Wednesday, August 17, 2016
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.