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Taxing Facts

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Here’s a letter to the New York Times:

Many letters in today’s edition [2] reveal deep confusion over the burden of income taxes shouldered by “the rich.”  Fortunately, Mark Perry [3] (my former GMU research assistant and now Professor of Economics and Finance at the University of Michigan-Flint) constructed this useful graph [4] showing the relationship, from 1979 through 2007, between changes in the top marginal U.S. income-tax rate and the share of Uncle Sam’s tax receipts paid by the top one-percent of income earners.

Two facts leap out.  First, over the course of these 29 years, the share of Uncle Sam’s income-tax receipts paid by the top one-percent of income earners rose significantly, from 18 percent to 40 percent.  (And because inflation-adjusted receipts in 2007 were 94 percent higher than they were in 1979 [5], the absolute amount of income taxes paid by the top one-percent earners therefore increased dramatically.) [I used the Minnesota Fed’s inflation adjuster [6] to adjust the 1979 tax-receipt figure into 2007 dollars.]

Second, because the top marginal tax rate declined significantly from 1979 to 2007 – today it is half of its 1979 level – it’s a myth to suppose that lower marginal tax rates for the highest-income earners result in these income earners paying fewer taxes, either absolutely or relative to the amount of taxes paid by the bottom 99 percent of income earners.

Donald J. Boudreaux