Effective Tax Rate Across Income Cohorts 2007 Update

I re-ran my prior analysis of effective tax rates across AGI (adjusted gross income) cohorts using updated data from 2007. We see the same trend as in 2006 – the extremely rich pay a lower effective tax rate than the not-quite as rich, due to most of their income coming from capital gains which is taxed at a flat 15% rate. This analysis makes a great case for tax reform – both in higher marginal tax rates for cash income on the rich, and for an rate increase or even rate marginalization on capital gains. Since households have a large degree of flexibility for when they realize capital gains (they aren’t taxed until you close the position), a lifetime marginal rate would be a solid approach. An example would be your first $50k of lifetime capital gains being untaxed, then each $50k after that being taxed at an additional 5% until you reach the cap.

While the results are nearly identical, but it did provide the opportunity to build some new data visualizations. The “average total income and effective tax rate” graph was generated using Think-Cell, and the “% of income by type and associated tax rates” graph was generated using Excel 2007.

Data available at the IRS website here, published as Individual Complete Report (Publication 1304), Table 3.5

Effective Tax Rate Across Income Cohorts

Here is a quick analysis of effective tax rates using official IRS tax data from 2006. I segmenting the population into cohorts based on their AGI (Adjusted Gross Income), then split their earnings and tax burden into regular income and capital gains categories.

These graphs clearly show that higher AGI cohorts receive a significantly bigger portion of their income from capital gains, which are generally taxed at a flat marginal rate of 15%, compared to the top marginal rate of 33% on normal income. This reduces their effective tax rate relative to lower AGI cohorts, distorting the tax burden.

Visualizing the US Military Budget

Here are a few graphs that compare the national military spend in the US with other developed countries. I used several distinct data sources to pull this together so the numbers may not be exact, but they will be close. The main take-away from this analysis is that if the US military spend per capita or as a percentage of  our national budget was at a level comparable to other developed countries, it would save between $500B and $600B annually.