What if income tax was 100% for some or all? Would it be enough?

by Hawke — published Mar 10, 2022 05:50 AM, last modified Mar 10, 2022 08:16 AM

A recent (and recurring) debate once again, as in the Washington state news today their "family leave program" is already running out of money, and someone stated "taxes just aren't high enough, especially for Jeff Bezos", but is this true? Ignoring psychology and reality, what does the straightforward math say? Would it be enough?

Now, addressing the common call to "just increase taxes on the wealthiest" claim to solve all the "unpaid liabilities" shortfall that worsens each year at federal (and often state) levels.

There are a number of different formulae, and for simplicity sake, extreme "best case" scenarios are used.

Each of these scenarios assumes no deductions or loopholes and 100% payment (not very reality based) , and that the wealthiest businesses and individuals don't just leave the USA immediately (which is always what happens when the rates get too high). As a side note, I think anyone wanting to have anything to say about taxes should be required to run Sim City, CivNet, or similar games for a few weeks and see what happens. :-)

So, realize that the numbers below are theoretical "best case" numbers. They are never actually achievable, but f they were, what do the numbers of these best case scenarios say?

This discussion only focuses on income tax, and only obliquely mentions other types of taxes, not just Social Security, FICA, etc., but the added taxes dogpile of sales taxes, property taxes, etc. In theory, you could have 100% of your income taken in income tax, plus another >10% or more of your income through property and sales taxes. For example in Washington state, between state, county, and local sales taxes you are paying roughly 10% more due to sales tax than you would have without the taxes, so that is effectively an additional 10% tax on your purchasing power income. Furthermore, annual property taxes can be thousands per year, effectively reducing your effective usable income by that much. For example a badly run-down 3,000 square foot property in Spokane WA, pays more than $3,000 per year in mandatory property taxes. So if you were making $50,000, this automatically takes away $3,000 leaving you with $47,000. If you spend $20,000 on purchases that receive a 10% sales tax, you are only able to purchase $18,000 worth of goods due to the sales taxes, which is a further $2,000 reduction of your actual purchasing power, basically your effective income. So in theory, if your $50k of income was taxed at 100%, and you still had to pay sales tax, and property tax, you would be experiencing effectively $55k in taxes on 50k income, which would be an effective overall taxation of 110%!

This discussion also does not go into the details of the potential greater than one hundred percent >100% taxation that can happen, and has happened, through payroll taxes the employer must pay for you being an employee, especially in states like Washington state with their paid family and medical leave and many other "fees" and taxes that the employer pays that aren't deducted from your gross paycheck, but must be factored into the employers operating costs, which impacts what hourly or salary wage the employer can offer. For example, if the employer wants to pay you $50/hr, but they must pay a 5% cumulative tax/fees just to have you as an employee, they will only be able to offer you $47.50/hr, and then the taxes taken out of your paycheck by the government agencies are deducted from that, but you effectively already suffered the consequences of the 5% tax on the employer lowering your gross income by 5%. But that is a more in depth discussion for another time.

So combining the sales tax, property tax, employer mandated leave tax from above, your effective income was already effectively reduced by 15%, which means 115% taxation. For the $50k/yr example, this means effectively really $42.5k. Of course it is really $0 because of the 100% income tax, but keeps these other tax numbers in mind for scenarios less than 100%, about what you are really getting. You may be "only" paying 21% in federal income tax ($10,500 of your $50,000 example), but with the awareness of the additional 15% from the aforementioned, you're really at a minimum of 36% tax ($18,000 of the $50k example, leaving you with only $32,000). But that doesn't include your state and local income taxes as well. And thousands of other little "fees" (taxes) and pass-throughs you pay for your phone bills, Internet service, electricity, natural gas, gasoline (Washington state has a $0.45 cent per gallon tax), licensing, registration, and much more.

Scenario 1: 100% taxation on the wealthiest top 1% individuals. 0% taxation of everyone else.

Scenario 2: 100% of the wealthiest top 1% of individuals and businesses. 0% taxation of everyone else.

