Saturday, July 22, 2006

Relatively Flat

I've long contended that the U.S. tax system, taken as a whole, is relatively flat and not very progressive. The Tax Policy Center, a joint venture of the Urban Institute and the Brookings Institution, has just issued various analyses of S. 3626, Senator Landrieu's "compromise" estate tax bill. Within the specific analysis of the bill, there are these two charts:

(Click to enlarge image. Original can be found here.)

The second chart shows the current distributional effect of all federal taxes. The average federal tax rate is 21.2%. Individuals in the $75-100,000 economic class have an average tax rate of 23.2%. Wealthy individuals, those making between half a million and a million dollars, have an average tax rate of 25.9%. Significantly, if you really start to hit it big and jump into the over $1 Million a year class, your average rate actually falls to 25%. This is not terribly progressive. Of course, when blended with state taxes, that are generally regressive, the system, as a whole, is even less progressive than shown in the table.

Under the Landrieu proposal (the first chart), the average tax rate for individuals in the $75-100,000 economic class would fall by 0.1%. Wealthy individuals, those making between half a million and a million dollars, will see their average tax rate fall by eight times that amount. The rate for those in the over $1 Million a year class would fall by a "mere" 0.4%. Of course, individuals making less than $75,000 a year get no tax benefit under the bill. Thus, the Landrieu proposal further reduces overall progressivity.

Of course, these two charts don't tell the whole story. Since the estate tax cuts will increase the federal deficit, there will be a continuing trend away from progressivity by, for instance, attempting to reduce Social Security benefits and throwing the costs of various programs onto the states. (Given the tax competition between states, this will only accelerate the trend toward regressivity. Wealthy individuals are more mobile, thus can more easily arrange to avoid having their income taxed by states that attempt to inject progressivity into their tax systems.)

Hat tip: TaxProf.

No comments: