Stephen Dubner has a post on the “Freakonomics” blog titled “The next time someone tells you that taxes are not progressive…” He relays information from a new Congressional Budget Office (CBO) report, via Greg Mankiw, which lists effective federal tax rates for households at various points in the income distribution. The rates are higher for those with larger incomes. The implication is that our tax system is quite progressive.
But it doesn’t make much sense to look only at federal taxes. State and local taxes account for about a third of total tax revenues, and they tend to be less progressive than federal taxes.
If we take into account all taxes — federal, state, and local — the effective tax rate for the well-to-do is only a bit higher than for the poor. Here is one way to see this, based on data from the CBO and the Tax Foundation.
January 5, 2009 at 4:14 pm
It is also interesting that when certain Serious Economists or Right Thinking Experts argue about cutting taxes, they always argue first about cutting capital gains, then corporate and income taxes, and I have not seen one Serious Economist or Right Thinking Experts advocate cutting sales or payroll taxes.
January 5, 2009 at 7:13 pm
Lane, can you break it down more finely? Things can be very different when you break out the top 20th percentile, looking at the top 5%, 1%, 0.1%.
January 5, 2009 at 7:58 pm
Richard,
I wish I could, but the Tax Foundation data on tax payments are only for the five quintiles.
Lane
January 5, 2009 at 11:37 pm
I think the percentage paid by the very wealthiest groups, top 5%, 1%, 0.1% would probably go down, with greater access to tax shelters and deductions, and with the capped and non-progressive pay-roll tax going to zero as a percentage of earnings.
Plus, capital gains taxes are much less than income taxes. EPI’s The State of Working America 2006/2007 has on page 79 a table showing that the top 1%, in 2006, got 33.2% of it’s income from capital income, 20.4% from business income, 11.1% from “other income”, and only 35.3% from wage and salary.
Look at what Justin Wolfers had to say in a May 1st post:
Do the well-off pay their fair share, or do they also deserve a tax break?
January 6, 2009 at 8:48 am
At the website ourfuture.org there is an article “A Final Report Card on the Reagan Years?”. The short story is the top .01 percent of taxpayers have an income of $412 billion (11,000 households making over $8.6 million) versus the bottom 20 percent with an income of $385 billion (24 million households with income below $17,000). A person with $10 million dollars isn’t any happier than a person with $9 million dollars. Kit
January 6, 2009 at 12:38 pm
Lane,
I would love to see a similar analysis to the one Mankiw provides that incorporates state and local tax rates, but it is very difficult to actually to see this in the graph.
Do you have a more clear depiction of the total effective tax rates for each quintile? Breaking it down into tax payments and pretax income kind of loses the issue in the margins. Percentages would be more powerful.
Also, CBO used total taxes by total income, would that be the same for this graph?
January 6, 2009 at 4:20 pm
Another way to look at it is Figure 3 from the Tax Foundation document you cite. If you include federal and state taxes, the system is still progressive, but notably less so.
Federal, State and Local Effective Tax Rates, Calendar Year 2004
By Income Quintiles
1: 13%
2: 23%
3: 28%
4: 31%
5: 35%
January 6, 2009 at 9:15 pm
Steve, thank you. Those numbers appear to be the proper counterparts to the Mankiw numbers.
For comparison:
Federal / Federal/State/Local rates
Lowest quintile: 4.3 percent / 13%
Second quintile: 9.9 percent / 23%
Middle quintile: 14.2 percent / 28%
Fourth quintile: 17.4 percent / 31%
Percentiles 81-90: 20.3 percent / (Fifth quintile mean: 35%)
Percentiles 91-95: 22.4 percent/ (Fifth quintile mean: 35%)
Percentiles 96-99: 25.7 percent/ (Fifth quintile mean: 35%)
Percentiles 99.0-99.5: 29.7 percent/ (Fifth quintile mean: 35%)
Percentiles 99.5-99.9: 31.2 percent/ (Fifth quintile mean: 35%)
Percentiles 99.9-99.99: 32.1 percent/ (Fifth quintile mean: 35%)
Top 0.01 Percentile: 31.5 percent/ (Fifth quintile mean: 35%)
I am presuming that the numbers would start off lower than 35% for the smaller percentiles Mankiw slices up for the fifth quintile, and end near if not higher than 40% for the top .01 percentile.
I suppose we can only speculate there.
But great numbers nonetheless!
