The tilt, or lack thereof, in the tax code

July 24th, 2015 at 11:50 am

I recently touted the benefits of a financial transaction tax (FTT), and in the intro, I made a comment about how our tax code is titled toward the wealthy. Chris Edwards very reasonably takes issue, correctly noting that our federal tax code is, in fact, quite progressive, meaning that low-income households face a much lower tax burden as a share of their income than higher income households.

My piece wasn’t about the broader code so I didn’t take the time to elaborate what I meant. My bad, but let me do that here.

The fact is that our tax system contains a large number of provisions that disproportionately benefit wealthy taxpayers, many of whom are the same folks on whom the incidence of the FTT will fall. So while I did not sufficiently articulate the point, for which Chris fairly dings me, I was trying to say that one distributional rationale for the FTT is that it pushes against some of the tax preferences I’m about to show you.

For example, the following chart shows how much after-tax incomes go up for different income classes based on the tax code’s preferential rates for capital gains and dividends:


The pattern is clearly “tilted towards the wealthy,” as low and middle-class households get zip from this part of the code.

Turning more broadly to the tax code’s largest special preferences, the regressive skew towards the top is muted relative to the prior chart but still evident. The top 1 percent gets a full 16.6 % of the benefit of these deductions, exemptions, and credits, almost as much as the entire bottom 40% of the population.


These regressive aspects of the federal tax code are particularly operative in the effective rates (taxes as a share of income) paid by the very richest taxpayers. The average tax rate for the top 400 taxpayers in 2012 was only 16.7%, not that different from the effective rates for upper-middle class households shown in Chris’s tables.

Finally, unlike their federal counterparts, state and local taxes are regressive, as those in the bottom fifth pay twice the average rate faced by the top 1%. When you put it all together (last figure below), the all-in pattern of effective rates is still mildly progressive, but only up to about the fourth income quintile, where average incomes are around $80K.



Source: Institute for Taxation and Economic Policy

So good for Chris for pushing me to explain myself, but more to the point, I take the fact that he said nothing about the central theme of the oped—it’s time to seriously consider implementing a small FTT—to be an implicit endorsement.


Print Friendly, PDF & Email

6 comments in reply to "The tilt, or lack thereof, in the tax code"

  1. Tom in MN says:

    Also if you are an average person investing for retirement and you think a FFT will adversely affect you, you should think again about what you are doing as all that trading likely means you are not doing it right. An incentive to buy and hold would raise most people’s returns.

  2. Fred Fnord says:

    You are being far too kind towards Chris, who is very obviously being disingenuous in the extreme. He doesn’t even bother to hide the fact that he bases his calculations on the top quintile and just pretends that they are roughly uniform and are what people mean when they say ‘the wealthy’, when there is a greater difference between the median person from the top quintile and the median from the top 1% (which is PART OF the top quintile) than there is between the median from the THIRD quintile and the one from the top quintile.

    But then, he writes for the Cato Institute, and I know from long experience not to expect honest analysis from anyone there. It is better to expect rank dishonesty and be surprised and delighted in the unusual case where you are wrong.

    • Zack says:

      Read the Edwards post again. He’s doing exactly what you want. The chart at the bottom of the post cites a Joint Committee on Taxation report that lists the average rate for taxpayers making “$1,000,000 and over” at 33.1%. This group is well into the top 1% of the income distribution.

  3. Kaleberg says:

    The FTT should be a usage fee. If you don’t care if you can enforce the relevant contract, you shouldn’t have to pay the fee. If you might want government sanctions to make sure you get paid, you should pay it. Even arbitration eventually relies on the government sponsored court and police systems for enforcement.

  4. Charlie says:

    Maybe it has changed, but I remember this paper by Kotlikoff and Rapson showing that if you include state and local, transfer payments and retirement benefits that beyond the very poor, every group faced a 40% marginal tax rate. I suppose sometimes the high MRT reflects the loss of a subsidy, so it may not conflict with the average tax rate results here.

    Here is a draft of the paper.,%20December%209,2006.pdf

  5. Paul Burik says:

    I read your piece on a financial transaction tax in the July 24, 2015 International New York Times. You might be correct such a tax would be relatively easy to impose, inexpensive to collect and have modest, if any, net negative impacts on the financial system.
    However, aren’t the priorities in the federal budget, specifically the size of the DoD budget, the real problem? The threat from global extremism is not effectively addressed by the military establishment regardless of how it adapts “for its new mission”. Is it really necessary that the U.S. spend so much more than other countries on its military as a % of its GDP. I think not. We might agree that re-setting the priorities would be much tougher than passing a transactions tax. But, true leadership is not about taking the path of least resistance. Middle America seems to be waking up to its economic stagnation. Perhaps it now may be open to a fundamental reassessment of how federal tax dollars are and could be spent and what impact those expenditures are and could have on their well-being today and in the foreseeable future.