Declining Progressivity in US Taxes
by Linda Beale
Maybe at this juncture, when Congress is beginning to talk about what to do about the sunsetting Bush tax provisions, it’s an appropriate time to remind ourselves about our historic commitment to progressivity in our tax system. A good source for thinking about this is an article by Tom Piketty and Emmanuel Saez, How Progressive is the U.S. Federal Tax System? A Historical and International Perspective, 21 J. Econ. Perspectives 3 (2007).
What they show by looking at income and taxes over the period from 1960 to 2004 is revealing. While our system remains progressive to some extent, the progressivity has declined significantly. This is primarily, they say, because of the cuts in the corporate tax and the estate tax–taxes that impact the very wealthiest more than others because of their high ownership of financial assets. Our concept of distributive justice has always demanded that we should determine the tax burden based on individuals’ relative abilities to pay–that means that those with lots more should pay proportionately more of their income, since those with very little need all of their income just to meet daily needs, and those with considerable wealth won’t even notice whether they have another few dollars or not.
The decades since Reagan took office have taken a huge toll on that sense of shared commitment. Fueled by a religious-like belief in the mathematically elegant but unrealistic assumptions of the “free market” economists from the Chicago School (see Yves Smith’s book, Econned, for a good take-down of the freshwater economists), the GOP in Congress passed huge tax cuts for the wealthy accompanied by increasingly heavy payroll taxes for others at the same time that spending continued apace–in fact, Reagan, Bush1 and Bush2 all greatly increased the military budgets and the Bushes embarked on wars of choice that imposed significant budgetary demands. The wealthy have fought for laws that favor them–deregulation, zero capital gains taxation, lower corporate taxes, the ability to offshore businesses and assets freely, privatization of social security and other programs (that would put more dollars under direct control of investment bankers and insurers), and lowering of individual tax rates and provisions that phased out deductions for the wealthy (like the phase out of the itemized deduction, which was repealed under Bush, etc.).
There are some really great graphs in the article–so look at it rather than just reading these excerpts. But if you only have time for excerpts, here are some key ideas.
Progressivity of the overall tax code has unambiguously declined in the United States and in the United Kingdom. The average share of income paid by those at the very top of the income distribution has dropped substantially. Id. at 21
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Large reductions in tax progressivity since the 1960s took place primarily during two periods: the Reagan presidency in the 1980s and the Bush administration in the early 2000s. The only significant increase in tax progressivity since 1960 took place in the early 1990s during the first Clinton administration. Id. at 23
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many of the recent tax provisions that are currently hotly debated in Congress, such as whether there should be a permanent reduction in tax rates for capital gains and dividends, or whether the estate tax should be repealed, affect primarily the top percentile of the distribution—or even just an upper slice of the top percentile. This pattern strongly suggests that, in contrast to the standard political economy model, the progressivity of the current tax system is not being shaped by the self-interest of the median voter .12 Id. at 23.
12 Permanent reductions in dividend and capital gains combined with a repeal in the estate tax would certainly reduce the current progressivity of federal taxes and favor large wealth holders. The Alternative Mininum Tax, which is not indexed for inflation and hits more and more tax filers, will mostly increase tax burdens on the upper middle class but will not affect much the top 0.1 percent.
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The federal individual income tax is the largest tax, typically collecting 7–10 percent of GDP in most years since the 1960s. Individual income taxes declined sharply from 2000 to 2004 following the tax cuts of the Bush administration, falling from 10.3 percent of GDP in 2000 to 7.0 percent of GDP in 2004. The payroll tax financing Social Security and Medicare has increased significantly, climbing from about 2 percent of GDP in the 1960s to 6.4 percent of GDP by 2004. The corporate income tax has shrunk dramatically: it was typically 3.5– 4.0 percent of GDP in the 1960s, but had fallen to 1.6 percent of GDP by 2004. The estate and gift tax has always been very small relative to the other taxes, although it is important for distributional analysis because it disproportionately affects those with higher incomes. The estate tax collected about 0.6 percent of GDP in the 1960s, and 0.25 percent of GDP in 2004.
