Wednesday, April 16, 2025

Taxes, Taxes, Taxes

Taxes are always a popular point for discussion.

That is especially true on the day after the federal income tax filing deadline.

It is also a major discussion topic in Washington, D.C. right now as President Trump and the Republicans in Congress work towards making the Trump tax cuts of his first term permanent.

Those tax cuts, which too effect in 2018, are scheduled to expire on December 31, 2025.

This includes individual income tax rate reductions, the doubled standard deduction, the increased child tax credit, the pass-through business deduction, and the estate tax exemption which was increased.

The Trump tax cuts also reduced the corporate income tax from 35% to 21% among other changes.

The Democrats opposed the Trump tax cuts when they were passed in 2017 arguing they would reduce necessary tax revenues and also be a windfall for the rich.

How has this worked out?

Individual income tax collections were $1.867 trillion in 2017, the year before the tax changes took effect. 

In 2023 (the most recent year that the IRS has published data), individual income tax collections were $2.561 trillion after reaching $2.903 trillion in 2022.

Business taxes increased from $339 billion in 2017 to $457 billion in 2023.

In other words, despite the reduction in tax rates, individual tax collections increased 37% and business taxes increased 35% in the first six years of the Trump tax cuts.

Individual tax collections were actually up 56% in the five years ending in 2022. 

This chart from the IRS website provides an overview.

Source: https://www.irs.gov/statistics/soi-tax-stats-irs-data-book

Here are the actual numbers behind that chart.

Source: Source: https://www.irs.gov/statistics/soi-tax-stats-irs-data-book

Note that overall tax collections were relatively stagnant for a number of years from 2014 up to and including the Covid shutdown year of 2020.

There is also usually a lag effect with any tax policy changes.

It takes some time for individuals and businesses to adapt and adjust their behaviors to the new tax regime.

Therefore, it is likely that the Trump tax changes contributed materially to the upturn in revenues in recent years combined with the low interest rates and accommodative fiscal policy and money printing during the post-Covid Biden years.

What about the share the rich pay in income taxes?

Has it gone down as a result of the Trump tax cuts as Democrats suggested it would ?

In 2017, the top 1% carried 38% of the individual income tax burden and the the top 10% paid 70%.


Source: https://www.ntu.org/foundation/detail/who-pays-income-taxes-2017

In 2022, (the most recent year for this data) the top 1% paid 40.4% of all income taxes and the top 10% had increased to 72% of the total.

The bottom 50%, those with incomes below $50,000, pay just 3% of the total tax burden.


Source: https://www.ntu.org/foundation/detail/who-pays-income-taxes-tax-year-2022

It is true that the adjusted gross income share of the rich increased slightly between 2017 and 2022 (most likely due to stock market gains) but the ratio of the percentage of personal income tax paid to AGI share was essentially unchanged.

These charts also show just how progressive the United States income tax system is and has continued to be even after the Trump tax cuts.

Those with more income pay a substantially greater share of their income in taxes than those with less income.

The top 1% pay a share of taxes that is 1.8x their share of income.

Conversely, the bottom 50% pay just .3x of their share of income.

The share of taxes that the bottom 50% pay as a percent of income is also substantially lower compared to the left-leaning European countries that the Democrats want the United States to emulate.

The average worker in Europe pays almost $12,000 more in taxes than they would in the United States.

Source: https://www.cato.org/policy-analysis/bigger-government-means-giving-almost-half-paycheck#european-middle-class-pays-high-taxes

 

It is true that the extra taxes in Europe do fund more government provided social benefits.

However, when you consider the redistributive effects of lower taxes in the United States the bottom 50% in the United States is doing considerably better than their European counterparts.

This chart shows the total new transfers received by the bottom 50% by country by adding the benefit of lower taxes on the bottom 50% to government benefits.

The United States is actually redistributing more to the bottom 50% than any European country. 


Source: https://www.cato.org/policy-analysis/bigger-government-means-giving-almost-half-paycheck#european-middle-class-pays-high-taxes


Keep these statistics in mind as you hear Democrats or media pundits argue that the rich do not pay their "fair" share of taxes or that somehow making the Trump tax cuts permanent is going to be a tax giveaway to the rich.

In fact, I would not be surprised that in the final negotiations on the extension of the Trump tax cuts that a higher tax rate is not imposed on $1+ million income earners.

Democrats have long argued that the "rich" should pay more.

I can easily see Trump co-opting another Democrat issue as he has done time and time again in the past and agreeing to some type of tax increase on the "rich" (which would include Trump himself) as part of a final deal.

Are the Democrats going to vote against a tax increase on the rich after complaining about it for so long?

It is called "The Art of the Deal" for a reason.

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