Random Thoughts on Tax Day Eve

April 14th, 2014 at 7:41 pm

–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!

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2 comments in reply to "Random Thoughts on Tax Day Eve"

  1. Joe says:

    Jared – the most frequently discussed tax program though is on a federal level. States and localities need to keep their own house in order. According to CBO, with regards to all federal taxes (including payroll taxes) the top 1% of earners have 15% of income and pay 24.2% of taxes. Top 20% has 52% of income and pays 69% of all federal taxes. All 4 of the lower quintiles have a greater share of income than share of taxes with the lowest quintile having 5.1% of income and .4% of taxes. Progressive?

    Federal income tax shares are even more stark tithe the top 1% paying 39% of all federal income taxes and the top 20% paying 93%!!! The bottom 40% of income earners have a negative federal income tax share (when including federal transfers). Progressive?

    Federal income tax rates? Top 1%? 29.4%; Top 20% – 24%; Next 20% – 15.6%; Next 20% – 11.5%; Next 20% – 7.2%; Bottom 20% – 1.5%. Progressive?

  2. Perplexed says:

    -“Hard to hear a blaring unfairness fire alarm in these numbers.”

    Is the supply of loser liberalism infinite? How is anything but optimal tax policy not “a blaring unfairness” to the American public that should be setting off every functioning “fire alarm”? http://elsa.berkeley.edu/~saez/diamond-saezJEP11opttax.pdf. And none of this discussion even addresses monopoly profits taxes that avoid government accounting altogether and go directly to private interests. Whatever happened to counterfactuals? Where would we be if we actually collected all tax revenues (& eliminated the $1trillion dollars of tax preferences), outlawed monopoly profits, and followed optimal tax policies as recommended by Diamond & Saez? What effect might that have on our investments in public goods, education, and infrastructure? What effect might that have on demand and output? Why isn’t this counterfactual the starting point for our discussions about what might be more “fair” and to whom? Hard to believe we’re even discussing how our current tax system might be unfair to our plutocrats. Is it “something in the water” that makes us so susceptible to this propaganda or is it just the overwhelming volume of it that leads to its success?