1 00:00:01,319 --> 00:00:05,979 Here's a question you're likely to hear whenever the subject of taxes comes up: 2 00:00:05,980 --> 00:00:08,500 Do the rich pay their fair share? 3 00:00:08,500 --> 00:00:13,380 There are two parts to this question: Who is rich? And, what is fair? 4 00:00:13,380 --> 00:00:15,379 Let's start with who is rich: 5 00:00:15,379 --> 00:00:19,259 Nearly everyone assumes that a person who is among the top ten percent 6 00:00:19,260 --> 00:00:22,260 of all income earners qualifies as rich. 7 00:00:22,269 --> 00:00:29,360 But according to 2011 data, a top ten percent household makes around $150,000 or above in 8 00:00:29,360 --> 00:00:36,140 gross annual income -- that's income before deductions and taxes. Now, $150,000 is a nice 9 00:00:36,140 --> 00:00:39,180 living, but it certainly doesn't make you rich. 10 00:00:39,180 --> 00:00:43,200 OK, then. What about the top 5%? 11 00:00:43,210 --> 00:00:49,270 You get into this percentile if your household makes around $190,000 or above. 12 00:00:49,270 --> 00:00:53,879 That's a nice bump. But it hardly puts you in the rich category. 13 00:00:53,879 --> 00:01:01,579 How about the top 1%? That's $500,000 or above. A great income, but remember, most people 14 00:01:01,579 --> 00:01:07,280 only get to that level after many years of hard work and, quite possibly, the accumulation 15 00:01:07,280 --> 00:01:12,140 of serious debt to fund their education or build their business. 16 00:01:12,140 --> 00:01:16,520 Of course, there are people who make more than $500,000. And there are some who make 17 00:01:16,530 --> 00:01:22,120 many millions, even billions. But the number who do is very small. 18 00:01:22,120 --> 00:01:24,120 Now, let's talk about fair. 19 00:01:24,120 --> 00:01:29,659 Fair would seem be that the group of taxpayers who earn 10% of the country's income would 20 00:01:29,659 --> 00:01:36,340 pay 10% of the country's taxes; the group who earned 20% would pay 20% of the taxes 21 00:01:36,340 --> 00:01:38,110 and so on. 22 00:01:38,110 --> 00:01:43,490 But what If I told you that, according to IRS data, the top 10% of all earners -- 23 00:01:43,490 --> 00:01:50,170 the people making $150,000 and above -- pay 71% of all federal income tax 24 00:01:50,170 --> 00:01:54,600 while earning only 43% of all income. 25 00:01:54,610 --> 00:01:59,780 If anything, the top ten percent pay more than their fair share. 26 00:01:59,780 --> 00:02:06,800 So, as it happens, do the much reviled top 1%. They earn 17 percent of all income, 27 00:02:06,800 --> 00:02:11,560 but pay 37% of all federal income taxes. 28 00:02:11,560 --> 00:02:17,320 And what about those at the other end of the income scale, the lower earners? Are we squeezing them? 29 00:02:17,320 --> 00:02:23,780 Hardly. Those who make $45,000 or less, 47% of all earners, 30 00:02:23,780 --> 00:02:28,220 pay little and often no income taxes. 31 00:02:28,220 --> 00:02:34,460 Ah, but what about payroll taxes -- the money we pay to fund Social Security and Medicare? 32 00:02:34,470 --> 00:02:41,160 That takes a bigger bite of the paycheck of lower earners than higher earners. Isn't that unfair? 33 00:02:41,160 --> 00:02:43,240 Consider two points: 34 00:02:43,240 --> 00:02:49,440 First, it's misleading to call the Payroll Tax a tax. It's really an insurance payment 35 00:02:49,450 --> 00:02:56,040 that guarantees we receive social security and Medicare after we turn 65. 36 00:02:56,040 --> 00:03:01,880 Second, the benefits we receive from Social Security are capped, no matter how much we 37 00:03:01,880 --> 00:03:08,250 have paid in. This means that the payroll taxes of high earners actually help subsidize 38 00:03:08,250 --> 00:03:15,160 the social security and Medicare benefits that low earners receive at retirement. 39 00:03:15,160 --> 00:03:18,870 How do all these numbers stack up against other countries? 40 00:03:18,870 --> 00:03:24,210 The US income tax system is substantially more progressive - meaning that income tax 41 00:03:24,210 --> 00:03:30,400 rates rise as income rises -- than other advanced countries, including Germany and Sweden. 42 00:03:30,400 --> 00:03:35,540 So, if you think that our tax system is unfair because it coddles high earners, then you 43 00:03:35,540 --> 00:03:41,830 must conclude that tax systems in these other countries are even more unfair. 44 00:03:41,830 --> 00:03:48,030 So how high are tax rates on Americans today? Well, throw in federal tax increases mandated 45 00:03:48,030 --> 00:03:56,340 in 2013 and state taxes, and top earners face a tax rate of more than 50 per cent in California 46 00:03:56,340 --> 00:04:01,620 and New York. Other states like Maryland and Connecticut are not far behind. 47 00:04:01,620 --> 00:04:09,320 Do you think a tax rate of greater than 50% is fair? If so, is there any rate that wouldn't be? 48 00:04:09,320 --> 00:04:14,120 Nobody is calling for bake sales for anyone in the top ten percent of earners. 49 00:04:14,120 --> 00:04:19,800 And no one wants to minimize the struggles of those at the lower income strata. But to say the 50 00:04:19,810 --> 00:04:26,380 "rich," however you might define them, don't pay their fair share is simply wrong. 51 00:04:26,380 --> 00:04:32,000 Finally, numerous academic studies, including ones that I have done, show that when tax 52 00:04:32,000 --> 00:04:38,350 rates are too high, investment, risk taking by entrepreneurs, and therefore job creation 53 00:04:38,350 --> 00:04:46,930 all decline. And when that happens it's the poor who suffer, not the rich. The rich do fine. 54 00:04:47,020 --> 00:04:53,800 It may feel good to take even more money from the top ten percent, but it doesn't do good. 55 00:04:53,810 --> 00:04:55,850 And it sure isn't fair. 56 00:04:55,850 --> 00:05:01,870 I'm Lee Ohanian, Professor of Economics at UCLA, for Prager University.