–There’s increasing noise about tax fairness, particularly given the increase in the share of total federal taxes paid by the top 1%, as in this WSJ piece today. I’ll have more to say tomorrow about different ways to think about fairness in the tax code, but a key factor here is that those whose liabilities and tax shares are going up are just about the only ones whose incomes have been going up in recent years. A general sense of the evidence can be seen here and here but more to come.
–So, given a progressive federal tax system with high levels of inequality in terms of pretax income growth, you’d expect the share of taxes paid by those at the top to increase.
–One measure of tax fairness I find quite intuitive compares shares of pretax income with shares of taxes paid, ideally not just at the federal level but at including all three levels: fed, state, local. The smart folks at CTJ provide us with just that table. The tax shares of all income groups are within a few points of their income shares. At the top 1%, the total tax share is 24%; the income share is 22%. For the middle fifth, the tax share is about 10%, the income share, 11%; at the low end, the tax share is 2%, the income share, 3%. Hard to hear a blaring unfairness fire alarm in these numbers.
–In fact, as the last column of the table shows, the effective, or average tax rates, including all levels of taxation, for the top 60% range from 27-33%, leading CTJ to conclude: “Contrary to popular belief, when all taxes are considered, the rich do not pay a disproportionately high share of taxes. Of course, in a truly progressive tax system, they would pay much higher effective tax rates than everyone else.”
–Compared to other OECD countries, we’re a relatively low tax country (here’s the table, a hairy one to be sure, but worth a look).
–I’ve already heard folks going on about complexity in the code and concluding that a flat/single rate tax or national consumption tax would be much simpler. Yes, re complexity but it the problem ain’t the rate structure. We could have a system with 100 different rates and you could just look up your liability in a booklet or online in well under a New York minute. What complicates the code is all the different treatments of different types of incomes, the trillion bucks in tax expenditures that the Treasury forgoes each year, the deductions, credits, and so on. I’m not saying they’re all misguided either, but don’t kid yourself that the complexity derives from the fact of the graduated rates (here’s a neat read on this point, from PPI).
And here’s a shout out to my fav CPA: you go, MEA!