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The greater progressivity of federal taxes in 1960, in contrast to 2004, stems from the corporate income tax and the estate tax. The corporate tax collected about 6.5 percent of total personal income in 1960 and only around 2.5 percent of total income today. [emphasis added] Because capital income is very concentrated, it generated a substantial burden on top income groups. The estate tax has also decreased from 0.8 percent of total personal income in 1960 to about 0.35 percent of total income today. As a result, the burden of the estate tax relative to income has declined very sharply since 1960 in the top income groups.
[Hat tip to fellow Angry Bear rdan for reminding me about this article.]
crossposted at ataxingmatter
When the return on investment rise faster in the firm than current tax rises on those returns, there is always short term incentives for the firm to adopt socialist practices that shift labor expenses onto government.
If you add in user fees that replaced or were created to replace taxes, then you would see that the middle class has been shafted by its friends on the right.
Linda,
Bush1 started the largest drawdown of the US military since Vietnam. He did not greatly increase military budgets and set the stage for the “Peace dividend”. I am not even sure DoD budgets increased at all in real dollars over his term. Once Desert Storm ended (another “War of choice” overwelmingly supported bi-partisanly supported BTW) I do remember the RIFs that went through all branches of the military and the following very slow promotion rates. Clinotn just continued this trend though the budget started going back up towards the end of his term. Bush II & Obama has been fighting a war so I would expect DoD budgets to go up.
Your continued meme of “War of Choice” would work except we didn’t start it and both sides of the isle have overwelmingly and continuosly supported it to this day. Its like calling the War against Germany in WWII a “War of Choice” becuase some anti-war people oppossed it. The fact that the anti-war fringe has made no political headway should tell you something. Heck they have even stopped protesting the “Surge of Choice” in Afghanistan. And DoD budgets are going up under Obama also….
So if you want to continuie to use the “War of Choice” crap at least acknowledge the fact that it was an overwelmingly bi-partisanly Democrat and Republican “War of Choice.” I thought this was a reality based blog…
Islam will change
Linda,
I should start by saying that I “believe in” progressivity in taxes. But you are going about it the wrong way.
We need to pay more taxes to correct the budget deficits and pay for some things we need… at least for awhile. Raise the taxes to pay for what we need to do and progressivity will take care of itself. But if you go out into the land in your shining armor and call for “progrssivity” so the “rich will pay their share” you will lose the argument, certainly among the rich who have the political power, but also among the “poor” who believe in “fairness” however misguided their understanding of that.
And Social Security is not a “tax” whatever it is called. Keep calling it a regressive tax and you help the people who want to destroy it. It’s an insurance premium, structured as a tax because the people are too damn dumb to pay it unless they are forced to. But it is not money that goes to “the government”. It goes to pay the retirement expenses of the same people who pay the tax… even if they can’t understand pay as you go financing.
I think the deal is a whole lot more insidious than the rather bland post suggests. One of the things that Reagan and Dumbya both did was cut some taxes for the poorest workers. As a result many of these people feel no sense of outrage that huge tax cuts have been given to the wealthiest Americans. I would hope that their outrage will increase when they see social security gutted to “stem the deficits” but as Coberly reminds me we should not count on voters being smart, particularly if it is bipartisan. Look at Buffpilot who is obviously very smart taking issue with “War of Choice” because some Democrats supported them and certainly each started with a high approval levels from the American public–no surprise there when the NFL enjoys immense popularity. Of course Dumbya again played everyone by keeping the cost off budget so the only “sacrifice” was by the volunteer members of our armed forces. At this point, I am not sure that anything can be done politically except to allow Dumbya’s tax cuts to expire. I would like to see some income taxes paid by everyone with a return to 1960 levels of progressivity–among other things it would reduce the incentive for highly paid people to behave badly in hopes of one or two years of extraordinary take home pay and it would give everyone direct skin in the game when debating tax policy. That ship has sailed and we still need to pay for government–not social security which Bruce tells me has a couple of trillion in unfunded manadtes over the next 75 years, but the military and most other government programs which are totally unfunded and which we have relied on borrowed money to pay. I really see no alternative to a VAT, presumably phased in as the economy strengthens. That will be highly regressive, but maybe their will be more popular support for soaking the rich if the poor see the resulyt of not doing so. Right now as Tom observes, the middle class is getting the shaft and that does not portend well for a civilized society.
“We ignore governement transfers.”
