Last week, the Congressional Budget Office released an annual publication, titled “The Distribution of Household Income and Federal Taxes, 2013.” This excellent report details the amount that different households pay in federal taxes, as well as the income and government transfers.
One of the main takeaways from this year’s report is that the richest Americans pay a lot in taxes. In 2013, the top 1 percent of households paid an average of 34.0 percent of their income in federal taxes. To compare, the middle 20 percent of households paid only 12.8 percent of their income in taxes.
Moreover, taxes on the rich are much higher than they’ve been in recent years. Between 2008 and 2012, the top 1 percent of households paid an average tax rateThe average tax rate is the total tax paid divided by taxable income. While marginal tax rates show the amount of tax paid on the next dollar earned, average tax rates show the overall share of income paid in taxes. of 28.8 percent. However, in 2013, this figure spiked to 34.0 percent, as a result of taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. increases in the “fiscal cliff” deal and the Affordable Care Act.
We’ve known for a while that taxes rose on the rich in 2013, but the new CBO report puts in perspective exactly how high taxes on the rich are now, compared to the last three decades. For instance, in 2013, the top 1 percent of taxpayers paid a higher tax rate (34.0 percent) than in the year President Reagan took office (33.2 percent).
According to the CBO, the federal tax system is now “the most progressive it has been since at least the mid-1990s.” Writing in The Atlantic, Derek Thompson notes that “the government is doing more to fight inequality right now than any year on record.”
All of this raises the question: are the rich paying their fair share in taxes yet?
Unsurprisingly, this is a highly contentious question in the U.S. tax policy debate. In fact, the three remaining Democratic and Republican presidential candidates have come up with very different answers about whether the rich are paying their fair share:
- Donald Trump’s tax plan implies that the rich are paying much more than their fair share in taxes. His plan would cut the top individual tax rate from 39.6 percent to 25 percent, and would lower the top rate on capital gains and business income. Overall, his plan would lower the average tax rate on the top 1 percent of households from the current 34 percent to around 20 percent.
- Hillary Clinton’s tax plan implies that the rich are paying almost their fair share in taxes. While her plan includes a number of measures that would increase taxes on high-income Americans, the changes are all relatively modest. Overall, her plan would raise the average tax rate on the top 1 percent of households from the current 34 percent to around 35 percent.
- Bernie Sanders’ tax plan implies that the rich are paying nowhere near their fair share in taxes. His plan would raise the top individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. rate to 54.2 percent – a rate which would apply to wages, capital gains, and dividends. Overall, under the Sanders plan, the average tax rate on the top 1 percent of households would rise from 34 percent to around 46 percent.
It would be difficult to find three tax plans that differed more radically than Trump’s, Clinton’s, and Sanders’ on the question of taxes on the rich. These differences reflect real divisions among American policymakers about how much of the tax burden should be borne by high-income taxpayers.
Readers should check out the new CBO report and reflect for themselves whether high-income Americans are now paying their fair share of taxes.
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