How Progressive Is Our Tax System?

How Progressive Is Our Tax System?

AEIdeas' Mark J. Perry has a new post about tax progressivity, partly in response to my last post. Just two quick additional thoughts:

One, Perry focuses on federal taxes, but I'm not sure they can be considered in isolation from state and local taxes. For example, if we all agreed that (A) federal taxes are unfair in one direction, (B) state and local taxes are unfair in the other direction, and (C) the two systems working together create a fair outcome, we arguably wouldn't need reform at all -- and at the very least, we'd want to avoid reforming one system while leaving the other untouched. State and local tax systems are often regressive, and I don't think we should forget that to some extent progressive federal taxes merely cancel this out.

And two, Perry deploys this chart:

This is strikingly different from the Citizens for Tax Justice data I published, which showed the fourth-quintile federal rate at 19 percent and the top 1 percent rate at 24 percent -- a five-point gap instead of a fourteen-point one between the upper middle class and people pulling down more than a million dollars a year. Perry also pegs the top 1 percent's share of income at 15 percent instead of 22 percent. Partly this is because my data were from 2013, but it's also because CTJ and the CBO use different processes for calculating these numbers. CTJ explains its methods here:

In estimating taxpayers' income, ITEP [the organization CTJ draws its data from] begins with the adjusted gross income (AGI) reported by taxpayers to the IRS and then adds sources of income that are not included in AGI. For the bottom three-fifths of Americans this additional income primarily reflects untaxed transfers, most notably non-taxable Social Security benefits. In the top income group (the top one percent), the additional income primarily reflects ITEP's conservative estimates of unreported and unrealized capital gains and understated business income.

For the income groups in between, additional income includes the above items, but the difference is much smaller than it is in the lower and top income groups, because wages subject to withholding dominate the total income of taxpayers in these in-between groups.

As a result of these adjustments, the income concept ITEP uses to separate taxpayers into income groups and to calculate effective tax rates is bigger than the income reported on tax returns. By our measure of income, in the bottom three quintiles, 75 percent of total income is reported as part of AGI on tax returns. In the top income group, 78 percent of total income is reported as AGI on tax returns. In the in-between groups, 91 percent of total income is reported as AGI on tax returns. The overall average is 85 percent.

Robert VerBruggen is editor of RealClearPolicy. Twitter: @RAVerBruggen

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