The Next Time Someone Tells You That Taxes Are Not Progressive …

… you can show them this chart, courtesy of the Congressional Budget Office, via Greg Mankiw:

Lowest quintile: 4.3 percent
Second quintile: 9.9 percent
Middle quintile: 14.2 percent
Fourth quintile: 17.4 percent
Percentiles 81-90: 20.3 percent
Percentiles 91-95: 22.4 percent
Percentiles 96-99: 25.7 percent
Percentiles 99.0-99.5: 29.7 percent
Percentiles 99.5-99.9: 31.2 percent
Percentiles 99.9-99.99: 32.1 percent
Top 0.01 Percentile: 31.5 percent

Here is Mankiw’s accompanying note:

The C.B.O. has released a new report on effective tax rates (total taxes divided by total income). Compared with previous reports, it includes more information about thin slices at the top of the income distribution. [These] are the total effective federal tax rates for 2005, the most recent year available … N.B.: These figures include all federal taxes, not just income taxes.

Remember that these are percentages and not amounts, which makes it pretty hard to keep making the argument that the rich are dumping their tax burden on the middle class and the poor. Yes, it is true that the top .01 percentile pays slightly less than the fraction of taxpayers just poorer than them, but if that is the extent of the rich-don’t-pay-enough-taxes argument, then … oy vey.

Also this morning comes word of an Obama plan for a $300 billion tax cut, fully half of which will “provide credits up to $500 for most workers.” One can assume that “most workers” includes people far below the 99th percentile.

If this still leaves you needing to scratch that hate-the-rich itch, consider one of the largest effects of the Great 2008 Financial Meltdown: income inequality — which many Americans fear more than fear itself — has been substantially leavened since the biggest losers of the meltdown have been high-income and high-net-worth individuals.


travis ormsby

Anyone with even a passing familiarity with the US federal income tax code knows that Mankiw is baisically right, but there are several additional factors at play that strongly affect the progressivity of taxes.

1) Total payroll taxes need to be included in the calculation. While I'm not 100% sure, I belive the calculations above include only the portion of social security and Medicare tax paid by the employee, which is only half the total. Because taxation on these items is limited to the first $100k-ish in income, it is regressive. Unless I am a minimum wage worker, I would make more money if my employer did not have to pay a portion of the payroll tax, thus it is effectively a tax on me that I pay indirectly.

2) State and local taxes represent a significant tax burden for most people, and the sales and property taxes relied upon by states and municipalities are regressive. In my state, Minnesota, the lowest taxed group (as a percentage of income) is the highest quintile.

3) The typical argument for progressive taxes are that rich people can afford to pay a higher percentage of their income. While that's fine as far as it goes, I think a more potent argument for progressive taxes are that rich people benefit more from government spending than poor people do.

Who pays for the roads over which suburban travelers drive? Who pays for the police to protect property? Who pays for airports that people fly from? Who protects us from foreign nations? Who pays to educate the vast majority of workers whose labor enriches the wealthy? Who offers a plethora of high wage/high prestige jobs to scions of important families? Who provides corporate welfare? Taxes pay for all of these and many more projects that disproportionaly benefit wealthy Americans, and some (like agriculture subsidies) that actively hurt poor Americans.

Because of the nature of non-excludable public goods, most government services can't be fee-for-service. But if they were, I strongly suspect that the tax burden would be even more highly skewed towards those with higher incomes than it currently is.

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Rich Benjamin

Ok, so this includes all Federal Taxes (which I assume includes capital gains taxes). Does it include FICA (and the "employer" half of FICA), property taxes, sales tax and state taxes. If you only include the progressive parts of our tax system and leave out the flat and regressive parts, of course you get a progressive tax plan. When all forms of taxation are included, the results are flat, not progressive.

Ian

Here is why people hate the rich.

A percentage of NET income that is disposable may, and I stress may, look something like this.

Lowest quintile: 5 percent
Top 0.01 Percentile: 98 percent

Filthy rich x 68% = still filthy rich.

Brian Baldridge

Also, lets look at the relative contributions of each population segment. Absolute numbers are generally misleading when applied to a "progressive/regressive" discussion

David F.

