How progressive is the tax code? Greg Mankiw links to the following table from the Tax Foundation:
The conclusion is that while America has a moderately high proportion of income held by the richest decile, this group also disproportionately pays more in taxes. The ratio between share of taxes paid and share of income earned is 1.35 in America — the highest ratio among the OECD countries, suggesting that America has the most progressive tax code by this measure.
This table has come undercriticism for presenting an incomplete picture of the tax distribution. While this table captures income taxes and the employee share of payroll taxes, it does leave out other sources of tax revenues (some of which are progressive, and others of which are regressive in their incidence).
Another estimate of tax code progressivity comes from the CBO, which has tried to estimate federal tax liability, individual income taxes, payroll contributions, corporate income taxes, and federal excise taxes. The CBO has tried to calculate both direct tax liabilities (in the case of income taxes), as well as imputed liabilities in the case of more indirect taxes (for instance, corporate taxes and the employer share of social insurance contributions) Their measure of pre-tax income includes all wage and capital sources of income. The result, while imperfect, provides a very comprehensive look at the overall tax liability of individuals:
The result for the top income decile produces a ratio — 1.31 — that is remarkably close to the fraction obtained by the Tax Foundation — 1.35. In both cases, the results suggest that the richest decile pay over 30% more of their income than they would if they simply paid taxes in direct proportion to their share of income. This ratio steadily declines from 1.23 for the wealthiest quintile of income to just .20 for the poorest quintile — suggesting that the American federal tax code is remarkably progressive in incidence.
A true apples-to-apples comparison of this second table with other OECD countries would likely show that America is even more progressive than other developed countries when a wider range of taxes are taken into account. Many comparable countries raise a substantial share of their revenue from Value Added Taxes which are strongly regressive in tax incidence.
These figures are worth keeping in mind when hearing politicians promise that vast new spending obligations can be managed by simply hiking the tax obligations of the richest. In fact, the richest 1% already pay over 28% of all federal taxes, while earning around 19% of total pre-tax income. Wealthy Americans are disproportionately responsible for paying America’s bills not just because of their income, but also in large part due to the remarkable progressivity of the federal tax code — which is likely the world’s highest. If politicians want to increase spending and tax revenues substantially, they have no choice but to go after the earnings of ordinary Americans.