## Progressive Tax System, My A\$\$

Update….

Sheesh. I wake up this morning and my first thought is… what the heck was I thinking last night? I have to put a bit more thought into these things that I write at the end of the day.

We all make stupid mistakes and this qualifies as one of mine. I think its been a while since I put up something this dumb.

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I’m doing a bit of work on taxes and income right now, and I found something really uncool. First, this table shows us the income limits for families for each income quintile and the top 5% of income earners. Second, Table 1A of this CBO spreadsheet gives us the total effective federal tax burden of faced by folks in the various income quintiles, and the top 10%, 5%, and 1% of income earners. (Data for 2003 and 2004 come from this update.)

With this, we can measure the progressivity (or lack of it) of the tax system. See, if the system is progressive, then the difference between the tax burden imposed on people who earn a lot and the tax burden on people who earn very little will be bigger than the difference in income earned by both groups. A person who makes 10 times what another person makes will pay more than 10 times as much in taxes. If the tax system is regressive, then the opposite is true.

Most of you can already see where this is going. If you can’t, you’re not enough of a cynic, or in denial and trying to think up an excuse. But keep reading, because there is at least one real surprise in this post.

So here’s a graph showing two curves. The first curve is the ratio of low income individuals (which I’m defining as those at the bottom quintile) to high income individuals (the top 5% of income earners). The second curve is the ratio of the tax burden imposed on the low income earners to the tax burden imposed on the high income earners.

What we see is this:

1. The ratio of incomes is lower than the ratio of tax burdens. As an example… in the year 2000, low income folks made 14.99% of the income of high income folks. (Those at the bottom made \$24,000, those at the top made over \$160,000) But the tax burden on low income folks was 20.65% of the tax burden on high income folks. (Those at the bottom had a 6.4% tax burden, and those at the top had a 31% tax burden.) Put another way… an increase in income leads to a less than proportional increase in the tax burden.
2. On the plus side, the system is heading in the direction of being progressive – and has continued to head in that direction even under GW! But that’s a recent phenomenon. Under Reagan, the system became a lot more regressive, especially through 1986.
3. What happened from 1996 to 2000? I suspect the booming stock market coupled with cuts in the capital gains tax rate is a big one.

But the big take-away… the tax system is regressive. Its becoming less regressive, but its still regressive.

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Update… As noted at the very top of the post, I must have been hallucinating when I wrote this. Conclusions in this post are incorrect. Sorry about that.

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