Paul L. Caron

Wednesday, August 17, 2016

Federal Taxes Are Very Progressive

Tax Vox: Federal Taxes Are Very Progressive, by Robertson Williams:

The US federal tax system is highly progressive, primarily because individual income tax rates rise sharply with income and refundable tax credits lead to negative income taxes for households with low income. Updated estimates from the Tax Policy Center project that effective federal tax rates this year will range from 3.5 percent for households in the lowest-income quintile (or fifth) to 33.0 percent for those in the top 1 percent.

The effective federal tax rate for all households—including individual and corporate income taxes, payroll taxes, excise taxes, and estate and gift taxes—will average 19.9 percent in 2016. Individual income taxes will account for half of total revenue (9.9 percent of income) and payroll taxes will provide just over a third (6.9 percent of income). Most of the rest will come from corporate income taxes (2.1 percent of income) with just 5 percent coming from excise and estate and gift taxes (a combined 1 percent of income).


The individual income tax boosts progressivity the most with effective rates rising from -4.8 percent for the lowest quintile to 25.3 percent for the top 1 percent. Low-income households benefit from refundable tax credits that not only wipe out any positive tax liability but often result in net payments from government. Families with children particularly benefit from the child and earned income tax credits and the American Opportunity credit for higher education. Meanwhile high-income households face higher bracket rates, lose some of their itemized deductions, exemptions, and other tax benefits to phaseouts, and get hit by the Affordable Care Act’s net investment income tax. That combination results in an 11.8 percent effective individual income tax rate for those in the 80th-99th percentiles and more than double that for the top 1 percent. ...

Similarly, estate and gift taxes are highly progressive—the estate portion falls entirely on the largest one-in-800 estates—but their tiny contribution to total revenue means they have little overall impact on the distribution of taxes. ...

There’s no question that we have a progressive federal tax system, thanks mostly to the individual income tax. But whether it’s too progressive or not progressive enough is a political question that economists cannot answer.

Tax, Think Tank Reports | Permalink


"But whether it’s too progressive or not progressive enough is a political question that economists cannot answer."

Chicken! Come on, I dare ya. :)

Posted by: Dale Spradling | Aug 17, 2016 5:22:53 AM

The title is misleading. Yes, the tax rate structure is "progressive" in that it has increasing rates, as is the estate tax since it has a 0% tax for the vast majority who are exempt and a positive rate for the few that pay (after their use of the many devices the rich have access to for eliminating estate tax). But the tax system is much less progressive than it should be, given the inordinate "gilded age" inequality whereby decades of tax cuts have benefited the rich, benefit reductions have harmed the poor (along with deregulation, deunionization, privatization and the other pro-rich policies that have proliferated since Reagan) and tax expenditures (like the mortgage interest deduction and, in particular, the absurd interest deduction for home equity loans, and the section 1031 charade allowing real estate moguls to pay extraordinarily low tax rates) have cushioned life for the well-to-do. The requisite extent of progressivity is both a political and an economic question, since gaping inequality is not a good recipe for a broad-based, sustainable economy with decent standards of living for everyone.The progressive tax system we should have would apply increasingly higher rates for the top 5%, 2%, 1% and .1% income tiers and would lower the exemption for the estate tax while applying a similarly progressive rate structure above the exemption.

Posted by: Linda Beale | Aug 17, 2016 10:22:54 AM

For an example, I often used William Ford Jr, when he was president of Ford Motor Company.

Let’s presume that Congress decides that Mr Ford is not paying his fair share and raises his taxes by a million dollars.

Mr. Ford is aghast and publicly decries this action but something else happens. In the course of the year, the price of anything related to Ford Motor Company increases ever so slightly. Car prices and service part prices go up. Maybe a few more jobs are offshored. Anything hauled on Ford trucks goes up a few milli-cents.

On April 15th, Mr Ford signs a check for the additional million dollars but where did he get this money? It came from us. Mr. Ford’s company served as the tax collector.

From this, I concluded that progressive income taxes and business taxes are merely a way to hide the true amount of taxes that people are paying. We are actually paying a flat tax with the tax hidden in the cost of goods and services. I have no evidence to back up this claim but if our progressive income taxes were converted to a flat tax, I suspect we are paying close to 50% in taxes.

Then, there is the Golden Rule; otherwise expressed as “Them that has the gold makes the rules”. People and businesses that pay the most taxes also have the most influence on the government. Progressive income taxes are a major driver of crony socialism; better described as corruption.

I would even argue that, so long as they are able to pass the taxes along in the cost of goods and services, the rich are paying no taxes at all but rather serving as defacto tax collectors.

I’m not sure how to remedy the situation but we need to lose the idea that the rich are paying their fair share. They are passing their taxes onto us.

Posted by: Jay Dee | Aug 17, 2016 10:54:58 AM

When I started in this game as a young revenuer in 1977, the top tax rate was 70%. (The estate tax exemption was around $33,000 or so). But I quickly noticed no one paid it. You do the math: 3 to 1 write offs against a 70% tax rate.

Fast forward to the Reagan ’86 tax act. I was in private practice, and this bill hit us like a 9.0 earth shaker. No matter how you ran the numbers, you couldn’t make it work with a 28% top rate. No how; no way; forget PAL; forget At Risk; ACRS; forget everything; because our real estate deals were toast. Sadly, one unintended consequence was the subsequent S&L crisis, but I digress.

Looking back, you have to say, “What if?” What if, we had stayed with the Reagan revolution? What if, we had kept capital gains and ordinary income rates the same? What if, we had not weakened the base with credits for everything under the sun, including solar (sorry)?

One of the problems with getting older is you see the same mistakes being made, over and over and over again. If you want to read something depressing, read Will Durant’s “The Story of Civilization.” Go on, I dare ya. The names change, but the story remains the same, year after year. It is one “Groundhog Day” after the other.

So go ahead. Indulge in class envy by attacking the one percent. It is what humans do. But, keep in mind, innovation is the driver behind real economic growth, not taxes, not central planning, but innovation. If Henry Ford had not come along, we still would be talking about the horse shit problem in NYC.

Posted by: Dale Spradling | Aug 18, 2016 7:48:44 AM

Edward Kleinbard, in his excellent "We Are Better Than This," makes the point that determining the progressivity of tax systems makes little sense in and of itself. Kleinbard makes the very valid point that progressivity has no real meaning unless the tax system is analyzed in conjunction with the spending priorities. Which makes a great deal of sense to me.

Posted by: Publius Novus | Aug 18, 2016 8:15:31 AM

By this measure, which I've seen replicated elsewhere, the U.S. has the *most* progressive federal tax system in the entire OECD.

And when you factor back in federal transfers (medicaid, medicare, socia security, welfare, etc.) to households, which I've also seen elsewhere, the funding structure is even more lopsided. The top 20% of households represent the only net federal taxpayers, period, which means the government is leaning very heavily on them to fund essentially everything over and above transfers.

Posted by: MM | Aug 21, 2016 11:44:05 AM