Monday’s Mtg Part 2: How progressive is the U.S. tax system?

In tax policy, taxes are “progressive” if payers contribute more as a proportion of their income than they do lower income payers. Liberals like a progressive tax structure because they believe wealthier people (1) can afford the burden more, and (2) generally benefit more from the pubic goods that government supplies (like public universities and property right protections).

How progressive is the American tax system? Not very! Yes, federal taxes are fairly (albeit not highly) progressive, as this chart shows.

Progressivity of USG taxes - all

[Source]

So, leftwing paradise? Wrong. First, note only some federal taxes are progressive (especially income and estate taxes). Payroll taxes for Social Security and Medicare burden working people the most because they don’t apply above a certain level of income. Payroll taxes comprise almost ½ of all federal taxes paid (not shown on chart).

More importantly, about 1/3 of all taxes are paid to state and local governments. When they are included – so, all taxes at all levels – the burden of paying for government in America is basically flat as a share of income. This is because state/local taxes like sales and sin (tobacco, alcohol) taxes are highly regressive, so much so that every one of the 50 states has a regressive overall tax burden. Even California.  In seven states, the poorest 20% of people pay more than four times the rate the richest 1% pay!

This chart that includes all taxes at all levels shows the flatness.

Taxes paid and income earned by quintile 2016 - CTJ

[Source]

It breaks Americans into five income groups, from the bottom-earning 20% to the top 20%.  It also breaks the top 20% down into the top 10%, next 5%, next 4%, and finally the top 1%. For each quintile and very top, a pair of bars compares the share of total income each group earns to its share of total taxes paid at all levels. Note how closely what most groups pay is to what they,  on average, earn.  The richest pay a little more than their “fair share” when measured this way, and the bottom 40% pay a bit less.

There is more to tax fairness than what I have described.  And, fairness is not the only thing that matters in a tax system.  More on this stuff later.

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