Who Rules America?

U.S. Department of the Treasury information regurgitated on taxpolicycenter.org, a website published by the Urban Institute and the Brookings Institution, shows that in the year 2000 taxation on the top 10% of earners in the United States paid for 48.5% of the annual spending of the Federal government.  The bottom 60% of earners funded 14.8% of Federal spending.  The 20% of folks in the “fourth quintile” (i.e., those who earn more than 60% of Americans, but less than 20% of Americans) funded 19.9% of Federal spending.  Here is a graph published by the Congressional Budget Office illustrating the distribution of income and taxes in 2007:

Those statistics do not say anything about the percentage of income paid in tax by each quintile.  The previous chart only shows quintile income as a percentage of total income and quintile taxes as a percentage of total taxes.  There is no way to derive taxes as a percentage of income from that chart.  Now, here is a chart that does show the “effective tax rate” (tax, as a percentage of income, after deductions) by quintile:

Thus, Federal taxes are “progressive”; the greater your income, the greater the percentage of that income you pay in Federal taxes.  In general, the progressive nature of Federal taxes is partially off-set by state taxes, which are usually more “regressive” in nature.  Florida does not have a state income tax, but does have sales tax, property tax, and other taxes, fees, and levies.  Sales taxes are usually considered regressive, but the regressive nature of Florida’s sales tax is, in turn, partially off-set because Florida does not collect sales taxes on food and some other necessities.  Much of Florida’s sales tax revenue is collected from people in the higher income quintiles who can afford to vacation in Florida.

Here is a chart that shows how Federal tax rates have changed over time.  In addition to the effective tax rate for the five income quintiles, the chart also shows the effective tax rate for all quintiles combined (blue) and the effective tax rate for those in the top 1% of incomes (orange):

Now, who are these people in the orange line?  The bottom half of the orange line (the 99th to 99.5th percentiles) is made up largely of physicians, attorneys, upper middle management, and small business people who have done well.  This group typically contributes $50,000 to $100,000 per year to 401Ks, IRAs, Defined Benefit Plans, and other retirement vehicles, which defer taxes until distribution during retirement, leaving them with yearly cash flows (spendable incomes) of $175k to $250k, after taxes, or about $15k to $20k per month.

The top half of the orange line is made up largely of people whose wealth comes from being involved in some aspect of the financial services or banking industry, real estate development involved with those industries, or government contracting.  Some hard working and clever physicians and attorneys can acquire as much as $15M-$20M before retirement, but they are rare.  Those in the top 0.5% have incomes over $500k, if working, and net worths of over $1.8M, if retired.  The higher you go into the top 0.5%, the more likely it is that wealth is in some way tied to the investment industry and borrowed money than to personally selling goods or services or personally providing labor.  It is much more likely that those in the top 0.5% have built their net worth from stock options and capital gains in stocks and real estate and private business sales, than from income, which is taxed at a much higher rate.

Folks in the top 0.1% come from many backgrounds, but most acquired their wealth through direct or indirect participation in the financial and banking industries.  The picture is clear; entry into the top 0.5% and, particularly, the top 0.1% is usually the result of some association with the financial industry and its creations.  It is questionable as to whether the majority in this group actually adds value or simply diverts value from the US economy and business into its pockets and the pockets of the uber-wealthy who hire them.  They are, of course, doing nothing illegal.  For the source (and all of the opinions, most of which I filtered) of the last three paragraphs, see Who Rules America?

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