Estimating Tax Burden

Much talk is made about tax burden, but no effort is made into estimating tax burden. Are we excessively burdened by taxes? Can we easily handle more? Who suffers the greatest tax burden? How does our current tax burden compare to the past? Without an attempt to estimate the size of the burden we can't answer these questions.
At this site, we've already looked at how federal taxes have changed over time, how different tax methods would affect citizens, how payroll taxes change the tax discussion, how deficits are part of taxation, and fairness considering the opportunity costs of taxation.
Most importantly, we observed that a person who must give up necessities to pay taxes suffers an excessive tax burden, whereas having enough money for necessities, comforts, and taxes, and still having money left over for luxuries and investments is a smaller tax burden. With that realization in mind, we will attempt to create estimates of tax burden, show what those estimates suggest about tax fairness, and discuss advantages and limitations to each method.

We might start by first looking at current tax rates which is far easier to estimate than tax burden.
The drop at the high end suggests that tax burden is not shared equitably. The estimates below will agree.

Last update: December 2011

 

 

 

 

 

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Method 1: Portion of income left after taxes and necessities

We start by realizing that giving up necessities to pay taxes constitutes a severe burden. Being taxed into poverty is inhumane. To be able to afford all your necessities, but to have to give up some comforts to pay taxes constitutes an inconvenience, but not a severe burden. Being able to afford all your necessities and comforts, pay your taxes, and still have money left for luxuries and investments does not constitute a burden at all. So to estimate tax burden, we should estimate how much necessities and comforts a person must give up just to pay his taxes.

We start by looking at 2009 tax rates. We estimate how federal taxes impacted citizens' abilities to pay for necessities, simple comforts, or deep comforts. We find that only the lower classes had to give up

necessities just to pay taxes and only the middle class and poor had to give up comforts to pay taxes. High incomes (above $180 K) suffered no real burden at all.
This suggests that a fair tax burden would be tax rates that don't require any citizens to give up necessities or comforts. Taxes could be assessed only on income after comforts. This change would put all tax on incomes under roughly $60,000 to zero. In turn it would raise taxes on incomes over roughly $120,000.
Red line represents no tax on comforts. Blue represents current rates. It also assumes a linear threshold model. A nonlinear model would lower the rates below $200,000 and raise them above $1 M.
This method to make tax burden fair would lower taxes on all citizen making less than $100,000, and raise taxes on all citizens making more than about $150,000.

Method 2: Number of days needed to work for taxes and necessities

We could estimate how many work days are necessary for citizens to pay for basic necessities including taxes. Again, we recognize that doing without necessities, food or shelter, as a result of taxation is a far greater burden having less to invest or spend on vacation.

When we do this, we notice that the poor have the highest tax burden (over 200 days), and those making over $100,000 the least (less than 67 days.)
From this approach, we can define fair taxation to be the same number of days until tax freedom for all citizens. By setting tax freedom rate to 68 days we could increase federal revenues by about 3%. This method would lower taxes for those making less than $65000.
As above,the Tax Freedom Day method would reduce taxes to 0% for everybody below about $50,000.

Method 3: Relative status drop caused by taxes

Another way to look at tax burden is to ask how much do taxes reduce your relative status in society? For example, in 2009 a person with an adjusted gross income (AGI) of $34,000 was at 58th percentile; he earned more than 58 percent of his fellow citizens. If he paid 5% in federal taxes his take home pay became the same as the gross of a person at the 56th percentile. We could say that taxation reduced his status about 2 percentile points.

Here we estimate the status drop due to taxes for citizens a various income levels.

The middle classes suffered the greatest drop in status due to taxation.

If we see the burden of taxes as being our drop in status, then we would see fair taxation as meaning that all citizens would suffer the same drop in status. A 3% tax would result in roughly 1 percentile point drop in status for citizens up to about $180,000. But to get a 1% status drop for citizens making more than about $200,000 the tax rate would have to rise very rapidly to achieve this drop. The tax rate would be close to 80% for million dollar incomes, and close to 95% for $5 million dollar incomes. The result would be a maximum after tax income of about $290,000. Even with the majority of citizens paying a 3% tax, federal revenues would increase.
For all citizens between $30,000 and $200,000 this approach to tax burden fairness would reduce their taxes.
A problem occurs at the low end also. 3% is a high tax rate for those already impoverished. And those earning at the 1st percentile or lower can not drop another percentile point. It's not mathematically possible. Otherwise, the idea seems fair: all Americans suffer the same drop in status due to taxes. But Americans won't stand for a maximum income.

Method 4: Historical precedents for tax burden

We might trust the intuitive instincts of the past. We might look at some time in the recent past. We might ask what tax distribution has already been trusted to divide the burden somewhat fairly. We might say what tax distribution affected most of us recently?

Over the last few decades tax rates charged to the lower and middle classes followed a simple curve. We could trust that curve to represent an intuitively fair distribution of burden and extrapolate that curve to the higher incomes.

We can model the distribution of taxes using either a logarithmic or linear curve. The logarithmic curve shows a very tight fit.

Both methods would keep taxes about the same for citizens making less than $100,000. The linear model would result in rapidly rising taxes about $100,000.
The logarithmic model would actually reduce taxes for those between about $100,000 and $1 M. But it would raise taxes on those making more than $2 M.

 

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Summation:

We used four methods to estimate tax burden. Each of these methods suggests that the poor and middle class currently pay a higher tax burden than the rich. The first two methods implied that taxes need to be lowered for the poor and some of the middle class. All four methods showed that taxes can be raised on those making over $2 million without any real burden (i.e. their tax burden would be no larger than the burden on the middle class.)

 
 

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