“We exclude the bottom quintile.”
“Our admittedly simple approach.”
“…our income measure also excludes non-taxable benefits such as employer provided health care.”
“We assume both the employer and employee payroll tax is paid by the wage earner.”
“We count the entire payroll tax financing Social Secuity as a tax.”
“We focus on annual incomes which are not a perfect measure of permanent income over a lifetime. Several studies show that because of year-to-year transitory fluctuations in income, progrssive…taxes appear lesss progressive from a lifetime perspective than from an annual perspective.”
Should I continue?
It’s a shame that the paper only looks at federal taxes. State and local taxes, in toto, are profoundly regressive. (In WA, When state and local taxes are figured in, U.S. taxes are nonprogressive about about $60K in income.
So somebody who earns $60K pays the same share of income as somebody earning $60 mill.
I’m going to be lazy and link to my blog, which has the followup links. I’d really like to see a solid peer-reviewed paper on this.
http://www.asymptosis.com/most-regressive-taxes-my-home-state.html
Not only are state and local taxes generaly far more regressive, they have grown. Remember that the only spending Reagan actualy cut was “block grants” to the states. That was largly used to fund education in most states. Without that help property taxes sales taxes and state income taxes have grown far more for most people then the federal taxes they replace.
As a 71 year old man who is the recipient of our Social Security pay out each month. Having given it much thought after reading some of the “better” blogs, comments, the only solution I find really having merit, is to outlaw once & for all the Congress of the U.S.A. as it stands today. From everything I’ve read, unless everyone of the participants here & at the other blogs I’ve read, are just participating in the “Greatest Kabuki on Earth”, then, it’s your place in history to help bring about the changes that need to take place. You know what the correct procedures are that should be implimented. If you only sit on the chair, to listen to yourself rant, but doing nothing beyond, just who are you doing justice to. Certainly not to your fellow Americans, the ones who toil in the muck everyday, nor the Military grunts (men & women) who are protecting the Business interests of this country, as they have done since the country feilded a Military Force.
An excellent little paper for what it does, which is temporal and international comparisons of central government tax systems at the top end of the income scale. Interestingly, the French system achieves much greater progressivity at the very top end (e.g. 0.1%) through a wealth tax.
little john
probably you should continue until it is clear to one of us exactly what is your point. is the analysis oversimplified? depends what you mean by “over.”
certainly the payroll tax is not a tax by any usual understanding of the word. not even a “government transfer” by any meaningful use of the word “transfer.”
the assumption that the whole tax is paid by the worker is of course the assumption the ss haters use when they try to tell the workers they are not getting a very good return on their money. then they turn around and tell the employers that it’s a “jobs killing tax.” it would be hard to take them seriously except that the politicians and the press can’t be counted on to think more than one thought at a time.
but all this is beside the point. there is a whole lotta governmet spending going on. most of it is NOT “welfare” and most of it is a result of lobbying by rich people. if we are going to have that level of government, at some point we need to pay for it. “borrowing” the money is probably not susustainable at these levels. the poor simply don’t have the money to pay for it. not even if taxed at the same “rate” as the rich. the defict problem is a direct result of tax breaks given to the rich in return for a promise that they would “grow the economy.” it hasn’t happened. time to pay the piper.
Norman
I agree with you. But the “how” and “what” might present problems.
When Buffy says that Desert Storm was “another” war of choice that was “overwelmingly supported bi-partisanly supported”, what he means to imply is that Shrub’s war of choice had broad public support, that Democrats voted to go to war, and the rest of the Right wing dishonesty on the subject. I have in the past responded to buffy’s efforts to join the effort to dig a memory hole for Shrub’s war, and will do so here, as well. Democrats in Congress were offered a coward’s way out, and took it. The did not vote for war, though. They voted for some broad, bland thing that they thought would provide them cover, which is pretty much just as bad, but not for war.
The public, on the other hand, began by favoring peace. It was only a prolonged, dishonest propaganda campaign that brought around a turn in the polls for war. And we should also keep in mind that “broad support”, which is how winger propagandists have liked to characterize poll results, depends on the poll and eagerness to call slim margins “borad”. The public did not support war when Bush decided to go – before he was inaugurated – and did not support it after 9/11 until some truly dishonest convincing was done, including enforcing a sort of bloody-minded political correctness on US news organizations. The “free” US press simply ignored stories that were run routinely run in the UK and elsewhere on the way into and during Shrubs big adventure.
