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America Has a Highly Progressive Tax System

Friday, October 24, 2008

The top income earners now shoulder far more of the federal tax burden than they did in the early 1980s.

Any discussion of reforming America’s federal tax system should begin with the recognition that it is already highly progressive. According to the latest Internal Revenue Service (IRS) data, the top 1 percent of income earners paid nearly 40 percent of federal individual income taxes in 2006, compared to roughly 19 percent in 1980. Between 1980 and 2006, the share of federal income taxes paid by the top 5 percent jumped from under 37 percent to over 60 percent. During that same period, the share paid by the top 10 percent went from around 49 percent to almost 71 percent.

To be sure, the share of income earned by the top groups has also increased substantially. The IRS says that in 1980, the top 1 percent of income earners collected less than 8.5 percent of all adjusted gross income (AGI), compared to more than 22 percent in 2006. Between 1980 and 2006, the share of AGI earned by the top 5 percent grew from about 21 percent to nearly 37 percent. During that same period, the share earned by the top 10 percent swelled from roughly 32 percent to over 47 percent.

But when we compare the figures for 2006, it is clear that the percentage of federal income taxes paid by the top earners was considerably higher than the percentage of AGI they received. For the top 1 percent, the difference was almost 18 percentage points. For both the top 5 percent and the top 10 percent, the difference was nearly 23.5 percentage points. For each of these groups, the difference between percentage of federal income taxes paid and percentage of AGI earned grew significantly larger between 1980 and 2006.

Feature_10-24-2008_CBO.jpgThe most recent Congressional Budget Office (CBO) statistics contain further evidence of the tax system’s progressivity. The CBO reports that in 2005, a net total of 2.9 percent of federal individual income tax revenues were transferred to the lowest quintile of income earners, and a net total of 0.9 percent of those revenues were transferred to the second lowest quintile. There’s no question that the Social Security payroll tax is regressive. But even when all federal taxes—including individual income taxes, social insurance taxes, corporate income taxes, and excise taxes—are accounted for, the top quintile still bears a disproportionately large share of the burden.

Consider the CBO data. In 2005, the lowest quintile of income earners paid only 0.8 percent of all federal taxes but earned 4.8 percent of after-tax income. The second lowest quintile paid 4.1 percent but earned 9.6 percent. The middle quintile paid 9.3 percent but earned 14.4 percent. The fourth quintile paid 16.9 percent but earned 20.6 percent.

Meanwhile, the highest quintile paid 68.7 percent of all federal taxes but earned only 51.6 percent of after-tax income, a difference of 17.1 percentage points. For the top 10 percent of income earners, the difference between percentage of federal taxes paid and percentage of after-tax income earned was 17.3 percentage points. For the top 5 percent, the difference was 16 percentage points. For the top 1 percent, it was 12 percentage points.

How has the federal tax burden shifted over time? The CBO finds that between 1981 and 2005, the share of all federal taxes paid by the second lowest quintile dropped by 2.7 percentage points, the share paid by the middle quintile dropped by 3.7 percentage points, and the share paid by the fourth quintile dropped by 4.9 percentage points.

Feature_10-24-2008_IRS Graph.jpgDuring that same period, the share paid by the top quintile increased by 12.3 percentage points, the share paid by the top 10 percent increased by 15.1 percentage points, the share paid by the top 5 percent increased by 15.8 percentage points, and the share paid by the top 1 percent increased by 14.5 percentage points.

What about George W. Bush’s tax cuts? The CBO estimates that in 2005, the share of all federal taxes paid by the top quintile was 2 percentage points higher than it had been in 2000 (Bill Clinton’s last full year in the White House). Between 2000 and 2005, the share of all federal taxes paid by the top 10 percent increased by 2.5 percentage points, the share paid by the top 5 percent increased by 2.4 percentage points, and the share paid by the top 1 percent increased by 2 percentage points.

As for federal income taxes, between 2000 and 2006, the share paid by the top 10 percent grew by about 3.5 percentage points, the share paid by the top 5 percent grew by roughly 3.7 percentage points, and the share paid by the top 1 percent grew by around 2.5 percentage points, according to the IRS.

Those are a lot of numbers, but they are inseparable from the tax policy debates that have raged during the 2008 presidential campaign. America’s top income earners now shoulder a greater share of the federal tax burden than they did when President Bush first took office, and they shoulder a much greater share than they did in the early 1980s. Remember that the next time some politician or pundit rails against “tax cuts for the rich.”

Duncan Currie is managing editor of THE AMERICAN.

Credit: Corbis/Bergman Group.

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