Our tax system, and what is the “fair share” for the rich?

January 21, 2025

Looking a bit deeper into the tax situation in the United States, the subject of the rich “paying their fair share” is a common point of discussion. It is especially popular with those who want to score points with voters by attacking the rich.

In his farewell address to the nation last week, and at other times, President Joe Biden made claims that are misleading or in need of context.

For example, he claimed that billionaires “paid an average of 8.2 percent in federal taxes.” Without further explanation, that figure is certifiably false. The truth is that under the current tax code, the top 1 percent of taxpayers pay an effective tax rate roughly three times that amount, about 25 percent on the income the government counts.

Whether Biden doesn’t actually know any better, or whether he just doesn’t care about the facts, is an open question. And, there is the theory that he just reads what he is given by the White House staff.

In general, Democrats think the lower income earners pay too much in taxes, and the wealthy pay too little. They are in support of an overhaul to the tax code and the tax system. They believe the country needs a tax code that rewards work and creates wealth for more people, which is certainly a positive goal. But they think we currently have a tax code that “hoards wealth for those who already have it,” and that we cannot afford to have tax cuts for the wealthiest Americans.

The Biden-Harris administration had proposed the following changes to the tax code:
* Raising the top income tax rate on the top 1 percent of earners from 37 percent to 39.6 percent
* Increasing the corporate income tax rate
* Taxing capital gains and dividends at ordinary income tax rates
* Increasing refundable tax credits for individuals

In response to the administration’s proposals, the Tax Foundation had estimated that the major tax increase proposals in the FY 2025 budget would reduce economic output by 1.6 percent, and reduce employment by 666,000 full-time jobs. Vice President and presidential candidate Kamala Harris had previously proposed to take the tax increases further, which would have made the economic losses even greater.

A look at the tax situation on The Balance website published last September cited these facts about the tax system in 2021:
* Most of the government’s federal income tax revenue comes from the nation’s top income earners. 
* In 2021, the top 1 percent of earners paid 45.8 percent of income taxes.
* The top 5 percent of earners — people with incomes $252,840 and above — collectively paid over $1.4 trillion in income taxes, or about 66 percent of the national total. 
* If you include the top 10 percent — everyone who made at least $169,800 — that figure rises to $1.7 trillion, or 76 percent of the total.
* The top 50 percent of earners contributed 97.7 percent of federal income tax revenue.

The unpopular and unfairly demonized “rich” carry the tax load for the rest of us. The top 10 percent of earners pay three-fourths of the tax revenue, much more than the relatively miniscule amount that some of the Democrat politicians would have everyone believe was the truth. And, the bottom 50 percent of earners contributed just 2.3 percent of income tax revenue.

It seems likely that given this information, any reasonable person would discount the old saw that the rich are not paying their fair share, with the wealthiest 1 percent paying nearly half of all income tax revenue.

There are seven different tax rates that an individual taxpayer, or taxpayers filing jointly, may pay, based upon their earnings: 10 percent; 12 percent; 22 percent; 24 percent; 32 percent; 35 percent; and 37 percent.

And taxes are collectable from a long list of income areas:
* Wages, salaries, and employee benefits
* Rental income
* Goods or services sold or bartered
* Royalties (e.g. from copyrights and patents)
* Business entities
* Capital gains (e.g. stocks and bonds)
* Digital assets (e.g. cryptocurrency)
* Government benefits (e.g. unemployment, Social Security)
* Tax refunds, reimbursements, and rebates
* Court awards and damages
* Gambling winnings
* Prizes and awards

Yes, we Americans — the citizens of the land of the free and the home of the brave — need to support our government’s functions. But Americans also deserve to keep as much of the money they work for as possible. And the government has a solemn duty to operate as efficiently and inexpensively as possible.

Our government is not living up to its economic responsibility. Those elected by the people, and the others who are hired to work in government, are there to serve the best interests of the American people. But they seem unconcerned about that duty. Rather than seek ways to economize, they seek expansion, which is both costly and infringes on the freedoms our Founders worked so hard to create for us.

We must hope that President Donald Trump’s incoming administration focuses on this duty, and that the opposition party is willing to help them.