The Agenda

NRO’s domestic-policy blog, by Reihan Salam.

Our Federal Tax System Explained, in Charts


In case you want to take a break from doing your taxes to learn about taxes, a brief, graphical rundown of the American federal tax system.

Feel like you pay a lot in taxes? You might, but you probably don’t pay a bigger share of your income in federal taxes than people who earn more than you, and people who earn less than you probably pay a smaller share of their incomes (this makes the system “progressive,” “flat” would be everyone paying the same share, “regressive” poor people pay more of their income than the rich).

That’s what we see from looking at the effective federal tax rate for Americans in each income quintile (the lowest earner to the 20th percentile, etc.) and at the very top of the income scale. As you can see, the system works quite progressively — the poor don’t have to contribute much at all, and the rich don’t get off without paying their share (chart via the Tax Policy Center).

On the other hand, that chart does overstate the progressivity of the whole tax system, because state and local taxes tend to be more or less flat, and some are regressive (sales taxes are regressive; state and local income taxes tend to be pretty flat — I pay nearly the same marginal New York City income tax rate as Michael Bloomberg).

Within the top quintile, the system remains progressive, through the top 1 percent of income earners, though rates do not ramp up dramatically on the Mitt Romneys of the world, since the top tax bracket began at $250,000 for families (when this data was gathered — it’s now $450,000). And since the above rates are just averages, some rich people really do pay lower rates than the middle class, and some people in the middle class do pay remarkably high tax rates, but this is pretty rare, regardless of what Chrystia Freeland is allowed to claim in the pages of The New Yorker.

Almost all of the federal government’s revenue comes from the individual income tax and the payroll tax (chart courtesy of Vox):

Since the payroll tax isn’t progressive, and is actually regressive when comparing rates paid by people making under the tax cap ($113,700 this year) versus people making more than that, who don’t pay it on every additional dollar they earn, the individual-income tax is actually much more progressive than the federal system overall:

For more on that issue, see this CBO table, which breaks down effective tax rates by quintile and type of federal tax. According to the CBO, this situation hasn’t changed much since 1980 (though it did change dramatically in the few decades preceding that):

However, during that time, the individual income-tax code (as opposed to the overall tax code) became more progressive, as various tax reforms moved poor people off the income-tax rolls entirely by cutting rates and expanding credits. The bottom 40 percent of earners see a negative income-tax rate on average. Milton Friedman would be proud. (Chart via the Tax Foundation.)

Most people in the bottom two quintiles don’t have a negative federal tax burden (though some do), because they pay a lot of payroll taxes — ideally, our tax system would probably allow them to reduce that burden too. But it’s still important that, over the years, more and more of the federal individual income tax has been paid for by the rich, as you can see in this next chart, though that has as much to do with their increasing incomes over the past 30 years than it does their paying higher rates per se:

The import of all these charts, among other things: The idea that the federal tax system benefits the rich (or even the ultra-rich) and milks the middle class is a total myth. In fact, the U.S. tax system does much less of that than famously egalitarian European countries do. European welfare states tend to tax their middle and working classes quite heavily, so even though the U.S. does not have an incredibly progressive tax system over all (because of the payroll tax), it beats most other countries.

That was the finding of analysis using data from the Luxemberg Income Study (where Paul Krugman is going to work when he leaves Princeton, incidentally). The following chart shows how much they calculate taxes reduce or increase inequality in a given country:

This question isn’t simple to calculate, but it’s pretty much indisputable that the U.S. is more progressive than other countries in this regard. The question gets more complicated, and the U.S. redistributes relatively less, when you look at the tax system plus other cash transfers and in-kind welfare benefits. The IMF did an estimate of that recently, and the U.S. does less of it than its wealthy European counterparts, but actually does more redistribution than Italy, Spain, or Greece:

According to the Tax Policy Center, the fundamental breakdown of our tax sources hasn’t changed much over time, except that the payroll tax has grown substantially — partly because we’ve made Social Security more generous, and that had to be paid for. Excise taxes have grown less and less important because the federal gas tax has been increased much more slowly than inflation. The corporate income tax, which used to be a big source of revenue from the wealthy (since it’s paid by shareholders, mostly, we think), has shrunk too, likely because the code has become so larded up with exemptions for corporations.

And that corporate-tax system that raises a (sort of) marginal amount of money? It relies on the highest statutory corporate-tax rate in the wealthy world to do it. We’re the blue line all the way to the right (chart from the Mercatus Center at George Mason University):


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