The Corner

A Tax Day Reminder: Inequality Looks Different If You Look after Taxes

Patrick posted a chart this morning over at the Agenda that shows the average effective tax rates by quintile for the year 2008; the same chart for 2011 is here. He rightly notes that at the federal level the tax system is quite progressive. (For more on this, hearken back to this debate.) The progressivity of the tax system, he notes, decreases when we add in state and local taxes. 

Some interesting tax data which I got from Gary Burtless of the Brookings Institution that shows the trends in after-tax income by household income distribution in the medium and long term aren’t quite the trends you’ve heard about. The data, from the CBO, measure after-tax income as “the sum of market income and government transfers, minus federal tax liabilities.”  

Contrary to popular belief, the richest 1 percent of Americans have not gotten richer during the past decade — as the chart below, showing after-tax income changes, shows. In fact, by Burtless’s calculations, the richest 1 percent of Americans are the only group whose incomes shrunk, falling by an average of 4 percent.

The incomes of all other groups have grown during this same period, and in fact the incomes of the lowest quintile have actually grown the most, at 20 percent. All other income quintiles or percentiles grew by 8 to 13 percent during the first decade of the new millennium. According to Burtless, this can be explained by the fact that, while everyone was affected by the 2008 recession, the richest 1 percent of Americans were hit the most (mostly because they derived a larger share of their incomes from investments than other income groups). 

Looking at the 1979 to 2010 period, one does see inequality rise, but only between the 1 percent and the rest. The average incomes of all other quintiles did grow healthily (by between 36 and 49 percent): 

One reason why so many Americans believe that the average incomes of middle- and low-income Americans have stagnated and that the average incomes of the top 1 percent always rise is the commonly cited income statistics from the Census Bureau – which only consider before-tax income. This approach understates the well-being of Americans who receive income-tax subsidies and overstates the well-being of Americans whose incomes are taxed at higher rates. Analyzing after-tax income levels provides a clearer picture of income trends in the United States, particularly as the tax code is frequently employed to redistribute income as a matter of policy.

Happy Tax Day!

Veronique de Rugy — Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

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