Income Distribution, Tax, Budget Deficit and Fiscal Cliffs

Sharing the Income Tax Burden in America

  By SURENDRA K. KAUSHIK

 

 A look at IRS aggregate data on individual income from 1991 to 2009 reveals that about 50 percent (44  percent of all tax returns to be exact) of individual tax payers paid 2 percent of the total individual income tax collected in 2004  and less than 1 percent in 2009 for which we have the latest data.  The per capita income in 2005 was $25,035 according to the 2005 Census so it is consistent that about half of Americans had that level of income reported on their tax returns. The distribution of adjusted gross income and tax collected from each income group is as follows.

Personal Income group           Percentage of AGI                  Percentage of Tax Collected 

                                                1991 1996 2001 2004 2009    1991 1996 2001 2004 2009

Less than $25,000                     21       16    11      17      9      10        5       3         2      1   

$25,000 to $50,000                   30       23    19      16     16      24      16     11         9      6

$50,000 to $100,000                 28       30    30      27     28      30      27     24       21    18

$100,000 to $500,000               15       21    27      26     34      24      30     36       38    45

$500,000 and above                    6       10    13      14     13     12      22     26        30    30

Total                                        100      100 100    100   100    100    100   100     100   100

Overtime the lowest income group has significantly reduced its burden from over 9 percent in 1991 to only 2 percent in 2004 and 1 percent in 2009. It has reduced its tax burden by 99 percent from 1991 to 2009. The income group from $25,000 to $50,000 has reduced its tax burden by 60 percent in 15 years and essentially to zero in 2009- the year for which IRS has latest data on its web site.

     The $50,000 to $100,000 group had their share of income and taxes remain stable with a slight decrease in taxes. The richer group in $100,000 to $500,000 bracket experienced a 60 percent increase in and the people in $500,000 and above had their taxes go up by 150 percent in fifteen years as their share of income increased by one hundred and thirty three percent

     It is clear that the normatively desired progressive nature of the US personal income tax system has been effective as personal incomes have grown in the aggregate and grown more for the higher income brackets. The average tax rates paid by people in the $100,000 and above groups approaches (or exceeds) the marginal tax rates in the system. 

     In recent years we have been collecting about 15 percent and spending about 24 percent of GDP – an impossible situation to continue.  How to bridge the gap? We collected 21 percent in 2004 so we could go back to that by raising taxes on income above$100,000 by setting a minimum percentage to be paid between $100, 000 to $500,000 (say 25 percent) and $500,000 and above (say 30 percent) and reduce unnecessary and inefficient spending wherever possible in the budget    This new system of taxing and spending could help us balance the budget in 2016-2017 and have surpluses beyond 2017.

   If growth picks up to 4% and higher and unemployment goes below 6 percent, the federal budget can be balanced in 2016-17 through a combination of additional revenues from growth of the economy, new taxes on higher incomes ($100,000 and above) and spending cuts when a new president assumes office in January 2017.

   If growth continues for the next forty years at four percent, the national debt in 2016-217 can be stabilized at $19 trillion (or less) and brought down to zero in 2054-2055 with an annual retirement of the debt by $500 billion on the average from 2017 to 2055.

 Surendra K. Kaushik is professor of finance at Pace University in New York and Westchester (skaushik@pace.edu)