US taxation datapoints of the day

By Felix Salmon
April 13, 2011
David Cay Johnston, has a fantastic cover story in the Willamette Week (of all places), shining a bright light on just how unfair and unequal the US tax system is.

" data-share-img="" data-share="twitter,facebook,linkedin,reddit,google" data-share-count="true">

The dean of tax reporters, David Cay Johnston, has a fantastic cover story in the Willamette Week (of all places and 40 other alt-weeklies), shining a bright light on just how unfair and unequal the US tax system is. The whole 3,000-word article is well worth reading in full, but here are some highlights:

  • In Alabama, the tax burden on the poor is more than twice that of the top 1 percent. The one-fifth of Alabama families making less than $13,000 pay almost 11 percent of their income in state and local taxes, compared with less than 4 percent for those who make $229,000 or more.
  • Between 2000 and 2009, the US population increased by 25,584,644. Meanwhile, the number of people with jobs increased by just 2,803,967.
  • John Paulson has paid no taxes at all on the $9 billion of income that he made in 2008 and 2009.
  • Frank and Jamie McCourt, the owners of the Los Angeles Dodgers, have not paid any income taxes since at least 2004.
  • Between 2000 and 2008, corporate profits rose by 12% while corporate income taxes fell by 8%. Without any change in the corporate income-tax rate.
  • George W Bush did sign one — just one — tax increase. It was on children under the age of 17.

None of this is likely to come as any surprise to tax wonks, but it’s well worth publicizing as Barack Obama now wades into the turbulent waters of long-term fiscal policy. The simple fact is that corporations and the rich aren’t paying as much tax as they have to if we’re going to make a serious dent in the deficit. And although anybody pointing that out is always going to risk being tarred as a class warrior, the country is not going to make any serious progress, fiscally speaking, unless and until it grows up and addresses that fact face-on.


We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see

Agreed. But lets get and end to the DOE, and government unions permanently eliminated, and additional privatization of saving for retirement in exchange for higher taxes. THere is no need to fund a bureaucracy that advocates class warfare.

Posted by CurtD59 | Report as abusive

One of my friends read this post, and remarked “Lets just go to a flat tax and be done with it”

What are your thoughts on a flat tax? I do recognize that there are several variations of this concept – so let’s stick with the version that Steve Forbes proposes here: forbes_flat_tax.html

Posted by dtc | Report as abusive

“Not one cent to the IRS on the first $36,000. Anything over that would be taxed at a flat, fair 17%.”

Works for me. This might actually increase the effective tax rate on the wealthy (who translate their income into either dividends or capital gains). It would decrease the effective tax rate on the upper middle class, but that would open the door to lifting the Social Security cap. It wouldn’t significantly change the taxation of the middle class and would be only a small increase for the lower middle class.

The best point, however, has nothing to do with the distribution of the tax burden — if you have a FAIR system that people know is FAIR, then you get buy-in. Right now we have a situation that everybody knows is grossly unfair and manipulated. As a result, many feel justified in hiding income, puffing up deductions, and lobbying for changes to the tax code to benefit their personal situation.

For a democratic society (any society?), buy-in is critical.

Posted by TFF | Report as abusive

The poor Alabama family paid $1430 and the rich one paid $9160. Who do you think got more back more than they paid in in terms of government in benefits? Add in federal income taxes, which are far more progressive, it’s not even close.

Posted by maynardGkeynes | Report as abusive

MGK, the rich typically benefit more than the poor.

Take each of those families and dump them into the Sudan. Which family loses the most from that shift?

Welfare isn’t the only benefit of living in civilization. It isn’t even one of the most valuable.

Posted by TFF | Report as abusive

A problem comes in when you get a multinational corporation (the one runs by the jobs czar, perhaps) telling Senator Belfry that it simply can’t compete with the tax levels paid by the Upper Slobbovia national champion in widget production (sorry for mixing my comic strips). We would really like to open a plant employing 100,000 in your state, but we can’t afford to. And all of our top executives stand prepared to contribute $100,000 to your reelection fund.

The system is rotten from taxes to lobbying to elections.

Posted by Curmudgeon | Report as abusive

Felix I haven’t read the 3000 word article yet (I promise I will) but even without reading it I can tell you many of the bullet points you highlighted are abusrd on their face.

“1/5th of poor AL families pay 11% in state and local taxes.” ah O.K. by that do you mean that they COLLECT the other 89%? Anyone in the bottom 20% in Alabama who bothers to file a return pays a NEGITIVE federal rate via the EITC. All in that group qualify for food assistance, housing assistance, zero cost health care. I’m a progressive… I belive in all those programs… but lets not pretend that the bottom 20% pay taxes on net when the benifits the receive far exceed what taxes they do pay.

“John Paulson has paid no taxes at all on the $9 billion of income that he made in 2008 and 2009.” Wow… when does his tax evasion trial start? Did he not realize the gains by closing out his positions? If that is the case then it’s a pretty weak argument to say that he didn’t pay taxes. Not only will J.P. pay up but he’ll soon lose his 15% cap gains rate along with the rest of us.

