Not All Money Is Created Equal

I had a thought last night that, what with tax season coming right on up, it would be fun to do a visualization of income and tax distribution. So I wandered down to the CBO and grabbed this document and turned it into a visualization. Sadly, their latest data is pushing 4 years old, so I’ll probably have to update it sometime soon.

(click for the full resolution image)

If you’d like to use a low res version of this chart in your own blog, this one has just the shapes and very little text, so it scales better smaller more better readability. The information here is kind of blunt… I’m sure there are several variables I haven’t accounted for. But this is a pretty accurate portrayal of the data at the CBO (unless I did a calculation wrong).

I wanted to do this because I get really sick of people who say things like “The top 1% of income earners pay 27% of the taxes.” Unless you believe that someone who makes $15K a year should pay $20K in taxes, that is a very silly statement. If the top 1% of income earners make 27% of all the money, it would be perfectly reasonable for them to pay 27% of all the taxes.

That’s why I wanted to make this chart. I want to be able to communicate in a single image how much the top (and bottom) earners make as well as how much they pay in taxes. The thing I think this chart brings out is that we have a progressive taxation system that does not treat all money equally. (Some may bristle that I just called our taxation system progressive, but I’m going to stick by that description. It may not be as progressive as some wish it was, but it is progressive.)

If you earn between the 80th and 90th percentile, you’re the closest we come purely equitable income taxation. That group makes 14% of all the money and pays 14% of all the income taxes.

A tax system that treated all money equally (like a flat tax) would look something like this:

In this system, dollar number ten million and one made by a hedge fund manager would be taxed at the same rate that a dollar made by a single mom earning minimum wage at a fast food restaurant. Every new dollar made would be “created equal” under the tax law. Such a system would probably reduce compliance costs as well, although I imagine it wouldn’t be particularly popular. “Let’s tax the poor more so that we can tax the rich less!” doesn’t sound like a winning campaign.

And, just for fun, I created the “pure socialism” model of this chart as well.

Of course, pure socialism is pretty silly, so this would never happen. Reason one is that, if everyone made the same amount of money, we wouldn’t have quintiles or “the top 1%”. It would just be a blob.

And it wouldn’t make any distinction between people who work hard and people who are lazy. As Penn Jillette has stated (I’m paraphrasing), “laziness is a perfectly valid life choice”. Life gives us all sorts of things to trade off with. Some people trade money (or the potential of earning money) for hanging around the apartment playing video games. Nothing wrong with that. But I don’t mean to get off on a “socialism is really silly” tangent.

I just hope that these charts are helpful and fun. Feel free to steal (with proper attribution).

37 comments

  1. Jon says:

    This is amazing. I’ve always wondered what the breakdown was. Thank you for working this out and sharing it with us.

  2. Dan says:

    I think that a flat “value add” tax would be best (in place of any kind of income tax). Because it would act like a sales tax, but hit all points in the supply chain. There would be some inflation issues initially, but once that settled down, “real cost” would be a much more real.

  3. […] This post was mentioned on Twitter by PoliticalMath, Knowles Atchison Jr. Knowles Atchison Jr said: RT @PoliticalMath: Blog Post: Not All Money is Created Equal #income #taxes http://bit.ly/6ROoIi […]

  4. Hutch says:

    Love these,

    Check out some of Perot charts at http://perotcharts.com

  5. politicalmath says:

    Hutch,

    Dang it… Now I’m going to have to rebuild this thing with that new information. Grrr…

  6. Jared says:

    Can you please add a “subscribe” link to your blog? Thanks!

  7. Yes indeed, but the RATES for the upper income earners are generally highter.

    And many pay no Federal taxes at all, which is the focus of this, not state and local.

    Now then, not to pile on the platter here, but what would be fascinating is the breakdown and YIELD from Federal taxes flowing to the government coffers, if everyone (working, we’ll leave out the lazy video game wizkids in the government housing projects as well as the retired millionairs, for this) paid, say, 10% flat. Period.

  8. Oh, you’re middle graphic did that. Oops. Missed it before because as I was reading IE crashed and gave some typical idiotic MS “click bang” message like “the tab has now been recovered”, so I saw only the first one.

    My bad.

    Thanks.

  9. You’re is to be YOUR.

    Hell on earth, I can’t type either…

  10. KingShamus says:

    Math make head hurty.

    Seriously, great stuff as usual, dude.

