Do the Rich Pay Their Fair Share of Taxes?

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Do the Rich Pay Their Fair Share of Taxes?

The Truth about Taxes, the Rich, and the Poor

October 5, 2014


People often ask the question “Do the rich get richer?” This is often accompanied by a follow up “Do the rich pay their fair share of taxes?” The country is divided in this matter and needs closure. I choose this research because my tax clients often confused with our unfair and complex tax system and I need to give them the accurate information. The term “fair share” is not well defined in this question. The best place to start is to determine how much high income individuals pay. By analyzing the (a) Economy: Capitalism vs Socialism, (b) opportunity cost (the value of what we give up for our choice) of a Capitalist economy, (c) Money and social behavior: human reaction toward money, (d) Inflation rate: average inflation rate increase 3 percentage annually, (e) Lifespan increase: people live much longer than previous generations, and (f) Tax system: complex and unfair tax system in our county. The information gained from this research will help others to answer their questions. The Joint Committee of Taxation provides clear data on how much tax, higher income people pay. This data gives us an idea of the proportion of taxes each income bracket pays annually.


Do the Rich Pay Their Fair Share of Taxes?

The Truth about Taxes, the Rich, and the Poor

On March 5th, 2014, another cold, rainy and windy day, I checked the appointment calendar and realized that my next appointment was with Mr. and Mrs. Tim; both of them retired a few years ago and settled in Salem. Looking through their last few years of tax return I realized that the couple was not required to pay any taxes, but they always surprised me with questions, which sometimes had no specific answers at all. Tim is a tall, heavy and rough voiced person, and his wife is a short, thin and smiley faced lady who always supports her husband’s views. Even though I am very knowledgeable and well educated in tax matters, in my last 20 years in accounting and tax professional life, no one surprises me more than Tim.

After verification of the documents I pointed out to them that they had more income this time, so they may have to pay some taxes. He looked at me like a lion waiting for prey, and replied with his natural rough voice “Are you making me pay more taxes? Why? I paid taxes all my life, now you are telling me I need to pay for everybody.” “Tim, I am just a messenger please don’t shoot me”, I politely told him but, he just started his complaints about the tax system and his antigovernment opinions. Finally, he said, “Do you know Mr. Cletus, the poor never pay taxes and they are depending on the welfare, and the rich are cheaters, and they are also not paying their taxes, but middle income people like me need to pay for everybody.” His wife agreed with him and said “Honey you are absolutely correct, we are paying for everybody.” Then Tim looked at me in the eye and asked me a surprising question: “Do the rich pay their fair share of taxes?”

As long as I can remember, complaints, accusations and allegations about the tax system in America between the rich and poor have been growing every year. My rich clients’ complaint was the government taxing them unfairly. The American public is misled by the politicians, media, and unqualified writers and analysts with inaccurate data. My professional experience and my knowledge of the subject have given me some credibility to discuss argument to the people on both sides of the issue, and they deserve the truth. My purpose is to reveal the findings with accurate data.

Many of those who claim the rich are not paying their fair share have not provided criteria for determining the fair share. Since the word “fair share” is not a measurable unit, then how are we to define the result based on an unmeasurable definition. Many people worry about the income inequality which creates social injustice to the community. There are no clear criteria for determining, what is fair, or when a country is unjust. The country is divided in this matter and needs closure. We need to analyze the several factors of this issue, including: type of economy, opportunity cost, money, social behavior, inflation rate, and our current tax system.

Economy and Opportunity Cost

America is a free enterprise (Capitalism) country where people have the freedom to choose, voice their opinion, elect leaders, and where most businesses are owned by private individuals. A different world view would be Socialism such as in China or Cuba. In this type of economy, there are far less freedoms and most businesses are controlled by the government. “The true cost of anything is the value of the next best thing which is given up because of that decision. Opportunity Cost stems from the foregone opportunities that are sacrificed in performing this certain action” (Kling, 2005). Choosing Capitalism over Socialism or vice versa comes with opportunity cost. In a Capitalist country businesses make profits that go to the owners. It is normal the business people become rich in a capitalist system, and they take advantage of the resources available to them. In a Socialist country businesses are controlled by the government and the profits they make benefit the government and people have less opportunity to start a business. Capitalism offers everyone a chance to make money if they choose. How much one makes depends on luck, sacrifice, hard work, and knowledge of their business. Unlike a socialist economy, this economy allows us to chase our dreams and offers a chance to improve our lives. What we give up in our economy is government control and allocation of wealth.

Money and Social Behavior

There are three groups that people can be categorized in. The first group consists of well off people who are hard-working, organized, and willing to take big risks to achieve their goals. They have a large amount of resources around them that they take advantage of to improve their standing in life. Most folks in this group become financially independent, challenge themselves, and adapt to changes easier than most. They don’t believe making more money is a sin. “The Bible doesn’t say that money is the root of all evil; it says that the love of money is the root of all kinds of evil. Money is amoral. It doesn’t have morals. It’s not good and it’s not bad. It’s the love of money that’s the problem- that’s a human problem, not a money problem” (Ramsey, 2011).

