Taxpayer's Tab: How Much Could be Raised with Tax Hikes on the Top 1 Percent?

A new report from the Pew Research Center shows that the middle class is shrinking. This confirms what NTUF has observed in the tax statistics reported by the Internal Revenue Service showing that a taxpayer with income of $74,000 is included the top 25 percent of earners, while over a third of filers have no income tax obligation, up from one in four in 2000. We have a progressive tax system so that those who earn more, pay more as they move up the income ladder. And as we pointed out in our last edition of the Tab, the income tax burden has shifted significantly upward. The top 1 percent of earners have shouldered an increasingly disproportionate share of taxes, and an amount nearly twice as much as their percentile’s share of income.

Yet we continue to hear that the wealthy are not paying their “fair share”.

In the second debate among the Democratic presidential hopefuls, the candidates were asked how they would pay for their proposals [note: they were not asked how they would address the federal debt].  All three on the stage indicated that they would increase taxes. Senator Bernie Sanders fell short of specifying a rate, but did declare that he would not raise the top rate to 90 percent.

With a hat tip to the Tax Foundation who used to feature these calculations, we thought it would be interesting to see how much additional revenues could be raised by increasing rates on the wealthy, and for how many days would the theoretical new revenues fund the government?

The latest tax data available is for 2013. The income threshold to be included in the top 1 percent was $428,713. The filers in this percentile paid an average income tax rate of 27 percent. The chart above shows how much additional revenue would flow into the Treasury if the average tax rate were increased to higher rates between 50 and 100 percent. Based on the recent Congressional Budget Office projection, the government will spend over $3.9 trillion in Fiscal Year 2016, about $10.732 billion per day. This figure was used to compute the number of days funded by the tax hike.

Raising the rate to 50 percent would increase tax receipts by $394 billion, which would fund the government for 36.7 days. At 90 percent, $1.08 trillion would flow into the government. This would provide funding to keep the government open for 101 days. For more tax hike stats, check out our new Fund the Fed widget.

As we’ve noted several times, those making the “fair share” argument need to explain what would be fair.

While the figures above are based on a static analysis, it shouldn’t be forgotten that taxpayers will respond to tax hikes. On the Neil Cavuto show, a Sanders supporter and coordinator of the Million Student March protest movement said, “There’s always going to be a 1 percent in the U.S.” Ok, yes. But after a while, the taxable wealth of the 1 percent will shrink.

There are also economic consequences. Senator Sanders was referring back to the top marginal tax rate last seen in the early 1960s. What he didn’t note was that under President Kennedy’s proposal to reduce it to 70 percent (enacted in 1964 after his death), the economy grew and employment rates improved.

Equity is an important part of a tax system and as the data reflects, our system is quite progressive. And if the “fair share” crowd argue that tax hikes are necessary because of inequality, a study by the Brookings Institution study found that raising the top rates would not reduce income inequality. A fair tax code also encourages individual achievement and economic growth. The political rhetoric imploring higher taxes runs the risk of undermining these tax reform principles.

National Taxpayers Union Foundation is a nonpartisan research and educational organization dedicated to helping Americans of all ages understand how taxes, government spending, and regulations affect them. Through our timely information, analysis, and commentary, we’re empowering citizens to engage in important policy debates and hold officials accountable.

Our findings are provided for educational purposes only and are not intended to aid or hinder the passage of legislation or as a comment on any Member’s or Candidate's fitness to serve.