January 7, 2009 at 12:04 am
Steve and Publius,
Actually, the Tax Foundation calculations of effective rates that Steve cites aren’t directly comparable to the CBO ones, because the Tax Foundation adjusts the incomes of each quintile for the estimated cost of transfers (see Appendix B of the working paper at http://www.taxfoundation.org/publications/show/2282.html if you’re interested in the details). Using Tax Foundation numbers comparable to those of the CBO (but including state and local taxes), the effective tax rates for the five quintiles in 2004 are:
Q1: 12.4% (bottom quintile)
Q2: 21.0%
Q3: 24.9%
Q4: 27.2%
Q5: 29.4% (top quintile)
But note also that both the CBO and Tax Foundation include government transfers in the incomes used to calculate effective tax rates. There’s nothing illegitimate about this per se; but if we want to see how much redistribution is accomplished via taxes vs. via transfers, it’s better to use only market (pretax and pretransfer) income in calculating the effective tax rates. Doing that with the Tax Foundation data yields the following effective rates:
Q1: 31.6% (bottom quintile)
Q2: 28.1%
Q3: 28.3%
Q4: 28.9%
Q5: 30.1%
Lane
October 15, 2009 at 6:50 am
Social Security and Medicare taxes play a BIG ROLE. First, it is the majority of the federal tax that most folks pay (basically, anyone at the 50+% mark or below).
Second, it is highly regressive — flat tax with a low cap. If person A makes a cool million next year, they’ll be throwing in about $10k to the SS/MC systems. If I make $110,000, it’s the same tax bill. So, the top $900,000 isn’t taxed, for person A.
This offsets much the progressive nature of our income tax, especially in bringing the high end tax bills way down.
That’s why Republicans only talk income taxes, it’s the only one that sticks it to the wealthy. Poor taxes are great!
October 24, 2009 at 3:35 pm
This recent Tax Policy Center (http://www.taxpolicycenter.org/UploadedPDF/411943_distribution_federal.pdf) report provides more data on income tax burden with the top quintile. If I read it right, roughly the top 10% of income earners do face a progressive income tax at the federal level; presumably this trend holds once we incorporate state, local, and payroll taxes as well.
Inspired by this post, I wrote a follow-up on it here: http://increaseourtaxes.com/the-tax-burden-of-the-top-quintile/
November 22, 2009 at 8:49 pm
I’ve been included in taxations for lengthier then I care to admit, both on the individual side (all my employed lifetime!!) and from a legal stand since passing the bar and following tax law. I’ve offered a lot of advice and righted a lot of wrongs, and I must say that what you’ve posted makes utter sense. Please persist in the good work – the more individuals know the better they’ll be equipped to cope with the tax man, and that’s what it’s all about.
March 11, 2010 at 3:19 pm
Social security houldnt be progressive. It was never intended to be a Welfare program, but basically a forced savings account. That’s why the cap is at 90k dollars… Ss is there to supplement your retirement, the uberrich don’t need the supplement, but they still pay (in most cases since they are self employed) roughly 12 grand a year, every year, as long as they are working, money that is essentially be redistributed to all the people who barely worked In their lifetimes and still collect social security.
What’s gonna be a real drag though, is those of us under 35 will pay in for our entire lives and will likely not get anything from it, since it’s bankrupt, a ponzi scheme in it’s last days.
And maybe it’s time to consider raising te age to receive ss benefits. When FDR introduced it, the age you received it was the age that the avg us citizen died. It was basically there to keep you from suffering if you happened to be one of the lucky folks that lived longer than you were supposed to.
Now, ss income is used to live in gated communities in Florida, play golf and shuffleboard every day, etc.
March 11, 2010 at 5:53 pm
If you look at the bottom of Table 5 of the CBO report, you see that the taxable income on which the report is based is only $9.7 trillion. In that year, there was about $2 trillion of additional national income based on the BEA report. It is overwhelmingly likely that the additional economic income is to the benefit of those at the top end of the scale, particularly since the CBO includes cash non-taxable income to the poor but not non-cash income of the well-to-do. The report essentially runs off of the definition of taxable income of households and corporations. Thus, the total tax system may very well be regressive, taxing the rich a lower share of their economic income than the poor.
Social insurance benefits should be means-tested. That would do a lot for the shuffle-board subsidy.
March 12, 2010 at 5:31 am
Does this bar chart shown by Kenworthy take account of government payments to the less well-to do? Following his link, I went to the Tax Foundation webpage and found the following:
“Overall, we find that America’s lowest-earning one-fifth of households received roughly $8.21 in government spending for each dollar of taxes paid in 2004. Households with middle-incomes received $1.30 per tax dollar, and America’s highest-earning households received $0.41. Government spending targeted at the lowest-earning 60 percent of U.S. households is larger than what they paid in federal, state and local taxes. In 2004, between $1.03 trillion and $1.53 trillion was redistributed downward from the two highest income quintiles to the three lowest income quintiles through government taxes and spending policy.
“These findings suggest tax distributions alone do not tell Americans how much the nation’s fiscal system is helping or hurting low-income households. To answer that, we must look beyond tax burdens to government spending as well. Lawmakers who ignore the distribution of government spending risk making policy judgments based on an incorrect set of facts about the United States fiscal system.”
March 12, 2010 at 9:33 am
I question this analysis. Federal Income taxes are such a large percentage of the tax burden on higher income folks that that factor alone would make overall taxes more progressive than this analysis suggests. For example, a high income person tends to pay a much higher percentage of his/her overall taxes in the form of FIT than any other form of tax. I would have to see the details to see what assumptions are being made by the authors, who appear to have a certain political agenda to further here.