The second group is made up of those who play it safe. They are hardworking, smart, optimistic people. They set their life up safely and are not willing to take high risks. More often they struggle because they are not rich, not poor, but somewhere in the middle of the teeter totter. “People want things to stay the same and they think the change will be bad for them. When one person says the change is a bad idea, others say the same” (Johnson, 1998).

The last group consists of those in the bottom of the financial and social pyramid. They are trapped by the system due to social injustice and do not know how to get out of the trap. They accept themselves as less fortunate and yet work hard except for a few who enjoy the support they receive from others. “Poor people are more greedy than rich people. If a person was rich, that person was providing something that other people wanted. In my life, over all these years, whenever I have felt needy or short of money or short of help, I simply went out or found in my heart what I wanted, and decided to give it first. And when I gave, it always come back” (Kiyosaki, 1997). The first and second groups make more income and contribute more taxes than the third group. Some of the third group don’t pay any federal income tax, but still pay social security and Medicare taxes.

Inflation and Current Tax System

“We can’t avoid inflation, so we need to factor it into the puzzle. To calculate future costs, use 3% - the average annual inflation rate since 1926” (Jason, 2009). People make more money today than in the past partly because of the inflation rate. Expenses are increasing for everyday living. A million dollars 40 years ago is not the same as a million dollars today. Due to improvement of modern medicine and eating habits the average life span has increased since 1946. People live much longer than previous generations so they need to save more money for retirement.

To measure the fairness of the US income tax system is, by any measure, very advanced and complicated. There are many types of income taxes and each one has its own rules and regulations. The most common one is the personal income tax, which only made up 28% of all IRS collection in 2012 (Joint Committee on Taxation, 2014). Before determining the fairness of the tax system, I will analyze the way Congress taxes people based on the category of their income.

There are two main categories of income, passive and active income. Simplifying the term “active” is a person actively participating in a trade or business, for example, employees earn wages while working, or business people making profits from a business which he or she materially participated in. Generally, active income is treated as ordinary income and subject to self-employment/social security and Medicare tax. Income generated from other sources such as interest, dividend, stock sale, property sale is called passive income. This sometimes creates capital gains tax. Both categories of income or loss are taxed and treated differently. Congress set the capital gain tax rate to 15% for most situations to help everyone because some people never recover capital losses due to limitation. The rich and poor are investing in passive activity and both take advantage or suffer from losses. The rich people take more risk and invest more than others and they may make more money or lose money. Married people making a capital gain up to 72,000 dollars did not pay any taxes in 2013, which helped many lower income people. Taking more risk and facing the consequences are not unfair or unjust (Joint Committee on Taxation, 2014).

Even though rich people make profits from capital gain and pay the lower tax bracket of 15-23% tax on their capital gain tax, they also pay other taxes. Such as the employer portion of social security and medicare, the medical insurance premium for their employees and other fringe benefit payments to employees. These are tax free benefits for employees. We must take into account excise tax, sales tax, and state tax payments (Joint Committee on Taxation, 2014).

The most important tax is the “death tax” which is after the death of a person; the Estate can exclude only 5 million dollars, if married the spouse also gets an additional 5 million exclusion. Everything else is taxable up to a 40% tax rate (Joint Committee on Taxation, 2014). They also need to pay a state inheritance tax anywhere from 8-20% depending on the state tax rate. Oregon inheritance tax exclusions are only 1 million dollars. Many of these rich people pay a huge tax after their death.

Here are some data provided by The Tax Foundation, an independent nonprofit, organization; “The Top 50 Percent of All Taxpayers Paid 97 Percent of All Income Taxes; the Top 5 Percent Paid 57 Percent of All Income Taxes; and the Top 1 Percent Paid 35 Percent of All Income Taxes in 2011”.

Table 1. Summary of Federal Income Tax Data, 2011 Source: Tax Foundation Lundeen (2014)

Number of Returns*

AGI ($ millions)

Income Taxes Paid ($ millions)

Group's Share of Total AGI (IRS)

Group's Share of Income Taxes

Income Split Point

Average Tax Rate

All Taxpayers






Top 1%






> $388,905









Top 5%






> $167,728









Top 10%






> $120,136









Top 25%






> $70,492









Top 50%






> $34,823


Bottom 50%






< $34,823


*Does not include dependent filers.

This research and the evidence provided proof that rich people pay their fair share of taxes. People who make over $200,000 annually pay 70% of the overall tax in the United States. Well off individuals work hard for their money, take high risks, managed through hard times, and accomplished their goals. Most of us have a shot at improving our lives and it is our choices that determine whether we succeed or fail. We should not punish people for making more money, pulling the economy up, and paying some of our share of taxes.


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