the income disparity, it is clear the very wealthiest are paying a significant amount of taxes. If we used the Pizza analogy to compare these sub 2000 returns against half of America, the bottom 50% of taxpayers would pay $25 each for their Pizza, and the Top 1/10,000 of 1% would be paying almost $2.5 million each for their Pizza. Is that “Fair?” Again, in the eyes of the beholder, but you can see that as the absolute amount increases at some point those in the higher incomes probably ask at what point is my contribution enough?
From Figure 2 above you can see the amounts paid by each income group in taxes on average. While the Micro view clearly points out there are those in higher income groups reported to be paying very little, however on average the very wealthiest in the Top 1/10,000 of 1% are paying over $66 million each while the Bottom 50% are paying less than $700 each in income taxes. The data points to the fact that the higher income tax brackets are indeed paying significant amounts in taxes at generally higher rates. The income data clearly shows a highly progressive tax system. While this is one view of income taxes, it is also should be noted that there are other sources of government taxes that are more regressive, such as Sales taxes, and in total they tend to burden those in the lower income brackets more, as do all regressive taxes.
Summary
At the Tax Project, we advocate no positions in this area, or any area for that matter. It is clear however, that there is no easy or common definition of “Fair.” We believe that it is important for everyone to start with the same base of information on how our taxes are constituted and who actually pays them. Transparency and not rhetoric, dialogue and not diatribes are our path forward. Healthy discussions on the trade offs in how tax revenue is collected, and what individual contributions and responsibilities should be are all healthy discussions for our Democracy and Society and should be done in the open with full transparency.
Citations
- ProPublica – The Secret IRS Files: Trove of Never-Before-Seen Records Reveal How the Wealthiest Avoid Income Tax https://www.propublica.org/article/the-secret-irs-files-trove-of-never-before-seen-records-reveal-how-the-wealthiest-avoid-income-tax
- IRS – Statistics of Income 2021, IRS publication 1304 Jan 2024
