Posted by: Michael Mandel on April 18
I’m just going to make this short and simple. We hear all this spin about how the tax system is fair/unfair to the rich/middle-class/poor. In honor of April 15, I figured that I would just present the numbers, and let you draw the conclusions.
I should say, though, that the results surprised me. Feel free to offer your comments (all numbers come from the latest tax report from the Congressional Budget Office).
Question 1: Is the federal tax system progressive? (that is, does it impose substantially higher tax rates on the rich)
Answer 1: Yes.
The latest year available from the CBO is 2004, which includes all the Bush tax cuts. In that year, the effective federal tax rate paid by the top 1% of people was 31.1%, compared to 13.9% for the middle quintile, or fifth, of people, and 4.5% for the lowest fifth.
|Effective Federal Tax Rate, 2004*|
|Federal taxes as percent of income|
|*Includes income taxes, social insurance taxes|
|excise taxes, and corporate income taxes|
|Data: Congressional Budget Office|
Question 2: Has the federal tax system gotten less progressive over the past two decades?
Answer 2: Surprisingly, the answer is no, according to the CBO data. Let’s compare 1981, the last year before the Reagan tax cuts, and 2004, the first year after the Bush tax cuts. In 1981, the effective tax rate on the top 1% was 31.8%, compared to 31.1% in 2004. That’s hardly a difference. By comparison, the effective tax rate on the bottom fifth dropped from 8.3% to 4.5%.
In other words, the people at the bottom saw their effective tax rate decline more than the people at the top. Incidentally, this calculation includes Social Security taxes.
Question 3: The middle class has been hit by higher federal taxes.
Answer 3: No. The effective federal tax rate for the middle quintile has fallen over time, from 19.2% in 1981 to 13.9% in 2004 (this leaves out state and local taxes, of course). It’s worth noting that the middle quintile tax rate fell more under the Republicans than the Democrats.
Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.