Arnold Kling  

The Distribution of Tax Burdens

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How progressive is the current U.S. tax system? Not very, if you read the new paper in the Journal of Economic Perspectives by Thomas Piketty and Emmanuel Saez. As Mark Thoma reported, they say that

The progressivity of the U.S. federal tax system at the top of the income distribution has declined dramatically since the 1960s.

But according to Alan D. Viard,

the federal tax system is highly progressive. The lowest quintile, the 20 percent of households with the lowest incomes, bears less than 1 percent of the federal tax burden. The next 20 percent bears less than 5 percent of the burden. The burden is higher for the next income groups, as the middle 20 percent bears 10 percent of the burden and the fourth 20 percent bears more than 17 percent.

That leaves the top 20 percent paying 66 percent of the cost of government; one fifth of the population pays two-thirds of the cost. The breakdown within that 20 percent is even more striking. Most notably, the top 1 percent of the population bears a staggering 25 percent of the tax burden.

Thanks to Greg Mankiw for the pointer.

What I find particularly fascinating is the different graphical ways of presenting data. Compare (a) the first chart in Mark Thoma's blog post with (b) Viard's figure one. They show exactly the same thing--overall tax payments by income category. In the lower part of the income distribution, people are grouped into quintiles. At the top end, we see the top one percent, which is a group that is one-twentieth the size.

1. (a) is a line chart, and (b) is a pie chart. In (a), it is less apparent that groups of different sizes are being compared.
2. (a) does not include the bottom quintile, and b does;
3. (a) includes the 1970 data, which spreads out the scale (because the tax system was more progressive then. As an aside, how much of the decrease in progressivity comes from greater breadth of stock ownership--if more people own stock, then more people are imputed to be be paying corporate income taxes--not that such imputations have anything to do with actual tax incidence? My guess is that the answer is "not much," but it illustrates a potential hazard with this sort of analysis. There are many hazards, which is why I tend to shy away from these sorts of discussions.), and (b) does not

These three factors together mean that (a) tells a story of low progressivity and (b) tells a story of high progressivity. Can anyone say, "confirmation bias"?

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CATEGORIES: Income Distribution

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Heather writes:

I think the story these comparisons are telling is different. The story of (a) is that the rich have disproportionately benefited from tax cuts in the last thirty years, making the system less progressive than it was. The story of (b) is that our system is progressive, which it is, but not as progressive as it used to be.

spencer writes:

I do not remember the number off the top of my head,
but what you find is that the number of stock owners has grow quite significantly, but if you look at the distribution of stock ownership by capitalization stock ownership has not changed significantly.

A lot of middle class people now own some stock, but
their portfolios are still very,very small.

spencer writes:

Also note that Viard uses an unusual definition of income groups. This study divides the income by the square root of household size. I presume they are attempting to adjust for the fact that the average upper income households have more members -- partially because very many of the lower income group are single individuals.

So in a way the two studies are comparing apples and oranges.

No, I do not know how seriously this changes the results.

Michael Sullivan writes:

What appears to be happening primarily is different definitions of progressivity. If you take as your baseline that each person should pay a fixed per capita cost of government, then our tax system is *very* progressive. If you take as your baseline that tax should be a flat percentage of income (i.e. if the rich pay a greater %, then the system is "progressive", while if they pay a smaller %, it is "regressive"), then the US tax system while definitely progressive is "not very" progressive.

The richest 1% earn about 17% of the income and pay about 25% of the taxes. That's progressive, but not nearly as progressive as the basic tax structure *looks*, and not nearly as progressive as the tax structure used to be.

So they are both right, they are just picking and choosing their terms and information display differently.

I'm one of those psychotic leftist wingnuts who thinks that people actually benefit from a liberal (in the classic sense) government roughly in proportion to their wealth or wealth creation ability, so I consider Piketty and Saez's approach to what "progressive" means to be much more reasonable.

Geoffrey writes:

Seems to be also a case of status quo bias (or 1970 bias??)

Mark Thoma concentrates on the changes from 1970.
Somewhat implying that changes away from that point in a nonprogressive way are somehow bad. (That was my impression)

His graphs are all true but it is hard to get a picture of the baseline on who is paying how much in relation to each other.

