Each year in March or early April, about 100 million tax returns are dropped into mailboxes for delivery to the Internal Revenue Service. Altogether, these returns report gross income (technically, adjusted gross income) of about $2 trillion.
Looking at the whole picture, we risk drowning in the huge numbers. But perhaps we can gain considerable understanding by looking at averages.
The average income per tax return in 1982, for example--the most recent year for which complete IRS statistics are available--is about $20,000, and the average tax paid is about $3,000, or 15% of income. But we need more--a sense of how income and tax are apportioned among rich and poor.
So let's take a millionth slice across the board. Put all tax returns in order by gross income, and pick one of every million. The result is shown on the accompanying chart.
First the number of people who earn at each income level. Actually, it is the number of the tax returns, not people. The majority of returns of less than $15,000 are single people and the majority of those of more than $20,000 are joint returns filed by married couples.
Of those earning $10,000 and less, about half are young folks working part time in grocery stores and restaurants while going to school. Others are probably unskilled workers.
Most of those earning $10,000 to $20,000 are semi-skilled workers. Earnings of $20,000 to $30,000 represent skilled workers, school teachers, junior executives and junior-level professors.
At $30,000 to $50,000 are middle-level executives and more senior professors. Two individuals (actually two tax returns) earn $75,000 each and one earns $200,000. These might represent the local doctor, a highly successful engineer or lawyer and a senior corporate executive.
Less Than 1% in Bracket
But, you ask, how about Gordon Getty who earns about $70 million a year, according to a recent magazine article? And all the folks who drive big cars and have big homes on hills? Those who wheel and deal on Wall Street? The million-dollar executives of giant corporations?
The answer is that they are all there, statistically speaking. Less than 1% of all Americans earn more than $100,000, and the average of their incomes is about $200,000.
Are these 100 taxpaying citizens (or couples) paying a "fair" tax? It depends on your definition. "Fair" is a little like "beauty"--it's mostly in the eye of the beholder. But we can note that going up the income scale, both average rate and marginal rate steadily move higher.
A broad definition of "fairness" is that the marginal rate either stays level or rises with income. Taxation in this community meets that test. The marginal rates rise from 14% to 50%.
The higher-income folks pay 50% of each extra dollar earned, but their average rate peaks at a lesser 33%. This is because lower "layers" of their income are taxed at lower rates. It averages out at 33%.
Should the rich pay more? Perhaps, but there may be some reasons not to take too much away from those half-dozen top earners.
For example, the doctor might decide to take a day or two off a week for golf or to "manage his investments" and might not be available as much to treat people and perform operations.
And taxes might influence the senior business leaders when facing expansion opportunities at the local factory. If the headaches outweigh the after-tax pay, they may make decisions that will not add needed jobs in the community.
So look over the list carefully. Suppose you were a member of this community's "Congress" and had to express opinions about who is paying an appropriate tax. What would you say?
It just happens that a group of representatives and senators are meeting right now in Washington wrestling with the same problem, only a million times bigger.
In the meantime, let's look in depth at the situation of upper-income folks about whom everyone is always asking if they couldn't take a little larger share of the tax load.
Juicy News Story
It has become common to read every few months about the rich who pay no income tax. No doubt it's a juicy news story. It might read, "262 Earn More Than $200,000 and Pay No Tax."
According to IRS statistics, this is, indeed, the case for 1982 returns. It stirs the mind. It gets discussed around the water cooler, at lunchtime and at social occasions. It's NOT FAIR!
What gets no publicity at all is the rest of the story. Those 262 are part of a group of exactly 169,367 folks whose income topped $200,000. Their average income before subtractions for tax shelters was $550,000. This is called "expanded income."
After subtracting, average adjusted gross income (AGI) is $425,000. The typical income tax paid was $157,000, or 37% of AGI. Including shelters, average tax was 29%, higher than all but one taxpayer in our "city of a hundred."