U.S. federal income tax structure “most progressive” in the world, more than offsets regressively of state/local taxes

Heading into the 2019 legislative session, we’re apt to be hearing more (again) about the need for progressive tax reform. Putting a little perspective on the issue, Brian Riedl, a senior fellow at the Manhattan Institute, reminds us of just how progressive the U.S. federal income tax is. In a commentary, Riedl writes,

In fact, America’s federal tax code is already the most progressive in the OECD, even adjusting for income inequality. The Congressional Budget Office reports that the top-earning 20 percent of taxpayers earn 53 percent of the income, yet pay 69 percent of all federal taxes, including 88 percent of all income taxes. The bottom 40 percent of earners earn 14 percent of the income while collectively paying no income tax, and less than 5 percent of all federal taxes. Tax code regressivity is not the problem.

The first link is to a 2013 Washington Post story, which features the following graph.

WaPo reporter Dylan Matthews writes,

Our top 10 percent gets a bigger slice to start, but it also pays a much higher share of the tax burden than the upper classes in other countries do. In Sweden, generally considered the most economically egalitarian country on the planet, the rich pay taxes that are more or less exactly their share of income. These numbers are a little dated, coming as they do from a 2008 OECD report, but the point stands. [Note: This was written before the recent federal tax reform, but again, as a 2018 analysis demonstrates, the point stands.] 

He adds,

The most redistributionist countries on the planet tend not to be those with really progressive taxes. Instead, they’re the countries that tax regressively but then direct that money overwhelmingly to poor residents.

Riedl also linked to a 2013 Congressional Budget Office analysis that reported,

Households in the lowest income quintile paid less than $1,000 in federal taxes in 2013, on average, which amounted to an average federal tax rate of about 3 percent, CBO estimates.2 Households in the middle quintile paid about $9,000 in federal taxes, on average, and households in the highest quintile paid about $70,000; their average federal tax rates were approximately 13 percent and 26 percent, respectively.

Households in the highest income quintile received a little more than half of total before-tax income and paid more than two-thirds of all federal taxes in 2013 (seeFigure 1). Households in other income groups received considerably smaller shares of before-tax income and paid considerably smaller shares of federal taxes.

Why this is important is laid out in a Washington Research Council report released earlier this year. The WRC writes,

Simply, two facts should be kept in mind.

  • In every state the combined state and local tax burden is regressive, accord- ing to ITEP.

  • When federal taxes are factored into the analysis, the combined federal, state and local tax burden in every state is progressive.

This report, of course, will not settle the debate about tax fairness in Washington. Those who prefer a highly progressive tax structure may examine the data, accept that Washington is perhaps not the“most regressive” state in the nation, andstill contend that Washington should adopt a more progressive tax system. States without an income tax typically rank as more regressive than those that have one. Others may examine the data and conclude that, within the context of fiscal federalism and the expressed preferences of Washington voters, the state’stax structure is satisfactory.

With respect the observation made by Matthews that “redistributionist” policies are better handled on the spending side than through taxes, we previously wrote that Washington looks pretty good on that score. We cited a Governing magazine article that stated, 

In 2014, the nonprofit Federal Funds Information for States (FFIS) warned that fairness is just one feature of a good tax system. Others are adequacy, simplicity, transparency and ease of administration. For example, FFIS pointed out that while Washington ranks poorly in tax fairness, it puts more of its revenues toward programs that support low-income families.

“Sometimes the policies that satisfy one feature run contrary to another, making it important that a system be evaluated in its entirety rather than in a piecemeal fashion,” the group said. (Emphasis added.)