  11. Bob McKenna says:

    Another great post to steal for my Blog (with proper attribution). Great as usual. Please let us know if your topic was picked for the upcoming conference. I put out a plea for readers to vote for you on every computer to which they had access, and to tell everyone they knew with a computer to vote for you.

  12. Social comments and analytics for this post…

    This post was mentioned on Twitter by _KYA: RT @PoliticalMath: Blog Post: Not All Money is Created Equal #income #taxes http://bit.ly/6ROoIi

  13. Elsie Hutton says:

    Wow! As a visual person this speaks volumes to me. I can see, read and understand in a very clear and logical way. The Flat Tax is the solution!
    Thanks!

  14. frank says:

    you stated in comments under the first graph ” if the top 1% of income earners make 27% of all the money, it would be perfectly reasonable for them to pay 27% of all the taxes.
    Your comment is in error because they only make 18% of the wages.
    Secondly, you make no allowances for inherited verses earned income, which is significant if you consider that business owners generate their income through usually, but not always, hiring people to work in their businesses. If they are taxed more, as they surely will be, the incentive to create more jobs will be stiffled.
    Unfortunately. the stats will be viewed in the wrong way, as vindication for higher taxes on the “wealthy”

  15. dullgeek says:

    Re: “laziness is a perfectly valid life choice”

    In the last paragraph, I think you’re stepping into the socialist argument that labor is the source of wealth. It’s not. Simply put, not all labor is created equal. What matters isn’t amount of labor, but value for the labor.

    Some comparisons:

    1) If someone asks me to dig a hole in their yard so they can plant a tree, digging a hole is valuable labor. Digging a hole in his neighbor’s yard (who does not wish to have that hole there) is not valuable labor. The former will make my life richer, the latter might make it poorer, even though (presumably) both involve the same amount of labor.

    2) Assume my friend asks me to dig a hole in their yard and I agree. Say we agree to a price of $100 to complete the task. If I use my bare hands, and it takes me 10 hours, the value of my labor is $10/hr. But suppose I rent a machine for $50 and use it to dig the hole and it takes a total of 2 hours. Now the value of my labor is $25/hr even though I end up with the same hole in both cases.

    The key to wealth is not just avoiding laziness. It’s ensuring that you provide value for your labor and economize to determine the most efficient way to provide that value. Your last paragraph suggests that labor equates to wealth. When you do this, you justify the socialist position that it’s the capitalists that get rich at the expense of the laborers. When the truth is that it’s those with value to exchange that get rich. The lower the value you have to exchange, the harder it is to get rich. And value is not produced merely by brute labor. It takes the mind.

    Here’s a great link on the subject:
    http://www.coyoteblog.com/coyote_blog/2004/12/60_second_refut.html

  16. thomas says:

    You say “If the top 1% of income earners make 27% of all the money, it would be perfectly reasonable for them to pay 27% of all the taxes.”

    Why is that “perfectly reasonable”? What is the inherent “fairness” behind that argument? Why should these people pay more in taxes? Do you think they use government funded resources more than the average person? In most other aspects of life people pay for what they use. I fail to see the endemic validity in your argument with regards to this point.

  17. Neil says:

    Estimates of effective tax rates through 2014 under (relatively) current tax law are available here: http://www.cbo.gov/doc.cfm?index=5746&type=0&sequence=1#pt4

  18. Jim says:

    Leaving out state and local taxes skews the data considerably. Here’s a reference to an attempt to include *all* taxes:

    http://www.tnr.com/blog/jonathan-chait/near-honesty-bush-economist

    Our tax system is nearly flat already.

  19. ghost says:

    i wonder what these charts look like for england or germany.

  20. Thanks for your graph of Income Percentage vs (Income) tax Percentage. What I wonder is how
    1) this is effected by adding the Payroll tax e.g. http://economistsview.typepad.com/economistsview/2006/09/the_progressivi.html

    2) and the subsides, e.g. Child Credit and earned income credit.

    In addition, I wonder

    3) how it would be changed if we looked at the percent paid vs the Wealth … This might lead to a proposal that we tax Capital Gains ONLY at a fixed rate rather that income. and that this might be a flat tax.

    4) The only other graph that I’d be interested in would be one that would show how spending (total and perhaps total excluding food and other obvious necessities) is related to income taxes. I am not sure if this can be obtained, but it would be interesting to see how a flat V. A. T. system would “change” this. There is the proposal that a VAT system, or a flat national sales tax would be easier to implement so how would this distore the system?

    But what I take away for this is that we do have a progressive tax, but no where as much as the 4% pay 50% of the taxes make it out to be.