Scenario 3: 100% of the wealthiest top 5% of individuals and businesses. 0% taxation of everyone else.

Scenario 4: 100% taxation of top 10%, 0% everyone else.

Scenario 5: 100% of top 20%, 0% everyone else.

Scenario 6: 100% of top 50%, 0% everyone else.

Scenario 7: 100% of top 75%, 0% everyone else.

Scenario 8: 100% of top 90%, 0% of everyone else.

Scenario 9: 100% of top 99%, 0% the remaining bottom 1%.

Scenario 10: 100% of of the adult population and businesses taxed at 100%

Current situation

Multiple tiers, who pays how much currently?

Example from

Example from 2018

High-Income Taxpayers Paid the Majority of Federal Income Taxes

In 2018, the bottom 50 percent of taxpayers (those with AGI below $43,614) earned 11.6 percent of total AGI. This group of taxpayers paid $45.1 billion in taxes, or roughly 3 percent of all federal individual income taxes in 2018.

In contrast, the top 1 percent of all taxpayers (taxpayers with AGI of $540,009 and above) earned 20.9 percent of all AGI in 2018 and paid 40.1 percent of all federal income taxes.

In 2018, the top 1 percent of taxpayers accounted for more income taxes paid than the bottom 90 percent combined. The top 1 percent of taxpayers paid roughly $615 billion, or 40.1 percent of all income taxes, while the bottom 90 percent paid about $440 billion, or 28.6 percent of all income taxes.

The Internal Revenue Service (IRS) has released data on individual income taxes for tax year 2018, showing the number of taxpayers, adjusted gross income, and income tax shares by income percentiles.[1] The new data shows how taxes changed in the first tax year after passage of the Tax Cuts and Jobs Act (TCJA) in December 2017.

The data shows that the U.S. individual income tax continued to be progressive, borne primarily by the highest income earners.

In 2018, 144.3 million taxpayers reported earning $11.6 trillion in adjusted gross income (AGI) and paid $1.5 trillion in individual income taxes.
Tax year 2018 was the first under the Tax Cuts and Jobs Act (TCJA). The number of returns filed and the amount of income reported grew in 2018 yet average tax rates fell across every income group and total income taxes paid decreased by $65 billion.
The share of reported income earned by the top 1 percent of taxpayers fell slightly, to 20.9 percent in 2018 from 21 percent in 2017. Their share of federal individual income taxes rose by 1.6 percentage points to 40.1 percent.
Since 2001, the share of federal income taxes paid by the top 1 percent increased from 33.2 percent to a new high of 40.1 percent in 2018.
In 2018, the top 50 percent of all taxpayers paid 97.1 percent of all individual income taxes, while the bottom 50 percent paid the remaining 2.9 percent.
The top 1 percent paid a greater share of individual income taxes (40.1 percent) than the bottom 90 percent combined (28.6 percent).
The top 1 percent of taxpayers paid a 25.4 percent average individual income tax rate, which is more than seven times higher than taxpayers in the bottom 50 percent (3.4 percent).

Summary of Federal Income Tax Data, Tax Year 2018
	Top 1%	Top 5%	Top 10%	Top 25%	Top 50%	Bottom 50%	All Taxpayers
Number of Returns	1,443,179	7,215,893	14,431,787	36,079,467	72,158,933	72,158,933	144,317,866
Adjusted Gross Income ($ millions)	$2,420,025	$4,217,996	$5,511,117	$7,969,121	$10,221,814	$1,342,069	$11,563,883
Share of Total Adjusted Gross Income	20.9%	36.5%	47.7%	68.9%	88.4%	11.6%	100.0%
Income Taxes Paid ($ millions)	615,716	926,367	1,096,343	1,336,041	1,491,041	45,137	1,536,178
Share of Total Income Taxes Paid	40.1%	60.3%	71.4%	87.0%	97.1%	2.9%	100.0%
Income Split Point	540,009	217,913	151,935	87,044	43,614	43,614
Average Tax Rate	25.4%	22.0%	19.9%	16.8%	14.6%	3.4%	13.3%
Average Income Taxes Paid	$426,639	$128,379	$75,967	$37,031	$20,663	$626	$10,644
Note: Table does not include dependent filers. “Income split point” is the minimum AGI for tax returns to fall into each percentile. Source: IRS, Statistics of Income, Individual Income Rates and Tax Shares.