If you had two pie graphs side by side like Viard's from 1970 and today..I am gussing most people would shrug their shoulders and think not much difference.. The "rich" paid most of the taxes and they still do today..

How you present it is truly important.

Reminds me of the news every time there is a proposed tax cut. The news always has people saying the tax cut is only going to the "richest" Americans.

Of course the reason is.. because you need to pay taxes in the first place to get them cut...

Mr. Econotarian writes:

The more interesting aspect would be to look at the "progressivity" of taxes minus government monetary transfers. A lot of well-off people are receiving Medicare.

Huh? writes:

"The more interesting aspect would be to look at the "progressivity" of taxes minus government monetary transfers. A lot of well-off people are receiving Medicare."

If you net Medicare and Social Security to reduce what the well off seem to be paying, you will put the bottom 40 percent under water.

Richard Schweitzer writes:

What is missing from the proper analysis of "facts" used in these discussions is identification of the source of the data, which, based on other studies I have been exposed to, seems almost certainly to have been derived from IRS data.

May I respectfully suggest that those interested in a broader base for understanding of factors to be considered could look into the work of Alan Reynolds.

Richard Schweitzer writes:

A lot of well-off people are being forced to accept Medicare, because it is now illegal to provide private health care outside those parameters, and they (I for one) are forced to buy their "insurance" from the Federal government.

Richard Schweitzer writes:

A lot of well-off people are being forced to accept Medicare, because it is now illegal to provide private health care outside those parameters, and they (I for one) are forced to buy their "insurance" from the Federal government.

John Thacker writes:

if more people own stock, then more people are imputed to be be paying corporate income taxes

At the same time, a different effect has happened. More small businesses are filed as S Corporations, and thus their income is paid as individual income taxes rather than corporate taxes. On the whole, it probably contributes to higher shares of income and taxes paid at the high end. (Rather than the taxes being paid as corporate taxes and then not showing up in individual income in the first place.)

Matt writes:

We forget the hidden taxes.

The bankers charge us a 3% inflation fee for their services.

We end paying an additional 3% fee in external inflation for providing New World Security services in support of free trade.

The 400 billion or so in interest payments compound the progressivity or lack thereof.

In short, to the extant that our progressivity level cause continual, unchecked expansion of governemnt; it is the lower income levels that bear the burden because the amount of private economy that is taxable decreases.

When the "conservatives" are able to stop their unlimited government expansion, then you know progressivity levels are set properly.

What the conservative argument is, to date?

Conservatives: We are better off with a government economy under our control than a free, private economy under the control of others. In short, they want communism.

Alan Reynolds writes:

Piketty and Saez “assume that the corporate income tax falls on capital income and that all financial assets (and not only corporate stock) bear the tax equally.” Randolph, by contrast, estimates that, “domestic labor bears slightly more than 70 percent of the burden of the corporate income tax. The domestic owners of capital [not just owners of taxable financial capital] bear slightly more than 30 percent of the burden.” (Randolph, William C., “International Burdens of the Corporate Income Tax,” CBO Working Paper 2006-09, August 2006).

If labor bears any significant share of the corporate tax, that would greatly undermine the conclusion of Piketty and Saez that “the greater progressivity of federal taxes in 1960, in contrast to 2004, stems largely from the corporate income tax.” So too would “income shifting” between corporate and individual tax returns after top individual tax rates fell in 1987 and 2003 (e.g., changing from Subchapter C to Subchapter S corporate filing).

Piketty and Saez also estimate the incidence of the estate tax by using the questionable assumption that dead people (rather than heirs) bear that tax in the year of their death. This is another reason for their "exploratory" conclusion about declining progressivity. In "Notes on the Estate Tax" in the JPE in 1978, Joe Stiglitz suggested that the estate tax falls on labor (by reducing capital formation and therefore labor productivity).

We cannot estimate progressivity without understanding incidence, and the general equilibrium incidence of the corporate income tax and estate tax is surely not as simple as Piketty and Saez assume.

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