By Julie Neitzel
We frequently hear arguments that the rich are not paying their fair share of taxes, although statistics show the highest income earners are important contributors to our nation’s federal budget and to our economy. In this month’s column, we’ll explore the facts surrounding the 3 million U.S. taxpayers commonly known as “the top 1 percent.”
During 2015, the top 1 percent generated 16.5 percent of total federal individual income while accounting for 44 percent of the total federal income taxes paid, according to the Tax Policy Center. In addition to the federal income taxes paid, many top 1 percent taxpayers are business owners and executives further contributing to the federal coffers through payroll taxes and business taxes. It is estimated that the top 1 percent fund approximately 33 percent or nearly $1 trillion of the federal budget through the various personal taxes paid individually and from their respective businesses.
In order to value the financial contributions of the top income earners, it is important to understand how the federal government funds its annual operating budget. According to NationalPriorities.org, during 2015 the federal government raised $3.18 trillion in revenues, with $1.5 trillion (47 percent) from federal income taxes, $1 trillion (34 percent) sourced from payroll taxes, and $350 billion (11 percent) from corporate taxes, with additional revenues from excise and other taxes. The 2015 federal budget deficit is estimated at $583 billion, funded from the issuance of treasury bonds, resulting in an increase of national debt.
The approximate $1 trillion in tax collections from the top 1 percent is a sizable funding source for the benefits provided to nearly 325 million Americans from a group of 3 million U.S. taxpayers. By expanding the high income earners to the top 20 percent (annual incomes greater than $134,000), the group expands to 65 million U.S. taxpayers that fund nearly two-thirds or $2 trillion of the federal budget – 20 percent of U.S. taxpayers funding 66 percent of the federal budget!
Remaining in the top 1 percent is a challenge as there tends to be lots of movement within its ranks. Many taxpayers do not stay there for long. According to a study from Thomas Hirschl of Cornell University, only 11 percent of Americans will join the top 1 percent for one year during their taxpaying lives, while 5.8 percent will be there for two years or more. Just 1.1 percent will remain in the top 1 percent for at least 10 years.
Additional challenges faced by the top 1 percent and all taxpayers is understanding the federal tax code, which is nearly 14,000 pages long.
JustFacts.com estimates that over 6 billion hours are spent yearly by U.S. taxpayers on tax compliance with a total cost of $168 billion. It would be reasonable to assume that the top 1 percent not only incur considerable federal taxes, but also sizable tax compliance expenses!
As the saying goes: “The only certainties in life are death and taxes.” However, there is a continued focus, particularly during an election season, on whether there is equitable taxation of our nation’s top income earners.
Julie Neitzel is a partner and advisor with WE Family Offices in Miami and a board member of the Miami Finance Forum. Contact her at firstname.lastname@example.org or 305.825.2225.