High-Income Taxpayers Paid the Highest Average Income Tax Rates

The 2018 IRS data shows that taxpayers with higher incomes paid much higher average income tax rates than lower-income taxpayers.[2]

The bottom 50 percent of taxpayers (taxpayers with AGI below $43,614) faced an average income tax rate of 3.4 percent. As household income increases, average income tax rates rise. For example, taxpayers with AGI between the 10th and 5th percentiles ($151,935 and $217,913) paid an average rate of 13.1 percent—almost 4 times the rate paid by those in the bottom 50 percent.

The top 1 percent of taxpayers (AGI of $540,009 and above) paid the highest average tax rate, 25.4 percent, more than seven times the rate faced by the bottom 50 percent of taxpayers.

The Tax Cuts and Jobs Act Reduced Average Tax Rates across Income Groups

The 2018 tax year was the first under the Tax Cuts and Jobs Act (TCJA). Due to the TCJA’s changes, average tax rates fell for taxpayers across all income groups. Overall, the average tax rate for all taxpayers fell from 14.6 percent in 2017 to 13.3 percent in 2018. The bottom 50 percent, taxpayers making below $43,614 in AGI in 2018, saw their average tax rate fall from 4.0 percent in 2017 to 3.4 percent in 2018. The top 1 percent, taxpayers making $540,009 and above in AGI in 2018, saw their average tax rate fall from 26.8 percent in 2017 to 25.4 percent in 2018.

U.S. Tax System Is Most “Business Dependent”

Setting aside the debate over whether a low tax bill is fair, what is missed in such discussions is that American businesses are critical to the tax collection system at every level of government—federal, state, and local. In 2017, OECD economist Anna Milanez measured the amount of taxes that businesses in 24 countries contributed to the overall tax collection system. Her report determined that the U.S. was one of the most “business dependent” tax systems in the industrialized world.[8]

The report found that U.S. businesses either pay or remit more than 93 percent of all the taxes collected by governments in the U.S.[9] As Figure 6 shows, this includes taxes paid directly by businesses, such as corporate income taxes, property taxes, and excises taxes, as well as the taxes businesses remit on behalf of employees and customers, such as payroll taxes, withholding taxes, and sales taxes.

Example from 2014

taxes1

1. In 2014, the top 400 US taxpayers based on Adjusted Gross Income earned $127 billion collectively, and they paid $29.4 billion collectively in federal income taxes at an average tax rate of 23.13% (see chart above). Just those 400 taxpayers paid more than 2% of all the federal income taxes collected in 2014 ($29.4 billion out of $1.377 trillion).

2. In 2014, the bottom 50% of taxpayers, a group totaling nearly 70 million Americans, earned collectively more than $1 trillion and paid $37.7 billion in federal income taxes at average tax rate of about 3.4% (see chart above).

Update:

3. According to the IRS, the top 0.001 percent of US taxpayers (N = 1,396) paid $49.7 billion in federal income tax in 2014, which is $12 billion more than the taxes collected from the entire bottom 50% (see updated chart above). Also, because of the progressive income tax schedule, note that the bottom 50% of US taxpayers reported about 5 times as much income as the top 1/1000 of 1% (more than $1 trillion vs. $207 billion), but paid $12 billion (and 24%) less in income taxes in 2014.

Bottom Line: A small group of 400 of America’s most successful earners in 2014, about the number of residents living in a typical apartment building in Washington, D.C., paid almost as much in federal income taxes as the entire bottom half of America’s nearly 140 million tax filers, which is a population equivalent to the combined number of residents living in America’s 28 least populated states, plus the District of Columbia. A small group of fewer than 1,400 taxpayers paid $12 billion more in income taxes than than the entire bottom 50% of all taxpayers in 2014. What makes this disparity possible is the fact that 45.4% of individual income tax returns filed in 2014 had a zero or negative tax liability, according to The Tax Policy Center. And a recent CBO study (featured on CD here) found that the entire bottom 60% of American households are “net recipient households” and received more in government transfers than they paid in federal taxes in 2013.

