Tax Progressivity and More

by Veronique de Rugy

Over at the American blog last year, Andrew Biggs of the American Enterprise Institute responded to the usual argument that while the federal income tax may be progressive, the rest of the tax system isn’t, particularly the payroll tax, since Social Security taxes are capped. He wrote:

Social Security taxes, as Krugman may or may not be aware, fund a thing known as Social Security benefits. Analysts of this system consider them together in order to determine whether the program is or isn’t progressive.

One way they do it is by calculating what’s called the “net tax rate”—that is, the statutory 12.4 percent Social Security tax paid by workers minus the benefits they receive from the program. If you receive benefits equal to your taxes, then your net tax rate is zero. If you pay more in taxes than you receive in benefits, your net tax rate is positive; likewise, if you receive more benefits than taxes your net tax rate is negative.

Here is a chart that shows his results:

I suspect that things aren’t that different this year. Now there is the issue of state and local taxes. State sales taxes are regressive, while state income taxes are relatively flat and property taxes are progressive. It looks like overall state taxes are much less progressive that the federal ones but of course that varies between states. I am going to look into this issue more this week.

I talked about some of these issues on Bloomberg last week. One thing I find quite striking is that most of us have a fuzzy understanding of what high income earners make. For instance, only few in the top ten percent of income earners make over a million dollar a year (I call them millionaires for income tax purposes) but when you ask people around they assume that the top 10 percent is mainly made of millionaires (again the term is unclear because it could mean to make a million a year or to own a million in assets). Maybe more interestingly, most people in the top income bracket don’t realize how well off they are compared to other people. These tow issues are somewhat related and I suspect have a lot to do with the fact that in the top 10 and 1 percent of income, Americans who are the richest in this bracket are so much richer.

Here is the script with links and charts.

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