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Dear Dr. Dollar:

The Heritage Foundation, a conservative think tank, has a website that purports to present evidence that the wealthiest group of Americans historically pay more taxes than middle- or low-income folks. Their sources include the U.S. Treasury Department, the Office of Budget and Management, and the Census Bureau. The wealthiest 1% paid over a third of taxes, while those in the lower 50% paid only 4% of income taxes in 1999. How do those of us who criticize the tax system as inherently unfair to middle- and lower-income folks respond to this apparently progressive tax system?
—Bruce Boccardy, Allston, Mass.

This article is from the September/October 2002 issue of Dollars and Sense: The Magazine of Economic Justice available at http://www.dollarsandsense.org

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This article is from the September/October 2002 issue of Dollars & Sense magazine.

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The most comprehensive source of information on “tax incidence”—who actually pays how much in taxes—is the Congressional Budget Office (CBO), which compiles data from the Internal Revenue Service every couple of years. The CBO’s most recent report, entitled Effective Tax Rates, was released in October 2001 and is available online at . (The effective tax rate is the percentage of income actually paid in taxes—as opposed to the tax bracket—after deductions and exemptions and loopholes and all the rest.)

The CBO divides families into five “quintiles”—from the lowest earning one-fifth of taxpayers (incomes ranging from $0 to $13,000 in 1997) to the highest paid fifth (incomes of $50,800 and up)—and further breaks down the top fifth into the top 10%, 5%, and 1%.

As the table below shows, the top income groups do in fact pay income taxes at a greater rate than they earn. The poorest quintile gets 4% of income but pays -2% of federal income taxes—negative because most qualify for the Earned Income Tax Credit. The top fifth garners 53% of income but shells out 80% of the income tax. And the richest 1% of taxpayers (average income of $1,016,000) receives about 16% of income but pays one-third of federal income taxes. After those taxes are collected, the wealthiest income groups end up with a slightly smaller share of the economic pie than they started out with, while the poorer groups end up with slightly more. So the folks at Heritage are not wrong. The federal income tax is indisputably progressive; it is intended to redistribute income, and that is what it does.

But the redistributive impact is mild—and it’s milder still since last year’s tax reform. The top quintile starts out with slightly more than half of all pre-tax income generated by the U.S. economy, and ends up with just under half of all after-tax income. The poorest fifth begins the game with just 4% of income and ends up with less than 5%. The folks at Heritage, of course, oppose government redistribution schemes on principle. But redistributing income is the whole point of a progressive tax, and advocates of progressive taxation should not shy away from defending this. If one believes that Ken Lay deserved no less than the $100 million he collected from Enron last year, while the burger-flippers and office cleaners of America deserve no more that the $6.50 an hour they collect, then a progressive tax would seem immoral. But if one believes that incomes are determined by race, gender, connections, power, luck and (occasionally) fraud, then redistribution through the tax system is a moral imperative.

The Heritage study also conveniently overlooks the impact of levies other than the federal income tax. Social Security taxes, excise levies, tariffs, and other duties are regressive—their effective rates decline as income goes up. When these other federal taxes are added in, the tax burden on lower-income groups increases significantly. Social Security taxes take an especially large bite out of low-income workers’ paychecks; the bite is even larger when we include payroll taxes paid by the employer. (Labor economists believe that the employer share of the Social Security tax functions, in practice, as a levy on wages, since employers reduce wages to compensate for the tax instead of paying for it out of profits). Further, because state and local governments collect regressive sales, excise, and property taxes, the lower four quintiles pay a larger share of their income in state and local taxes than the top quintile. If we were to add all of these taxes together, we would almost certainly find that the U.S. tax system, as a whole, is not progressive at all.

Ellen Frank teaches economics at Emmanuel College and is a member of the Dollars & Sense collective.

Distribution of Income and Taxes by Income Groups, 1997
Income Group Average Household Income Share of Pre-Tax Income Share of Federal Income Taxes Share of After-Tax Income Share of All Federal Taxes Effective State and Local Tax Rate (1995)
Lowest 20% $11,400 4.0% -2.0% 4.8% 0.9% 12.4%
Second 20% $28,600 9.0% 1.1% 10.1% 5.2% 10.3%
Third 20% $45,500 13.9% 6.4% 14.9% 10.4% 9.4%
Fourth 20% $65,600 20.2% 14.5% 20.8% 18.1% 8.6%
Top 20% $167,500 53.2% 80.0% 49.7% 65.4% 7.0%

Top 10% $240,700 38.7% 65.4% 35.3% 50.4% n.a.
Top 5% $355,800 28.9% 53.8% 25.8% 39.4% n.a.
Top 1% $1,016,000 15.8% 33.6% 13.7% 23.1% 5.8%
Sources: Congressional Budget Office, Effective Tax Rates, 1979-1997; Citizens for Tax Justice, Who Pays? A Distributional Analysis of the Tax Systems in All 50 States, 1995 (last column).

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