Friday, July 31, 2009

Tax Progressivity

Recently released IRS data show that the federal income taxes paid by the top 1% of filers in 2007 exceeded that of the entire bottom 95%. By contrast, the top 1% paid less than half what the bottom 95% did as recently as 1987.

Some conservative groups, notably the Tax Foundation, tout this as evidence of dishonesty in discussions of tax progressivity (the left says - of course - that it is not progressive enough). But these very groups are not being entirely honest themselves. Looking at the underlying data from the IRS, it's clear that one reason the top 1% are paying a much greater share of taxes is that they are getting a much greater share of income. In 1987, the top 1% earned about 12.3% of total reported income; in 2007 their share was 22.8%. The share of income earned by the bottom 95% fell from 74.3% in 1987 to 64.3% in 2007.

So while the rich are taking on a much greater tax burden, it's not obvious that they are paying a disproportionately greater share of taxes. One way to check this is to look at the average tax rates of various tranches of tax filers, and the IRS data tabulates this for us. The overall average tax rate fell slightly from 1987 to 2007 (from 13.1% to 12.7%), and this drop was broad-based: for every filing category detailed in 1987, the average tax rate was lower in 2007. The group with the single largest decrease (in percentage terms) was actually the bottom 50%, whose average tax rate dropped from 5.1% to 3.0%. The next biggest drop was the 2nd quartile (26-50%), whose averate rate dropped from 9.5% to 7.0%. It's also true that the richest 1% saw their average rate fall from 26.4% to 22.5%. (The group that did worst, oddly enough, was the 2-5% slice, whose average rate dropped from 18.1% only to 17.5%. Apparently it does not pay to be stuck between the very richest and the middle class.)

It's pretty clear from going over these details that the Tax Foundation's conclusions are broadly correct: the rich are paying disproportionately more in 2007 than they did in 1987. But their analysis is laughably incomplete, and a close read of the data shows a much smaller effect than they would have us believe. Wouldn't a better attack on one-sided liberal tropes about tax progressivity be a systematic, thorough, fair-minded analysis of the data, rather than a rehash of one-sided conservative tropes?

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