What is a Fair Share?

April 3, 2017

 Ok.  I’m a nerd.  The nice thing is that I work with nerds.  We spend a disproportionate amount of our ‘free time’ learning financial facts around the world.  So, lunch conversations a Cedarstone will often begin with a question like ‘which has the bigger economy Ireland or Singapore’ or ‘which US corporations have a greater market capitalization than the stock market of Russia’.  To us, this is ‘fun’.

 

But these random facts also have a purpose.  They help frame our perspective on the world and help ground the decisions that we make in a knowledge of how the financial markets work.  Suddenly, we can put into perspective news of a ‘slowdown in the Ireland economy’ or a ‘stock market crash in Russia’.

 

It is with this perspective that we began a conversation this week about how much the wealthy should pay in taxes.  It is often said that the wealthy should pay their fair share.  How can you argue with that statement since the statement itself is only asking what is ‘fair’?  But what is ‘fair’?  Is that more or less than the rich are currently paying?  How much are they paying now?   Whatever your political perspective, it seems a reasonable starting point to answer these questions first, so that we can have a basis for deciding what to do next.  In our Cedarstone way, we want to make sure that the opinions that we hold and the decisions that we make are based on data.

 

Based on data released by Tax Foundation, using the most recently released IRS data for 2014, we found the following:

  • The top 1% of Americans earned 20.6% of all income and paid 39.5% of all individual income taxes.

  • The top 50% of Americans paid 97.3% of all individual income taxes.

  • The top 1% of Americans paid a greater share of individual income taxes 39.5% than the bottom 90% of Americans combined.

  • The top 1% of Americans have an effective tax rate of 27.2%, which is 7.9 times the rate of the bottom 50% of taxpayers.

In case you were wondering, the top 1% of all taxpayers represent those with Adjusted Gross Income of $465,626 and above.

 

Given the proposals for tax reform currently in the works, we are likely to hear more about how much taxes the wealthy should pay.  As you have your own conversations about what is a fair share, I hope that these data points will be helpful.  Clearly, the American tax code is very progressive, meaning that the rich do pay a high percentage of all taxes.  Is that fair?  Are they paying their ‘fair share’?  That is for you to decide, but I hope you make those decisions armed with an understanding of how the tax code is currently working.

 

Greenburg, Scott. Tax Foundation, “Summary of Latest Federal Income Tax Data, 2016 Update” https://taxfoundation.org/summary-latest-federal-income-tax-data-2016-update/.  February 1, 2017

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