    THANKS.

  21. Al says:

    Very interessting. To partially answer ghost’s question: for germany, there is a very similar graph (though with less details) from the german statistical Bundesamt at
    http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/DE/Grafiken/FinanzenSteuern/Steuern/Diagramme/Einkommensteuerpflichtige,templateId=renderPrint.psml

  22. s says:

    what some people don’t realize is that progressive tax systems are a method to keep the poorer from uprising against the richer in countries (such as US) where there are limits on police force. it keeps a low/mid class avaiable for labor & consumerism.

  23. s says:

    And really people. have a look at that graphs above.The flat tax solution would increase taxes for the “bottom 60%” of the people by at least 50% and up to %400. WHat are the chances of that succeeding?

    Right now, from the perspective of people in power, the poor/middle class are nicely split politically right/left. Implement flat tax, there is a good chance the poor/middle class unite in some sort of anarchy that will make the teabaggers look docile in comparision.

  24. Bert says:

    It would be really great if you could include payroll taxes as well. I believe that including only income taxes produces misleading results. You are leaving out the regressive part of the tax system, and only including the somewhat progressive part. For instance, I paid almost 3 times, really 5 times as much if you count the employer portion, as much last year in payroll taxes as in income taxes. Analyzing only the income taxes unfairly diminishes my contribution.

  25. Bert says:

    Hrm… After looking a little closer, I see you did use the “All Federal Taxes” column. I drew the wrong conclusion from your text. Sorry.

  26. John N. says:

    Awesome work as usual. Would love to see the less progressive local taxes (sales, cigarette) and fees included in this so see how they stack up (pun intended). I think one key to getting better tax law is to try and chip away at payroll deduction. Obviously we’re not going to change the law that allows for payroll deduction. However, if people — at all levels of income but mainly the lower levels — can be made more aware of how much of their $$ is going to the government, we might see wiser choices at the ballot box.

  27. […] I've got my own version of the unequal taxes chart, if you're interested http://www.politicalmathblog.com/?p=270 in reply to dmataconis […]

  28. Ben W says:

    Think you could make one with the “Fair Tax” plan of a sales tax with a rebate for all American’s. It would be a bit more work as one pays tax on consumption but not on savings or investments. My initial though is the hardest hit will be the second quintile as they have high levels of consumption (little ability to save or invest) and the first quintile will have a higher portion of their income offset by the rebate (although I think the term used by “Fair Tax” proponents is prebate as it is received at the beginning of the year).

    If you want I can get some of the data together for you as I am a PhD student and that is all I do all day anyway.

  29. shares employ a perfect website decent Gives thank you for the efforts to help out people

  30. Jan Madeley, College Station, TX says:

    I read your response to my post on the Heritage Forum. Thank you. I really like the way you expressed this; it is very clear and concise! I have added your website to my favorites. I have a MS in Math so you really speak my language. Thanks again.

  31. Tom Sullivan says:

    Is there any standard software to make a graphic like this?
    I’d like to see:
    – a time series
    – an update to 2010, or whatever’s available
    – a timely, regular govt report of the data
    – very detailed data on the top 1%, millionaires, billionaires
    – added column to represent spending

  32. […] of the graphs presented that I like is one of income taxes and you can read all about it in his blog post.  All credit goes to Mr. Shapiro.  What I like about the graph is that it makes it easy to see […]

  33. dave says:

    love the way you presented this data. I know this was done a year ago using 2005 tax data, but I noticed that in the IRS data updated in Oct, 2010 they have summary data for the 2008 tax year. It’s very interesting to note that the top 1% share of taxes grew from 27% to 38% in just three years. And the top 10% share grew from 55% of taxes paid in 2005 to 70% in 2008. If we keep this up, by the year 2020 the top 10% will pay everything and the rest of us will get goverment for free.

  34. jeff says:

    Dave – what percent of national income did upper 1and 10% maken?

  35. Eric says:

    Matthias,
    Thanks for the chart. I’m lazy, but still want to understand. The CBO data is “effective tax rates”. That takes into account tax code rates minus deductions right? What type of other things change the amount of tax paid, but might not be in the data? Just wondering.

    Also, in terms of “income” – does capital gains count as income? Or is income only count jobs for which a W2 is received?

    Thanks for putting time into an interesting blog.

  36. […] from the top 5% and calculate that data for people in the top 1.1%-5%. This means I can update my Not All Money Is Created Equal […]

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