Actual Taxes Paid by Income levels
To decide how taxes should change it is useful to see how much different income levels pay in current taxes.
Actual Taxes Paid 2006
The figure below shows actual taxes paid on the reported income in IRS filings in 2006. The effective tax rate (taxes/taxable income) increase until $5,000,000 annual income and then decrease to 18% at $100,000,000 annual income. Note, the middle class pays 12% on $50,000, millionaires pay 27% and the super rich 18% (or 1.5x the rate of the middle class). The Super Rich Tax Break is the drop in effective tax rate from 27% to 18% for the income levels of $5 to $100 million per year. If we do not raise taxes on anyone, that would lock in the super rich tax break that resulted from the Bush tax cuts. The Obama plan does raise taxes on the super rich group. The McCain plan does not. The effective tax rate is less than the marginal tax rate at upper incomes. For example, the marginal US tax rate peaks at 35% after $358,000. Yet the average tax rate for people earning over ten million dollars annually was 23.3% based on the amount paid versus taxable income. Tax breaks such as the capital gains (maximum rate 15%) are used to keep their paid taxes well below the marginal tax rate.
Tax rate and ratio to middle class by income level
This uses the middle income $50,000 as a comparison point, and shows the ratio of relative tax rate (e.g., the Super Rich pay 1.5 times the rate of the middle class. The data for these tables are based on the IRS tax report of 2006 and the Wall Street Journal data on the "Fortunate 400" taxpayers.
| Tax Rate by Income Level Relative to Middle Table MTC 8T06 | |||
|---|---|---|---|
| Income Level | Annual Income | Tax Rate | Relative to Middle |
| Poverty (20%, $20K) | $20,000 | 10.3% | 0.8x |
| Middle (50%) | $50,000 | 12.2% | 1.0x |
| Millionaire top 1% | $1,000,000 | 27.1% | 2.2x |
| 10 Million/year top 0.01% | $10,000,000 | 22.8% | 1.9x |
| Super Rich $100 Million/year (0.01%) | $100,000,000 | 18.0% | 1.5x |
IRS Tax Report 2006
Wall Street Journal "Fortunate 400"
Spreadsheet
Historic Max/Min Marginal Tax Rates
The orange line below shows the maximum tax rate paid by the top income bracket. The grey line show the tax rate of the lowest group. The maximum rate ranged from 91% in the 1955-1963 to a low of 24% in 1929 and is now at 35%. The effective tax rate now is 23% for the Very Rich ($10 million annual income). By historic standards the maximum tax rate on the Super Rich income levels are low (35% marginal rate and actual rate of 18%). A sharp drop of the tax rate on the rich preceded the Great Depression (drop from 73% in 1922 to 25% in 1926). The drop from 1965 to the present has been more gradual but big drops occurred in 1988 and 2003. The drop in the effective tax rate and wealth accumulation by the Super Rich has been very marked since 2003 (dropping to 18%) The marginal tax rate in the 1950-60s peaked at 91% though effective maximal tax rates were 71%. The minimum tax rates have been fairly consistent over time in the 10% range.
Historic Marginal Tax Rates
Top 400 Tax Payers 1992-2005
Re-creating the Gap that Gave Us the Great Depression
Change in Marginal Tax rate and redistribution of wealth to upper 1%
The following graph plots the marginal tax (Brown) and annual income (green) for the top 1% (A) making more than $600,000 per year and (B) rest of the population (99% of US households). Note the dramatic increases in income that followed the changes in the tax rate for the top 1% (A) when the tax rate dipped and income rose sharply ($175,670 or 54% increase) whereas the other 99% experience a small increase ($777 or 2%). The Reagan and Bush tax cuts resulted in substantially higher income and accumulation of wealth in the top one percent. This period did not produce substantial improvements in the income of the middle class. This suggests that tax cuts did not "trickle down" to 99% of the population.
Reported Incomes and Marginal Tax Rates, 1960-2000: Evidence and Policy Implications NBER Working Paper No. 10273, January 2004, published in Ed. J. Poterba Tax Policy and the Economy 18, 2004, Cambridge: the MIT Press
Spreadsheet of Data Tables
Both tax plans give small (3%) benefits in the range $75,000-$250,000 of the upper middle class to lower upper class.
Obama reduces taxes on people below $250,000, by reducing rates by 8% for poverty level and increasing by 4% for millionaires.
McCain provides more of a child exemption but does not change the rate on the poor or Super Rich (greater than $250,000).
Example estimated effect of tax proposals
For illustration this takes the plans for a 2 earner family with 1 dependent child at home as the example.
| Candidate Tax Rates and Changes by Candidate Plans for a family with 2 earners 1 dependent | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Income | Tax Cut in % Taxable Income | Rates | Middle Income Ratio | Poverty Ratio | % Population | |||||||
| McCain | Obama | Current | McCain | Obama | Current | McCain | Obama | Current | McCain | Obama | ||
| $20,000 | 0.0% | 4.7% | 10.3% | 10.3% | 5.6% | 0.8 | 0.9 | 0.5 | 1.0 | 1.0 | 1.0 | 74.11% |
| $50,000 | 0.7% | 2.0% | 12.2% | 11.5% | 10.2% | 1.0 | 1.0 | 1.0 | 1.2 | 1.1 | 1.8 | 41.88% |
| $100,000 | 2.0% | 2.4% | 13.7% | 11.7% | 11.3% | 1.1 | 1.0 | 1.1 | 1.3 | 1.1 | 2.0 | 20.11% |
| $200,000 | 3.2% | 2.9% | 17.7% | 14.5% | 14.8% | 1.5 | 1.3 | 1.5 | 1.7 | 1.4 | 2.7 | 11.90% |
| $500,000 | 0.0% | -1.3% | 24.2% | 24.2% | 25.5% | 2.0 | 2.1 | 2.5 | 2.3 | 2.3 | 4.6 | 3.00% |
| $1,000,000 | 0.0% | -3.8% | 27.1% | 27.1% | 30.9% | 2.2 | 2.4 | 3.0 | 2.6 | 2.6 | 5.6 | 0.70% |
| $10,000,000 | 0.0% | -5.4% | 25.7% | 25.7% | 31.1% | 2.1 | 2.2 | 3.1 | 2.5 | 2.5 | 5.6 | 0.03% |
| >$10,000,000 | 0.0% | -5.4% | 22.8% | 22.8% | 28.2% | 1.9 | 2.0 | 2.8 | 2.2 | 2.2 | 5.1 | 0.01% |
The estimates of changes in tax savings are based on the plan for the average US household of 2 earners and 1 dependent child.
Data for the historic marginal tax rates from Tax Policy Center Report http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=543