The flat tax is still the most fair tax system in my view--everyone would pay the same rate! Is there anyone left to champion that system? I guess the above chart illustrates the old saying "the more you make, the more they take."

a_c

I don't buy the "rich benefit more from government" argument. The poor disproportionately benefit from government transfers, free education, social services, free libraries (at least in theory - if they choose not to peruse it that's not government's fault), and police presence where they live, which tend to be high-crime areas. The only aspect in which the rich benefit more is from national defense, since they have more assets to lose.

dx

i think this post is intellectually dishonest. just because the federal side of taxes is progressive does not mean that we as a society truly practice progressiveness in principle. i recall a scientific american article from several years ago that concluded that the true effective total tax rates, including, state, local, sales, property, etc., for all 50 states, were regressive or flat at best. perhaps this conclusion is debatable given various assumptions, so i would be interested in the freakonomics team's thoughts on the TRUE total effective tax rates in this country, rather than merely repeating the CBO's self-aggrandizement. the internet and the blogosphere are an echo chamber; i expect more value-added analysis from "high-quality" blogs such as this one. if there is an intellectually honest reason for excluding non-federal taxes from the "progressiveness" discussion, please include one.

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lukas

The poor disproportionately benefit from [...] police presence where they live, which tend to be high-crime areas.

You can't be serious.

Eric

Adjusted to subtract the poverty line from average income ( presuming a low 2 person household size )

Lowest quintile: 23 percent + almost 20%
Second quintile: 15 percent + 5%
Middle quintile: 18 percent
Fourth quintile: 20 percent

That is before state, local, and indirect taxation especially for working individuals where half of the taxation is indirect.

BK

Plot the effective tax rate of percentile 91 thru the top 0.1; then plot the annual income for each. The former looks linear, the latter more like geometric. We're pretty high up in the percentiles ourselves, as *I'm* miffed about about the slope differential; anybody in the middle quintile oughta be outraged....22 / 25 / 29 / +35 / +39 / +44 would be a nice start that could lower the rates for others or be invested into education and infrastructure would be a good start.

Scott Supak

Let's see...

Regressive: Sin taxes, gas taxes, sales taxes...
Regressive: fines, fees, permits...
Regressive: loopholes, off-shoring, tax shelters, muni bonds...
Progressive: income tax..

I have at least one way to make the tax code more progressive: index fines to income. This is done in some European countries. If the idea of a fine is to invoke pain on the violator, then why is my pain so much greater than a millionaire's?

Michael St. Paul

The person who pays the tax is not necessarily the one that bears the burden. The classic example is the employers portion of the payroll tax. I would speculate that large aggregations of capital (rich people and the businesses they predominantly own) are much more likely to have the market power necessary to pass through some of their tax burden to others.

I would also speculate that the wealthy bear less of the burden of externalities. They tend not to live in neighborhoods that are close to freeways, industrial pollution, poor schools, and crime.

As it is, the table is nothing more than a statement of receipts, not a valid piece of economic analysis suitable for making policy.

Chris Gruber

"...income inequality ... has been substantially leavened since the biggest losers of the meltdown have been high-income and high-net-worth individuals."
Hmmm. Be nice to see that backed up by some data. Which would be hard to produce, given that these folks have not yet filed any tax report for 2008.
The sudden drift from vague, global facts (the rate table) to a more specific but entirely unsubstantiated claim about who is feeling pain, does not do this blog justice

Joseph O'Shaughnessy

Paraphrasing Hem & Fitz--

The rich pay very differently from you and me.

Yes. They pay more money.

That is because they make more money.

But do they pay anything close to the actual percentages as set out in the tax codes? I believe, for example, that Mssrs. Cheney and Bush paid something like 21% of actual gross income. They would both be found somewhere in the higher echelons of the highest bracket.

So if you make a million and you keep $800,000 and much of the $200,000 is spent on personal deductible items...is the tax code too demanding?

travis ormsby

@ #8, right on.

@#6:

Government transfers represent a very smal percentage of government spending, as do public libraries.

Education of poor people actually benefits rich people at least as much as it beneifts the poor.