Approximate percentage of expected revenue that is actually received:

Total Current funded and unfunded liabilities

So, What is the Best Approach?

First of all, my stance, I think deductions and "loopholes" should be eliminated.

We should go with the "postcard size" income tax form for everyone, large and small, private or business.

There should only be two income tax tiers, at whatever society decides is the acceptable poverty line and below, no income tax. No income tax is deducted from your paycheck (or set aside by a business) until you hit this threshold, so there will be no need for the whole wasteful tax return filing process (except if mistakes were made and need to be fixed).

Everyone above the threshold pays one rate, whether individual or business.

Reporting taxes is as simple as a postcard size filing.

This reduces the complexity and cost of the IRS and accounting by billions (trillions?), and if set at a "tolerable" level so as not to be so high it drives out the businesses and wealthiest from the country, has been proven to INCREASE total "revenues".

Unfortunately there are too many individuals, professionals, and organizations involved that benefit from added complexity, fighting against this clean flat tax approach. It will require someone with real backbone and an exceptional consensus builder, a "great negotiator", to have any chance of such change happening. This is an idealized approach of course, but I argue the closer we can get to it, the better for all (except the corrupt).

Summary of Suggested Solution

Recommend only 2 tiers, clean, simple, flat income tax.

The same tax rate for everyone, individual or business.

Anyone below the accepted cut of point pays 0% income tax. Basically, so you do not even have to worry about the infrastructure burden of filing for tax returns, until your annual income crosses that threshold, zero income tax is withheld.

Percentage of liabilities

References

https://www.aei.org/carpe-diem/fair-share-top-400-us-taxpayers-paid-almost-as-much-in-federal-income-taxes-in-2014-as-the-entire-bottom-50/

https://www.americanbar.org/groups/crsj/publications/human_rights_magazine_home/the-next-four-years/we-the-people/

https://taxfoundation.org/rich-pay-their-fair-share-of-taxes/

https://www.latimes.com/archives/la-xpm-1992-04-08-me-457-story.html

https://www.politico.com/interactives/2019/how-to-fix-politics-in-america/inequality/create-a-maximum-wage/

https://taxfoundation.org/federal-income-tax-data-2021/

https://www.linkedin.com/pulse/american-taxation-explained-kevin-fream/

Excerpts

From American Enterprise Institute

We hear all the time that “the rich aren’t paying their fair share of taxes” (you’ll find more than 4,000,000 Google search results for that phrase). In a 2013 video at the start of this second term, President Obama celebrated his tax increases that “make our tax code more progressive than it’s been in decades,” but then reiterated his belief that the wealthiest Americans still aren’t paying their “fair share” of taxes. Here’s an analysis using recent IRS data that suggests otherwise.

Update:

When you have only 400 Americans paying almost as much in federal income taxes as the entire bottom 50% of Americans filing income tax returns, and only 1,400 taxpayers paying more income taxes than the bottom half of taxpayers, I think we can dismiss any notion of the rich not paying their “fair share” of taxes. In fact, maybe the IRS should publish the names and addresses of the Top 400 taxpayers (or provide a forwarding service to protect anonymity), so that we can all send them “Thank You” letters to express our gratitude for shouldering such a disproportionately large share of our collective tax burden.

From Linkedin article

https://www.linkedin.com/pulse/american-taxation-explained-kevin-fream/

60's Tax Cuts and 70's Intervention

Following World War II and despite high tax rates for all wage earners, America prospered helping to rebuild most of the destroyed world and the dollar became the reserve and international currency for trade. With the Revenue Act of 1962, Democrat President John F. Kennedy (JFK) cut the corporate tax rate from 57 percent to 47 percent famously saying "rising tides raise all boats". The Joint Committee on Internal Revenue Taxation estimated that the Kennedy plan would result in a tax shortfall of $7.6 billion in 1964, and $11.4 billion in 1965. What actually happened was that total revenue rose by $6 billion in 1964 and by $5 billion in 1965. After the assassination, in 1964, Congress passed another tax cut crafted by JFK, this time on personal income tax from 91 percent to 65 percent at the top, and from 20 percent to 14 percent at the bottom.