“Between 2000 and 2008, corporate profits up by 12% corporate taxes down 8%.” Taxation at the corporate level is myth. You think your getting a great deal on your tax advantaged IRA Felix? If a 62 year old who lived right has $400,000 stashed away in 401ks & IRAs lets assume the market P/E of 14 and say the stocks in her 401k/IRA nest egg earned $28,500. The New York Times says that SP500 companies pay an average effective rate of 32.8% so that little old lady who lived right paid $9,348 in taxes on those corporate earnings. ss/economy/02leonhardt.html

Colleges, Art Museums, Pension plans, the middle class, and even the working class pay the same high corporate tax rate as the wealthy. Move the corporate tax to zero and tax high incomes and luxury consumption at higher levels.

Best hopes for good decision making in the age of austerity!

Posted by y2kurtus | Report as abusive

Taxes are definitely far more progressive in the US than in Europe. Indeed GW Bush made the tax system even more progressive. While he cut taxes on the rich many lower earners saw their taxes go away entirely, a 100% tax cut.

In the US the bottom half of earners pay basically no tax and often tax day is a huge pay day because of credits. I know of no other other developed country where that is true. At the lower income ranges taxes may be more progressive here than almost anywhere else in the world.

In Europe, VAT taxes are the biggest kind of tax. They amount to a flat tax that everyone pays in proportion to the amount they consume. Since the poor consume a larger share of their income, they may actually pay a higher tax rate, at least for the VAT portion of their tax bill.

For a surgeon or high-earning lawyer or pro athlete who gets paid in salary, the average US tax rate (federal, state and local) can be north of 40%. All examples of rich paying little tax are where they get their income from something other than salary (i.e. dividends, capital gains, etc.). Perhaps something needs to be done about this particular aspect. **It is a glaring gap!!***

People wonder why the class warfare tactics aren’t more effective among the lower classes but maybe this is because most of them see what a great deal tax season is for them.

Posted by DanHess | Report as abusive

It’s childish to pretend that a flat tax would be simple or that a corporate tax is unnecessary. Taxation is an inherently complex tax in an advanced economy. You need to define income, which means defining when amounts are realized and when deduction are taken. You need to manage interactions across borders. You need to manage personal/corporate separation without enabling too much tax avoidance or deferral. These are complex tasks. We can’t wish them away.

If you drop the corporate tax rate and lift the individual tax rate, you are simply further incentivizing the John Paulson approach – invest your wealth and never realize any gains. If you need money to spend just borrow against your wealth. If you think you could write rules to prevent this kind of behavior, welcome to the most complex part of the tax code (all the rules for CFCs, personal holding companies, constructive dividends, etc.).

If you put in a flat tax, you are simply handing money to very-high-salaried workers at the expense of the middle class. There’s a reason the biggest advocate of this tax has been Steve Forbes. Some people pay 25-35% rates (and we probably need either a 40%+ top rate or some serious cuts in government spending). If you start charging them 17% and exempt the poor, where else are you going to get the revenue?

Posted by najdorf | Report as abusive

I don’t believe this is an issue of tax rates being too high. Obama frequently wants to hike taxes on those making over $250k/year. Hiking those taxes will hit the working affluent; who work quite hard for their money. The problem with out tax code has nothing to do with higher rates. Even if we hike the income tax John Paulson and the LA Clipper owners will stay pay nothing in taxes. We need a new code that makes sure everyone pays. We don’t need higher rates.

Posted by sditulli | Report as abusive

The working affluent worked quite hard when the top marginal tax was 70% in the 1970s. And most people work hard for their money, at whatever % they are taxed at.

I don’t know of any papers showing that the tax burden on the upper classes in the mid-20th century resulted in negative standards of living. People need to realize that high earning isn’t a reflection of one’s ability. It is classic entrenched entitlement.

Also, commenter should read the original article before misconstruing the point.

Posted by thispaceforsale | Report as abusive

He’s wrong about Paulson’s income. He’s drawing on a book he wrote in 2003, which was before Congress passed laws in 2004 and 2008 to guarantee that hedge fund managers pay current tax on their income.

Posted by jpe12 | Report as abusive

jpe12- my understanding is that hedge fund manages only pay ordinary income on their flat fees – any fees they make based on the fund’s profit margin is taxed at capital gains rates.

Posted by AdamJ23 | Report as abusive

Adam: Johnston is talking about deferral. You’re right that the typical structure is for the manager to get a profits interest in the partnership, so that the carried itnerest is the type of income made by the partnership (if the partnership makes a bunch of long term cap gains, the carried interest is allocated a bunch of LTCG, too). What Johnston is talking about, though, is deferral, where the manager gets something like a total return swap on the carried interest (this is an “incentive fee”). Since the incentive fee is a contractual payment, it’s taxed as ordinary income. The upshot is that one had to choose between LTCG income taxed currently or ordinary income that was deferred. One could have passthrough taxation or deferral, but not both. That all changed w/ the passage of 457A in 2008, which ended deferral.

Posted by jpe12 | Report as abusive

In the U.S. the rich pay much more taxes than the poor or middle class. The top ten percent, for example, pay almost 70% of federal income tax and the top one percent pay more than a third.

Posted by Waltlaw | Report as abusive