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October 30, 1992
"Sure! Tax the Rich! One Problem: There Aren't Enough of Them to Make Much of a Dent in the Budget Deficit"
San Jose Mercury News

By Timothy Taylor
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ADVOCATING HIGHER taxes for "the rich" has a nice ring to it. It evokes a courageous and tough-minded willingness to confront the rich and powerful, with an appealing undertone of conscientious concern for the poor and middle class. And since nearly every American south of Ross Perot in the income distribution seems to think of themselves as middle class, proposing to tax the rich doesn't rain on too many parades.

While it's a pity to pour cold water on such a high-virtue, low-pain, all-purpose solution, proposals to solve America's fiscal problems by taxing the rich have one problem: there just aren't enough high-income taxpayers.

The table below offers data from 1990 federal tax returns. The numbers should not be taken as a perfect reflection of the income distribution of U.S. households, since a given household may file one or several tax returns. But the numbers are nonetheless useful for purposes of illustration.

As a first example, consider the group for which Bill Clinton has been willing to raise taxes: those who had income over $200,000. In 1990, one of every 133 tax returns reported at least that much in income, for a total of 835,000. That tiny fraction of taxpayers -- less than 1 percent -- reported 12.6 percent of the total income, and paid 22.6 percent of the total income taxes.

The total income taxes collected from those with above $200,000 in income was $101 billion. A Clinton-style plan, raising the top tax bracket from 31 percent to 36 percent, is no more than a 16 percent rise in taxes (that's a 5 percentage point rise divided by the original 31 percent rate). So this sort of tax increase could raise something on the order of $16 billion.

I'm perfectly willing to stipulate that $16 billion is real money. But it doesn't come close to wiping out the budget deficit, allowing for a middle-class tax cut, funding investments in infrastructure and worker training, insuring everyone for health care, or a lot of other attractive goals.

As a more aggressive tax increase, consider a 30-20-10 plan: that is, collect 30 percent more in taxes from those above $200,000 in income; 20 percent more in taxes for those between $100,000 and $200,000; and 10 percent more from those between $50,000 and $100,000. Even this substantial tax hike, reaching quite a bit lower into the income distribution than anything Clinton has advocated, would collect about $54 billion more, with somewhat more than half that amount coming from the highest income group.

No matter how you cut it, three-quarters of all income is earned by those reporting less than $100,000 in annual income, so the amount that can be collected by focusing on the rich is inevitably limited.

Moreover, these arithmetic exercises can be deceptive, because raising taxes involves much more than playing with the tax tables. The rich have all sorts of legal ways to avoid or reduce taxes: lobby for tax breaks; hire high-priced tax lawyers and accountants; invest in tax-free bonds; defer taxes by investing in stocks that pay no dividends, but only a long- term capital gain; and the easiest way of all for the very rich to reduce income tax is to work less.

I have no ethical problem with raising taxes on those with high incomes. Although the federal income tax is reasonably progressive -- that is, the average tax rate rises with income -- many other taxes burden the poor more heavily, like sales taxes and Social Security payroll taxes. When the whole mix of federal, state and local taxes is taken into account, it seems that people in all income groups pay roughly the same proportion of their income in taxes. To me, this seems a reasonable justification for increasing the tax burden on those with six- and seven-figure incomes.

But if you are honest about the number of these fortunate folks, and their ability to sidestep higher tax rates in one way or another, it's hard to see collecting much more than an extra $20 billion or so by this method.

Which is why, whenever someone talks about solving society's problems by "making the rich pay their fair share," I hear the bleat of scapegoating. Sure, the rich should chip in relatively more, but the annual budget deficit is above $300 billion, not to mention the laundry list of other demands for social programs and tax relief.

If the federal government unexpectedly imposed a 100 percent tax rate on all income above $200,000, I calculate that it would collect $272 billion, not enough to cover one year's budget deficit. And of course, the government can only confiscate that amount once, since the next year, people wouldn't be dumb enough to earn (or admit to) income that was going to be seized.

To deal with the deficit, as well as finding the money for other social needs, everyone will have to chip in something. For some, that may be higher taxes on income or gasoline or cigarettes, or reductions in existing tax breaks for home mortgages and health insurance. For others, it will be lower Social Security payments, loss of a defense-related job, or lower levels of social services.

But the rich alone can't bail the nation out of its fiscal problems; one way or another, we're all going to have to pay.

The chart breaks down tax payments by adjusted gross income, AGI. Because middle brackets have the majority of income, that's where most revenue is raised. In parenthesis, under each number in the middle three columns, are the percentages of total returns, of adjusted gross income, and of taxes paid for that income bracket.

Level of AGI Number
of Returns
Total AGI

Total income
taxes paid

Average tax as
% of income

Less than $25,000 66.7 million

$699 billion

$47 billion

$25,000 to $50,000 28.9 million
$1.03 trillion
$110 billion
$50,000 to $100,000

14.2 million

$937 billion
$131 billion
$100,000 to $200,000

2.9 million

$305 billion
$58 billion
$200,000 to $1 million 774,000

$275 billion

$64 billion
Above $1 million 61,000
$154 billion
$37 billion

Source: Internal Revenue Service, "Statistics of Income Bulletin," Summer 1992, Table 3. All data for 1990.

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