The tumultuous 70's were presided over by Republican Presidents Richard Nixon and Gerald Ford, as well as Democrat President Jimmy Carter. Nixon almost destroyed the U.S. economy trying to cure mild inflation by imposing harmful wage-price controls on the free-market, adding tariffs, and ending the gold standard for the dollar that insured the dollar's value - permitting the U.S. government to print dollars to solve every economic woe with the dollar's value falling indefinitely from over-spending until worthless.

President Fold tried to fix stagflation (stagnation with inflation) and the energy crisis by encouraging people to spend less and increasing taxes on oil companies which only fueled the recession. Under President Carter, the Federal Reserve increased interest rates to reduce inflation and increased payroll taxes for businesses and individuals to continue to fund Social Security. Federal Income Tax Brackets for Tax Year 1978 (Filed April 1979) (tax-brackets.org)

80's Boom and 90's Taxes

The economy would not recover from recession until the early to mid 80's during the administration of Republican President Ronald Reagan. President Reagan believed in the free market with government spending and intervention as our main economic problem. President Reagan adjusted tax brackets and deductions for inflation while lowering the top tax rate from 70% to 28%, deregulating business, and encouraging the Federal Reserve to print less money. While government spending was still higher than tax revenues. the 80's would be the second very prosperous time in history for Americans.

Republican President George H.W. Bush and Democrat President Bill Clinton served during the 1990's. Both increased taxes with the former attempting to counter congressional spending to control debt and the latter promising to balance the budget. Having no major wars and a robust economy, President Clinton raised taxes on higher incomes and also increased Social Security tax which impacted all taxable wage earners. Clinton cut the annual deficit in half, but did not lower the federal debt.

2000's and Taxes to Present

Following the dot com bust and the worst terrorist attack in U.S. history, Republican President George W. Bush lowered income taxes on the bottom 50% of taxpayers, reduced dividends and capital gains tax rate, and increased expense deductions for businesses. Bush's tax relief put more money in families' pockets and encouraged businesses to grow and invest with tax revenues outpacing the economy and 52 months of uninterrupted job growth, the longest run on record. THE BUSH RECORD - FACT SHEET: President Bush Helped Americans Through Tax Relief (archives.gov)

The Bush Administration warned of the risk that government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac posed to America's financial security beginning in 2001.

Federal government over extending credit led to the housing crisis and the Great Recession from 2007 - 2009 to begin the Obama administration. Democrat President Barack Obama (our first black president) increased government spending with $2 trillion economic stimulus, raised healthcare excise and medical payroll taxes over $250 billion annually for individuals and corporations (not including penalties for not participating in the Affordable Care Act), and increased government regulations - plus government for the first time took control of private banks and auto manufacturers in exchange for "bail-outs". Full List of Obama Tax Hikes | Americans for Tax Reform (atr.org) Despite the Keynesian economics, the nation would see another recession from 2015 - 2016 and federal debt increased to $19.9 trillion.

Both beloved and hated for his demeanor and direct communication to the people via Twitter, Republican President Donald Trump under the 2017 Tax Cuts and Jobs Act lowered individual and corporate taxes by over 10%, increased deductions, increased tariffs, and decreased government regulations - along with repealing fines for Obamacare individual mandate. Ninety percent of Americans saw an increase in take-home pay that helped foster historic lows in unemployment and national prosperity for all. The strategy was to eliminate government debt in 8 years by increasing government revenues through tariffs and more tax revenue from an unrestricted economy. Economy & Jobs – The White House (archives.gov)

Before the full effect of these policies and planned budget cuts, tragedy struck and CARES Act with related stimulus measures increased the national debt to $27 trillion.