If you are a rich person, you probably own or manage a business. You require the labor of others in order to make the money you do. The state's education of your workers makes them much more productive than they otherwise would be, increasing your profits and income.

The benefits of police protection accrue substantially more to weathy people than poor people. If you are wealthy, you have substantially more incentive to protect your property, and subsequently derive greater benefit from that service than a poor person with little to protect. Not to mention, as #8 did, the lack of effective (even antipathetic) police protection in poor neighborhoods.

And I forgot to mention earlier the vast transfer of wealth that results from the payment of interest on national debt. While people of modest means are more invested in bond markets today than in the past, the vast majority of government interest payments go to wealthy people.

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Scott

The question we should be debating is not whether we have a flat, regressive, or progressive tax burden but why many people prefer to punish success with progressive taxes? Does anyone really believe the government is better at spending their money than they are?

Plus it does not show the cost that those in the upper ranges face to keep their taxes down. Do you think it happens naturally or they pay professionals and experts to help them lower their tax obligations though legal channels? Does that cost show up in their part?

Do the benefits that those in the lower portions show up? EITC, public assistance, etc? Do they show up as negative taxes or transfers of wealth?

Our government has grown too large and will never be an engine of long term economic growth. Taxes will always be a negative drag on the economy as you lose efficiency the more times the money changes hands before finally being spent.

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Eric

We also need to remember that this is a diversion from the fact we are paying pennies on the dollar for our services thanks to a 10 trillion dollar nation debt ( before social security and medicare obligations are factored in ).

Without taking the debt into account we are all just paying a fraction of what we should be paying.

h

Right. They pay 30 percent. Absolutely. There are no adjustments, loopholes, etc. They just sit at home with the short form and pay 30 percent. I bet you have autographs from the tooth fairy and Easter bunny, and a deed to the Brooklyn Bridge.

ajg

I usually enjoy reading this blog and find that it presents insightful analysis. I was disappointed, as were others who have already commented, by the superficial treatment that the CBO numbers received. But then I considered the possibility that the post's objective was to inspire readers to dive in, argue about apparent flaws in transparently weak economic analysis -- whether it supports their ideology or not -- and perhaps even consider ways to more accurately investigate the relative burden of our government on its citizens. If this was the objective, this post will have beneficial effects far outstripping substantive posts that present intriguing findings to passive readers.

roger

The dispositive numbers on this issue are contained in the report from the OECD about wealth inequality - with the bottom three countries, the ones with the greatest wealth inequality among the middle and most developed countries, being Mexico, Turkey, and the U.S. As per the note by the OECD about thg U.S.: "The United States is the country with the highest inequality level and poverty rate across the OECD, Mexico and Turkey excepted. Since 2000, income inequality has increased rapidly, continuing a long-term trend that goes back to the 1970s." At the same time, the OECD acknowledges that the U.S. has a progressive tax rate - in fact, in the OECD's opinion, one of the reasons that inequality is so vast and problematic in the U.S. is the dependence on taxation to mitigate unequal outcomes. Surely, all Mankiew's figures show is that the marginal tax rate for the rich is about at its average in the post Reagan period. What we need, of course, is pre-Reagan taxation of the wealthy, at rates reaching 70 to 80 percent. The rich will use their money as rentiers, to entrench their positions - most recently and spectacularly, in successfully lobbying to lift regulations from the financial sector. The result will always be an economic disaster and a democratic catastrophe. If Mankiew's figures showed that the poor rich, after taxes, were having trouble feeding themselves, one could understand his ardor for tax cutting. They don't. Mankiew and the Freakonommics crewe and the University of Chicago economists consider the economy to be a thing that should benefit the wealthy first and foremost - that is all they really care about. They are the theologians of the plutocrats.

We need to take a real bite out of the wealthy of the wealthiest, to discourage, among other things, the massive misallocation of capital that results from a system in which chasing the highest yield allows you to pretty much retain the profits. If the state had swooped down and taken 80 percent of Fuld's 400 million earned while at Lehman, he would have been a much better manager of risk - not being able to profit so much by short term gains.

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