45% of American households have no Federal income tax liability. This does not mean that nearly half of American households don’t pay Federal taxes. If they’re working, they’re paying payroll taxes (FICA). If they pump a gallon of gasoline, 18 cents goes to Federal government. But FICA and the Federal excise on gasoline are earmarked for specific purposes. All of that money is spoken for Social Security, Medicare, and the Highway Trust Fund.
Outside of those 3 specific programs, just about everything else the Federal government does is funded by revenue raised primarily through personal income taxes and corporate income taxes. And these taxes are overwhelmingly paid by the well off.
What does it say about our national tax system when the top 20% of earners pay 84% of Federal income tax (when their share of personal income is roughly 51%)? And I’m not talking about fairness. I’m talking about fragility. Earnings at the top are subject to a lot more volatility.
California knows this firsthand. Half of its personal income taxes are paid for by the top 1% of earners. This is great when markets are doing well and the economy is on good footing, but back in 2008, the over-reliance on the state’s wealthiest taxpayers created a 20+ billion dollar budget deficit. It’s since raised taxes even higher, disproportionately affecting the wealthy while also making the state that much more reliant on those top taxpayers.
Money is a very complicated subject, and the moral arguments made for or against certain rates or types of taxes and who’s paying for what aren’t of much use when there isn’t enough money to go around. This country has a growing problem as it relates to the fragility of our tax system, because the spending is more-or-less on autopilot while revenue collection can swing wildly from year to year, depending on the immediate health of the economy and financial markets.