If you were to redesign our tax system from scratch, what would it look like? What would each person’s fair share of the burden be?
Our federal system primarily taxes individuals’ incomes, not their overall wealth. You pay taxes on your money when you earn it and you don’t have to keep paying every year on the things you buy with that income, like real estate and financial investments (though you do have to pay taxes on the capital gains you make when you sell these assets). Local tax systems, which are based mainly on taxing property, work differently – you pay taxes on assets you own, every year, as long as you own them.
What’s interesting is that when you look at how the tax burden is spread across different groups, it reflects the distribution of wealth more closely than it does the distribution of income. The top 5% earn 35% of all income but pay a whopping 59% of all taxes. Sounds unfair, right? Until you consider that this group owns 64% of all the wealth in the country.
Where does this pattern come from? The richest Americans’ share of overall wealth is higher than their share of income because they tend to have a greater portion of their wealth in assets (mainly financial investments, real estate, and business ownership), as opposed to middle- and low-income Americans, who have fewer assets and a greater share of their net wealth in the form of cash income. The wealthy’s share of income taxes is greater than their share of income because our tax system is progressive, meaning the affluent pay a bigger chunk of their earnings in taxes than people in the lower income brackets.
There’s been a lot of discussion lately about whether increasing taxes on the wealthy should be part of the solution to our deficit problems. Let’s assume we stick with an income-based tax system; we can still ask ourselves: Should peoples’ taxes correspond to their share of income or their overall wealth? Do the richest Americans pay too much, or not enough?
The State of Working America’s Wealth
Economic Policy Institute // Sylvia A. Allegretto // March 23, 2011
Recent Trends in Household Wealth in the United States: Rising Debt and the Middle-Class Squeeze
Levy Economics Institute at Bard College // Edward N. Wolff // March 2010