Saturday, January 28, 2012

Total Tax Burdens: Why We Need a More Progressive Income Tax

It is natural for the country to turn to its wealthiest citizens when it is in need of increased revenue. Numerous explanations can be heard for why this might not be a good idea. The most current response being propagated is that the wealthy are already paying more than their share. This theme has been reinforced by an inflated estimate of how many people pay no federal income tax. It is implied that having no income tax levied is equivalent to paying no tax at all. An article posted by the Citizens for Tax Justice, All Americans Pay Taxes, explains that there are more taxes levied than just federal income tax. These would include payroll, property, sales, excise, and estate taxes. When all federal, state, and local taxes are summed, it is found that these other taxes are significant, and that they are regressive in nature, falling most heavily on the lower income groups. This chart summarizes the results.

This data was compiled using a model that averaged over all the state and local variations, and apparently assumed standard federal tax rates applied. A number of interesting facts emerge. When federal income tax is excluded, the lowest quintile pays a tax rate 50% higher than that imposed on the top 1% of incomes. The lowest quintile by income actually sees a tax of 16% that it is responsible for. That is a rather heavy burden considering the meager incomes involved. Perhaps of most interest is the recognition that when total taxes are tallied in this manner, the tax burden as a fraction of income is nearly constant as one moves toward the higher income groups.

From this perspective, the notion that the highest income earners have the highest tax burden is just not true. In fact, one might conclude that we have more nearly stumbled into a "flat tax" situation. Perhaps the most interesting perspective, given the jargon of the day, is the realization that the 99% has a tax burden of 28.6% of income, while for the top 1% it screams all the way up to 30.8%.

Given these numbers, one can certainly make the case for extracting a few more dollars out of the top income groups with a more progressive federal income tax.

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