“Don’t Tax Me, Don’t Tax Thee, Tax That Person Who’s Richer Than… We.”

Taxes

Presidential primary season is here, and the Democrats’ talk of taxing the rich grows louder. Those proposals spark interesting conversations among my friends:  Should we tax the rich to pay for new government spending?  And who do we mean when we talk about “the rich?”

Most Americans seem to believe that the wealthy should pay more in taxes, even though our federal tax system already is quite progressive. But public opinion polls, as well as my own informal survey of friends, suggest that people are not at all clear who “the wealthy” are.

This gets even more complicated because people sometimes characterize wealth by annual income, not by assets. That seems true of my friends as well as respondents to formal surveys. “Wealthy,” then, may be a proxy for “high income” or “somebody who makes more money than me.”

What do data say about “people who make more than me” and what they pay in taxes?

TPC estimates (using a broad definition of income) that about 26 percent of US households earn more than $100,000 in annual income, but they earn almost 82 percent of all pre-tax income in the US. About 700,000 US households with annual incomes greater than $1 million account for 13 percent of all pre-tax income. For the top 1 percent (those who make more than about $780,000 annually), income is evenly split between capital (interest, dividends, and capital gains) and labor. For those in the top 0.1 percent (who make $3.4 million or more) just one-quarter of their income comes from wages and salaries. 

Because the federal individual income tax rate is highly progressive, the top 1 percent pay a lot in taxes. TPC estimates that while they make 16 percent of income, they pay 25 percent of all federal taxes. TPC estimates that effective federal tax rates range from 3.5 percent for lowest earning households to 33 percent for the top 1 percent—though that rate has been falling since World War II.

“The rich [whoever they are] should pay more.”

Last month’s Reuters/Ipsos poll that found that 64 percent of respondents strongly or somewhat agreed that “the very rich should contribute an extra share of their total wealth each year to support public programs.” 

There was little difference across incomes. Sixty-five percent of those with annual household income under $50,000 and 62 percent for those earning between $50,000 and $100,000 felt the rich should pay more in taxes. So did 65 percent of those making “more than $100,000.” Unfortunately, the survey did not distinguish between those earning $101,000 and those earning $1 million. 

“I am not rich [or at least my annual income is not super high].”

Who are these “rich” people that we think should be paying more?  In 2018, YouGov reported that 56 percent of Americans think somebody’s rich if they’re earning about $100,000. According to the US Census Bureau, the median household income earned in the US in 2018 was $61,937. The YouGov survey also found that nearly two-thirds of us think we’re neither rich nor poor. And only 5 percent of us think of ourselves as rich. Maybe that’s why taxing the “very rich” seems popular.

And it tracks with my own informal survey of friends. This mix of men and women ranging in age from 40 to 70 likes a progressive income tax system. Only one of the 14 respondents considered themselves “rich.” And all but one thought the very rich should “contribute an extra share of their total wealth each year to support public programs.” Ten of 14 thought investment income should be taxed at a higher rate than wages and salaries (the opposite of current law that has preferential tax rates for dividends and long-term capital gains). One, however, thought “the very rich should be allowed to keep their money, even if it means increasing inequality.”  

If you’re not rich—who is “rich?”

That brings us back to the question: Who is rich? Some of the 14 respondents say “rich” means a vacation home by the lake or owning two or three cars, or the ability to save for college, or even being able to afford health insurance. 

One of my friends thought it means having “enough money that it generates revenue without much effort. [Like] a landlord or a person with a trust fund.”

If richness is relative, what does that mean for the popularity of taxing wealth?

These admittedly very subjective views of wealth appear to fall far below the wealth tax thresholds of the even the most aggressive Democratic presidential hopefuls. Senator Bernie Sanders would impose his wealth tax on assets of $32 million for a married couple. Senator Elizabeth Warren’s wealth tax would kick in at $50 million—both vastly more than the levels my friends (and those YouGov respondents) think of as rich. 

But when I asked my friends if they’d be willing to pay more in federal income taxes than they do today, half said yes. That might be a surprise to those Democrats whose revenue plans seem to follow the long-ago advice of former Senate Finance Committee Chair Russell Long (D-LA): 

“Don’t tax me, don’t tax thee, tax that fella behind the tree.”

The Tax Hound, publishing once a month, helps make sense of tax policy for those outside the tax world by connecting tax issues to everyday concerns. Have a question or an idea? Send Renu an email.

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