It Ain’t Necessarily So

According to the New York Times, the Tax Policy Center claims that under the 2012 Taxpayer Relief Act, the increase of the top two marginal income tax rates, for those earning $400,000 or more, makes the tax code the most progressive since 1979 (progressive means that as income increases, the

tax rate per dollar of income increases). While this appears to be true as far as the published tax rates, the actual progressivity of the tax system remains to be seen.  How so?

The fact that the rates are more progressive does not mean that the tax burden itself will become more so.  TPC makes a bold statement without regards to how people will respond under the new tax regime.  Indeed, we currently have no idea how progressive tax year 2013 will be until the data is collected in…well…2014.

Economics professor Michael Stroup measures a truly progressive tax system in three ways:  1) The share of aggregate income taxes paid by the wealthiest income earners, 2) The average tax rate paid by the wealthiest income earners and 3) the growth of income of the wealthiest income earners compared to the growth of their share of the tax burden.

So let’s look at these criteria for progressivity.  Most on the left would not even consider that the Bush tax cuts were progressive, but in fact, they were.  According to the Congressional Budget Office, in 1989, the top 1 percent of income earners paid 25 percent of the total share of federal income taxes.  By 2007, that share increased to nearly 40 percent.  It has dropped since then, but it still remains high at more than 37 percent in 2010.  Meanwhile, the bottom 50 percent paid about 5.8 percent of the total tax burden.  Their share fell to about 2.4 percent in 2010.

Regarding the average share of income paid in taxes, IRS data show that the top 1 percent had an effect average tax rate of more than 23 percent in 1989.  This average rate actually increased in the 1990s, peaking at over 28 percent in 1996.  However, the average tax rate for the bottom 50 percent has steadily declined, from about 5 percent in 1989, compared to 2.4 percent in 2010.

Finally, in the above referenced NCPA publication, Stroup notes that between 1986 and 2004, the share of taxes paid by the top 1 percent grew more (11 percentage points) than their share of income (7.7 percentage points).

Those yearning for a more progressive tax system may want to put their pom-poms down and wait until real numbers come out before they cheer the Obama Administration’s tax hikes.

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Comments (3)

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  1. Joe Barnett says:

    Some of us in the 99% think that if more is taken from the rich, it will be given by the beneficient government to the poor, but that isn’t necessarily so.
    Federal contractors and workers do quite well.
    And since those who are already rich can shelter their income, they aren’t going to pay the highest tax rates. Even with the tax increases that have occurred, or that some Democrats propose, Warren Buffet and Nancy Pelosi aren’t going to pay a dime more in taxes. It is those who are working, trying to accumulate wealth, who are being penalized.

  2. Kyle says:

    Joe is right.. Much like corporations, increasing tax burdens will only decrease the likelihood that wealthy Americans will realize assets.

    What these graphs don’t show is how much of this burden actually falls on the top 10 and 20 percent of earners. Tax structures and income patterns for these groups means it’s not as progressive, or exclusive to “the rich,” as we would like to think. The bottom 60% of Americans have had effective tax rates well into the negative for more than ten years now.

    Exciting times.

  3. Gabriel Odom says:

    I am happy to see that someone is taking the time to compare share of taxes versus share of income. Whenever corporations are taxed, they pass on these taxes as increased prices. Whenever prices increase – everything else held equal – quantity demanded of these goods will decrease. This, in the long run, creates downward pressure on supply – meaning that companies produce less to meet the lower quantity demanded. Thus, these companies pay less wages – or employ less workers as wage prices are sticky downwards – which decreases overall consumer disposable income.
    So while the average worker believes that taxing the corporations is all well and good, because “they can afford it”, it is in reality the common worker who pays the taxes levied on corporations.

    A similar argument can be made against excessive taxation of the top 1%, as the majority of income from this stratum comes from corporate shares.