The Rich Get Poorer [Fribble] April 17, 2000

Fribble The Rich Get Poorer

April 17, 2000

I just finished filling out all of the forms for our business and personal federal income taxes. Because we derive our income from various sources, the process is pretty complicated. I am anal enough that I retain and file every receipt and also record all expenses in a selection of accounting software. Even so, it took the better part of three days to do the draft returns back in January, and another two days to finish everything up this month.

In the process, I went back to a conversation that I had with a few new Foolish friends over the weekend. I told them that roughly 5% of the people in this country paid around 50% of the income tax. I don't think that they actually believed me, so this morning I looked up the figures. I subscribe to the Kiplinger Tax Letter and I found the data I wanted in their March 17 issue. Each year around this time they publish the following table:

% of Filers  % of AGI   % of Nation's   AGI Threshold
                           Tax Paid 
    1            17           33          $250,700
    5            32           52          $108,000
   10            43           63           $79,000
These figures are derived from the IRS analysis of all tax returns filed in 1997. The data have become more skewed against the "rich" for each of the past several years. All of these percentages are cumulative.

What this means is that it is somehow "fair" that 5% of filers pay over half of all of the federal income taxes. I don't understand this. Someone that has an AGI of $108,000 is not "rich" by my definition. And the 50% of people paying the least income tax are paying only 4% of total collections. Those who oppose tax reform always rant about "tax cuts for the rich." How can you cut taxes for people who essentially don't pay any?

Here is another question about fairness: Do the "rich" consume more services from the federal government than do the poor? On its face, I would say that the answer to that question has to be no. Certainly not 130 times as much [(52/5)/(4/50)=130]. With an AGI band of only $108,000-$250,700 to be in that second from the top basket, we are not talking about NBA stars or CEOs of major corporations. These are really pretty ordinary people. As a member of that group, I still do my shopping at Wal-Mart and Costco, not Rodeo Drive.

You could say that many of those in the top three rows are married filing jointly and therefore the shares shown should be divided between two earners. While I agree that there are probably more joint incomes in the top rows, there are certainly many still at home students in the bottom one. I suspect that the two cancel each other out.

And these are the people who lose all of the goodies that are supposed to go to the "middle class." Things like the Roth IRA, the Child Tax Credit, Adoption Credit, and so on. A majority of these people are married filing jointly, with both spouses working. If they were to get divorced, assuming that they have two or more children, they could each file as head of household and recoup a lot of the goodies. How is that for "family values"?

The usual argument from liberals is that the rich can "afford" to pay more. Why does the government have the right to decide how much I can afford? Inquiring minds want to know.