Linda,
I don’t know whether you actually think that Repubican politicians were “fueled” by an academic claim, or simply misspoke. I would strongly argue that the GOP would have ridden any convenient pony toward the goal of skewing US tax policy in favor of the rich. It just happened that Chicago was available. Our current state of income distribution is not the result of principled thought. Even if you grant that the Chicago kids were principled, the politicians and pundits who put Chicago thought to use were certainly not. It wasn’t fuel. It was just a paint job.
The post and article are arguing that federal taxes are less progressive today than in 1960. OK that very well may be, but the authors seem to be picking and choosing their data. In addition they include the entire payroll tax ( something many people on this blog including yourself don’t even consider a tax) which is much more regressive than the federal income tax. It appears to be a seriously flawed article.
K,
The public was completely behind America going to war in Afghanistan right after September 11th.
Coberly, I have no doubt, that the mindset that exists with all of you, used in conjuction to solving the “how” & “what” will present a no-brainer. Perhaps this may seem to be “Panglossian” on my part, but believe it when I say, “If you agree, then there are 2 of us”, that others of like mindset, won’t be able to resist the challenge, for indeed, we are on the brink, we haven’t pulled back, as the W,H. spinmisters are preaching. I’m old, you & yours have the knowledge to change what the Government has allowed to shatter the American Dream. My Grandson & his wife just presented a Great Grandson to the Family, as I’m sure that you have family, children, perhaps grandchildren, maybe even like MOI. We have enjoyed the American Dream, to let the fraudsters both insethe government & Industry get away with this, well, then all can just sit down, snivel & whine, waiting for the next big steal.
little john
i can’t argue with that.
Norman
I think I agree with you, but I am not sure about “no brainer.” I hope I am not simple minded, but I am simple enough to think the government ought to pay its debts (not “never run a deficit”) and not use the fact that it doesn’t want to as an excuse to gut social security which has had absolutely nothing to do with the debt and never will.
the how and what is basically a question of how do you get the people to show up in Washington with pitchforks and ropes and talk to the Congress and President in terms they can understand.
part of the problem may be that i am old too. and my grandkids haven’t got a clue, and may never have a clue. they may live in a world very different from ours and never know what they lost.
“Our concept of distributive justice has always demanded that we should determine the tax burden based on individuals’ relative abilities to pay–that means that those with lots more should pay proportionately more of their income, since those with very little need all of their income just to meet daily needs, and those with considerable wealth won’t even notice whether they have another few dollars or not.”
This statement is self defeating and very inaccurate from the perspective of instituting a “fair” tax system. Wealthier citizens shouldn’t be expected to pay a larger share simply because they can better afford to, that they will still be left with a great deal more spending money than the rest of the income earning population. Those who benefit most from the economic system that the government codifies and supervises should pay the greater share of maintaining that government system. It isn’t any more complex than that. Don’t expect some to pay a greater share simply because it is right, moral or what ever fuzzy logic can be used to justify that position. Do expect those who benefit the most from our system to repay their government for that greater benefit.
Look at it with this simple analogy. In any capitalist endeavor the fruits of the activity are paid out to the investors in accordance with the shares each owns of the joint effort. The investor that has purchased the greatest number of shares will recieve back the greatest share of the income from the effort. If the endeavor falls behind in its efforts, income may not match expenses of the business, which may occur in any endeavor, the investors may be expected to increase their capital investments into the effort. In order for an investor to continue to claim a greater share of the eventual income that investor will be expected to contribute a greater share to the increased capital investment.
So why do we think of higher taxes as a penalty and some how a charitable gesture on the part of the wealthiest citizens? Taxes are simply the cost of keeping the economic system intact. The government is expected to do that through the codification of rules for the system and the development of shared capital investments, roads, reservoirs, armies and navies,etc.
So why would any good capitalist not recognize the greater responsibility to support the expenses of the system from which they benefit to the greatest extent? It isn’t charity when you pay your taxes. It is your share of your gain from the system that makes your gain possible.
Jack, very nicely put. Cogent and convincing.