Sticking to the facts on how we're taxed

You may have seen a version of an e-mail about taxes.

In it, one of several university economists purportedly attempts to explain how the tax system works via the example of several guys who regularly have dinner together.

The men pay based on their income, so that some pay nothing and the richest guy pays the most ($59 out of the $100 tab).

The restaurateur gives the men a discount, which means that the richest guy gets a bigger discount (read: tax cut) than the other guys. When they figure this out, they get mad and beat him silly. Understandably, he stops having dinner with the gang, who are then surprised that they have to pay more for dinner with Daddy Megabucks out of the picture.

"And that, boys and girls, journalists and college professors, is how our tax system works," claims the e-mail. "The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore, in fact they might start eating overseas where the atmosphere is somewhat friendlier."

The first problem with this analysis is that the two economists most often cited as the authors of this piece have said they had nothing to do with it.

The second, and bigger problem, is that the tax system in fact looks very little like this.

The richest Americans do not pay 59 percent of total taxes, and nobody pays nothing. Every American pays consumption taxes, such as sales tax and excise taxes, and every working American pays what are called payroll taxes — the taxes that fund Social Security and Medicare.

Those taxes take a higher chunk of poor people's income than rich people's, if only because the Social Security tax is applied only to the first $87,000 of each person's income.

The personal income tax is called graduated, because the more you make, the more you pay. But the top rate is 35 percent, and you pay 35 percent only on the money you make over the threshold, which is anywhere from about $168,000 to $336,000, depending on your filing status.

So, for example, if you were married filing separately and your taxable income was $100,000, your tax bill would be $23,723, or a tax rate of 23.7 percent.

The richest Americans, according to the IRS — those who make more than $10 million a year — paid about 25 percent of their income in taxes in 2003. That made up only about 4.6 percent of total tax receipts from personal income.

The roughly 2.5 million Americans who had more than $200,000 in taxable income that year accounted for 40.2 percent of total personal income-tax receipts, a healthy chunk, but that's not exactly picking up the tab for dinner.

The folks who make the single biggest contribution are those with $100,000 to $200,000 in taxable income. They pay 23.3 percent of total personal income taxes.

In 2004, the top 1 percent of U.S. wage earners — those making more than $373,000 a year — had a 15 percent share of total income and a 33 percent share of total wealth.

The bottom 20 percent — those with incomes of less than $18,000 a year — had a 5 percent share of total income and a minus 1 percent share of total wealth, which means, basically, they had debt.

The point of this is not to bash the rich. A good many of them actually earned their money, unlike, say, Enron's Ken Lay or Jeffrey Skilling.

Clearly, wealthy Americans play an important role in the economy. No sane person would want to chase them away. But to argue, as some do, that the rich are being taxed into oblivion is not supported by the facts.

It is possible for taxes to be too high, thus discouraging investment and economic activity. But it is also possible for taxes to be too low, making it difficult for government to provide the services that most Americans say they want.

Moreover, taxes allow government to both ensure that markets operate fairly and that the unintended consequences of economic activity, such as pollution and traffic congestion, are in some way addressed.

Apparently these aren't problems in the hypothetical tax haven to which our richest diner is threatening to flee. So we should ask, just where is this place?

The United States' total tax rate is around 25 percent of gross domestic product, the usual measure of total economic output. The next seven leading economies collect about 33 percent of GDP in taxes, and the next 20 or so average 34.7 percent.

The highest tax rate in this group is Sweden, at 50 percent, and the lowest is Mexico at 19. All those immigrants must have really hated those lower taxes.

But seriously, if you want to pay no taxes, there's always some place like Somalia, which, after they get past the drought and the civil war, has some lovely weather.

T.M. Sell, Ph.D., is professor of political economy at Highline Community College.