Taxing the Rich: A Fair Share Value Test

As I explained in a recent article, there are a lot of myths floating around out there about the results of the Trump tax reform. The common nonsense about corporate taxes is that corporations don’t pay them; anyone suggesting as much is blissfully ignoring the $95.7 billion that corporations paid to the federal and state governments just in the second quarter of this year.

Another pervasive myth is that the rich don’t pay “their fair share”. Those who suggest as much never present any evidence, and certainly do not offer any metrics of “fair share”. To fill that void, I am hereby introducing the Fair Share Value, a way to measure whether or not people of a certain income pay their “fair share” in taxes.

The Fair Share Value is very simple:

If F=1 it means the taxpayer contributes the same share of taxes as his share of taxable income. That makes his tax burden fair. If F>1, it means the taxpayer contributes a larger share of taxes than what is fair; if F<1 his tax burden is less than what is fair.

The following three figures report the Fair Share Value for IRS tax-return data from 2001 through 2018. First out is one that covers the top-one percent income earners. The solid red line represents the share of total personal federal income taxes paid by this group, while the dashed red line represents their share of total taxable income. The former is consistently higher than the latter, resulting in Fair Share Values reported by the grey columns (and their attached values) for each year. For example, in 2007 the top-one percent income earners paid 39.4 percent of all personal federal income taxes but earned only 22.7 percent of the taxable income. This resulted in a Fair Share Value of 1.741, telling us that this group was unfairly over-taxed; similar calculations for every other year gives us the same result:

Figure 1

Source of raw data: Internal Revenue Service

Next up is the Fair Share Value calculated for the top-20 percent income earners. As the solid red line in Figure 2 indicates, this group has been paying more than two thirds of all personal federal income taxes since the Bush tax reform went into effect. Since their income share has varied but never exceeded 50 percent of total taxable income, the Fair Share Value for this income group has consistently hovered around 1.5:

Figure 2

Source of raw data: Internal Revenue Service

In other words, the taxpayers in the top-20 percent income group carry a heavy load in funding the federal government, while also being heavily, and unfairly over-taxed.

By contrast, the Fair Share Value for the 50 percent who make the lowest incomes is far below unity. In fact, as Figure 3 reports, they are as unfairly under-taxed as the top-20 percent are unfairly over-taxed:

Figure 3

Source of raw data: Internal Revenue Service

In addition to the Fair Share Values, Figures 1-3 report some interesting changes in the tax burden as a result of the Bush and Trump tax reforms. After the first step of the 2001 and 2003 Bush tax reform, the Fair Share Value for the lowest-50 percent income earners fell from 0.34 to just over 0.29. In other words, their tax burden was shifted away from this lower-income group to the higher income layers.

The same thing happened after the Trump tax reform: in 2017 the Fair Share Value for the bottom-50 percent was 0.276; in 2018, the first year with the Trump tax reform in place, that value fell to 0.253.

As visible in Figure 1, the top-one percent income earners – often criticized for not paying their “fair share” – saw their tax burden increase relative their taxable income. Their Fair Share Value increased in both 2002 and 2018.

The same happened to the top-20 percent, of course. In fact, in 2018 they paid 71.4 percent of all personal federal income taxes, yet they only made 47.7 percent of the taxable income.

In short, the last two tax reforms have sharpened the ideological profile of our income-tax system. More and more of the tax burden is placed on the higher incomes, relatively speaking relieving those with lower incomes. This design of our tax system is deliberate and serves the purpose of economic redistribution. As I explained in my book Democracy or Socialism: The Fateful Question for America in 2024, economic redistribution is the ideological purpose behind socialism.

Ironically, the last two tax reforms, championed by conservatives in Congress and signed by right-leaning presidents, have functionally reinforced the socialist profile of our income-tax system. As a result, this system is now heavily unfair, with everyone making $200,000 or more being over-taxed and everyone making less than that being under-taxed:

Figure 4

Source of raw data: Internal Revenue Service

The stark differences in Fair Share Values are reflected in the actual tax rates for each group, i.e., the taxes they pay out of their taxable income:

Figure 5

Source of raw data: Internal Revenue Service

The fact that the actual tax rate drops when incomes exceed $10 million is easily explained by the lower tax rate on equity-based income relative work-based income.

The federal income-tax system is heavily redistributive in nature, in other words it is a socialist tax system. It makes one fifth of the taxpayers contribute $70 of every $100 in income taxes and puts a relatively lenient tax burden on those making less than $100,000.

In short: anyone claiming that the “rich” don’t pay their “fair share” is dispensing nonsense.