Recently, Congress passed, and the president signed, the Inflation Reduction Act, a tweak to the federal government’s taxing and spending policy. The Inflation Reduction Act is a significantly scaled-back version of a more ambitious Build Back Better fiscal plan.
The bill that passed is estimated to reduce the federal government deficit over the next 10 years but by a relatively small $264.1 billion. We suspect Congress will discuss tax policy and ways to raise government revenue again this decade.
Using 2019 tax data, the most recent year for which comprehensive data is available, the federal government raised $3.46 trillion in revenue and spent $4.4 trillion. The sources of the revenue were $1.7 trillion (49%) from individual income taxes, $1.2 trillion (35%) from Social Security and Medicare taxes, $230.2 billion (7%) from corporate income taxes, and $98.9 billion (3%) in excise taxes. The rest comes mainly from revenue from the Federal Reserve Bank, customs duties, unemployment insurance taxes, and estate and gift taxes.
If we take Social Security and Medicare taxes out of the equation, our back-of-the-envelope calculations suggest the federal individual income tax will account for around 75% of all federal revenue, even with the new increase to the corporate income tax.
Some suggest that only the “rich” should pay the increased tax revenue since they are not paying their “fair share.” Of course, what is a “fair share” is a matter of opinion. Should the rich pay a higher proportion of their income than the poor? And if so, how much more? Twice, three times, 10 times? We can’t answer that question, but here is the 2019 data.
The richest 1%, with adjusted gross incomes of more than $546,434, surrendered an average 25.6% of their income to federal income taxes. The next richest 9% (adjusted gross incomes above $154,589 but below $546,434) surrendered 15.7%, while those in the bottom 50% (adjusted gross incomes of $44,269 or less) surrendered less than 3.5% to the taxman. The wealthiest 1% of taxpayers paid more than seven times what the taxpayer in the bottom half paid as a percentage of their income.
Suppose Congress were to reduce deficits and ballooning national debt in the next few decades without any spending cuts. The individual income tax will have to be increased. And it is hard to imagine how the necessary revenue can come exclusively from the top 1%.•
Bohanon and Horowitz are professors of economics at Ball State University. Send comments to firstname.lastname@example.org.