New York Times
POSTED: 01:30 a.m. HST, Nov 30, 2012
BELLEVILLE, Ill. » Alan Hicks divides long days between the insurance business he started in the late 1970s and the barbecue restaurant he opened with his sons three years ago. He earned more than $250,000 last year and said taxes took more than 40 percent. What is worse, in his view, is that others — the wealthy, hiding in loopholes; the poor, living on government benefits — are not paying their fair share.
"It feels like the harder we work, the more they take from us," said Hicks, 55, as he waited for a meat truck one recent afternoon. "And it seems like there's an awful lot of people in the United States who don't pay any taxes."
But in fact, most Americans in 2010 paid far less in total taxes — federal, state and local — than they would have paid 30 years ago. According to an analysis by The , the combination of all income taxes, sales taxes and property taxes took a smaller share of their income than it took from households with the same inflation-adjusted income in 1980.
Households earning more than $200,000 benefited from the largest percentage declines in total taxation as a share of income. Middle-income households benefited, too. More than 85 percent of households with earnings above $25,000 paid less in total taxes than comparable households in 1980.
Lower-income households, however, saved little or nothing. Many pay no federal income taxes, but they do pay a range of other levies, like federal payroll taxes, state sales taxes and local property taxes. Only about half of taxpaying households with incomes below $25,000 paid less in 2010.
The uneven decline is a result of two trends. Congress cut federal taxation at every income level over the past 30 years. State and local taxes, meanwhile, increased for most Americans. Those taxes generallytake a larger share of income from those who make less, so the increases offset more and more of the federal savings at lower levels of income.
Now an era of tax cuts may be reaching its end. The federal government depends increasingly on borrowed money to pay its bills, and many state and local governments are similarly confronting the reality that they are spending more money than they collect. In Washington, debates about tax cuts have yielded to debates about who should pay more.
Public debate over taxes has typically focused on the federal income tax, but that now accounts for less than a third of the total tax revenues collected by federal, state and local governments.
To analyze the total burden, The Times created a model, in consultation with experts, which estimated total tax bills for each taxpayer in each year from 1980, when the election of President Ronald Reagan opened an era of tax cutting, up to 2010, the most recent year for which relevant data are available.
The analysis shows that the overall burden of taxation declined as a share of income in the 1980s, rose to a new peak in the 1990s and fell again in the 2000s. Taxes amounted to 31 percent of personal income in 2010 — 31 cents from every dollar — the same share federal, state and local governments took in 1980.
People with higher incomes pay taxes at higher rates, and real incomes rose over the past three decades, particularly at the top. There are now many more millionaires, in other words, paying more than they did in 1980 — but less than they would have if tax laws had remained unchanged since 1980.
Those affluent households still pay a larger share of income than the rest of the population, but the difference has narrowed significantly. The trend can be seen by comparing three examples:
» A household making $350,000 in 2010, roughly the cutoff for the top 1 percent, on average paid 42.1 percent of its income in taxes, compared with 49 percent for a household with the same inflation-adjusted income in 1980 — a savings of about $24,100.
» A household making $52,000 in 2010, roughly the median income, on average paid 27.7 percent of its income in taxes, compared with 30.5 percent in 1980, saving $1,500.
» A household making $22,000 in 2010 — roughly the federal poverty line for a family of four — on average paid 19.4 percent in taxes, compared with 20.2 percent, saving $200.
Hicks, like many residents of Belleville, views this debate with unhappiness. He would like the government to cut spending but not reduce services. He is certain that the government should not raise taxes on the middle class, a group in which he includes himself, but he is ambivalent about asking anyone to pay more. Higher taxes would hurt his businesses, he said, so raising taxes on those who make more money seems likely to hurt their businesses, too.
"At this point, I guess it's inevitable in order to get us out of this hole," Hicks said of higher taxes. "Illinois is in bad shape, along with a lot of the nation. But I don't feel like we should tax the middle class any more than we are right now. There's going to come a point where they take the incentive out of working hard."
The income tax stands apart from other forms of taxation. It is the reason that upper-income households pay a larger share of their income in taxes than the rest of the population. The combined burden of all other federal, state and local taxes takes roughly the same share from all taxpayers.
And many Americans — even in a middle-class, Democratic stronghold like Belleville — have misgivings about imposing higher tax rates on the affluent, an important reason that income taxation has declined.
The share of Americans who said high-income households paid too little in taxes fell from 77 percent in 1992 to 62 percent in 2012, according to Gallup, even as income inequality rose to the highest levels since the Great Depression.
Some people in Belleville subscribe to the argument that higher tax rates impede economic growth by discouraging investment. For others, it is a matter of fairness.
Anita Thole, a middle-income safety supervisor for a utility contractor, is not wealthy. She does not expect that she ever will be. She is a single mother with a daughter in college, and she said she regarded the wealthy with a mixture of envy and admiration. But she does not want them to pay higher taxes.
"They work their butt off to get what they got," she said. "I wouldn't want them to pay more so that I can pay less."
What would she like governments to cut?
"I really like it when they cut the weeds along the highway," she said. "I like it when there's good roads to drive on. The schools, I don't know, I don't want to pull back from the schools. I don't have the answer of where to pull back.
"I want the state parks to stay open. I want, I want, I want. I want Big Bird. I think it's beautiful. What don't I want? I don't know."
ABOUT THIS REPORT
Economists and journalists have devoted great attention to federal taxes. This analysis offers a more complete picture of taxation in the United States — the combined impact of federal, state and local taxes on U.S. households.
There are no comprehensive statistics on the distribution of state and local taxes, so The used other government data to estimate the distribution of those taxes.
The Times developed the methodology and reached its conclusions in consultation with more than two dozen experts on taxation, including academics, specialists at government agencies like the Census Bureau, the Internal Revenue Service and the Bureau of Labor Statistics and researchers at organizations like the Tax Policy Center and the Tax Foundation.
The Times created a nationally representative sample of taxpayers, and calculated a tax bill for each based on income, state of residence, marital status and other factors. The analysis was run for each year from 1980 to 2010.
Federal and state income tax bills, as well as federal payroll taxes, were determined using a publicly available calculator maintained by the National Bureau of Economic Research, an organization of academic economists.
The Times created models to calculate tax bills for three other taxes: property, sales and corporate income.
The analysis required choices, like picking a definition of income, about which tax researchers disagree. And as with all models, the results are estimates.