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The Progressive Effective Tax System
Posted by: Jon Henke on Wednesday, April 27, 2005

Kevin Drum, Duncan Black (Atrios) and Media Matters accuse the Wall Street Journal of dishonesty, after the WSJ claims "overall tax burden grew more progressive from 1979 to 1999". They also object to the WSJs failure to mention that the rich garnered a larger share of national income.

Well, yeah—in some carefully selected measurements—compared to the era when the highest tax rates were 70%, progressivity has slipped.

But that doesn't mean the Wall Street Journal was wrong. In fact, the statement to which they object—"the overall tax burden grew more progressive"—is precisely correct. Media Matters writes...
The relative share of total taxes paid by various income groups—which the Journal cites—is a flawed measure of actual progressivity in the tax code. Economists do not consider a tax system "more progressive" simply because high-income earners pay a larger share of total taxes. Rather, a tax system is "more progressive" if taxpayers pay a progressively larger share of their incomes in taxes as these incomes go up.
The WSJ, MM claims, "presented no evidence that the U.S. tax system has become "more progressive" in this sense".

It's true, the Wall Street Journal didn't. So, I will.

From the Congressional Budget Office Publication: Effective Federal Tax Rates: 1979-2001 Effective Federal Tax Rates for All Households, by Comprehensive Household Income Quintile, 1979-2001

Using the 1979-99 data prefered by Atrios, Drum and Media Matters:

Total Effective Federal Tax Rate
Quintile 1979 1999 2001
Lowest 8.0% 6.1% 6.4%
Highest 27.5% 28% 26.8%
Spread 19.5% 21.9% 21.4%

So, just as the WSJ claimed, the tax burden has grown more progressive. And contra Media Matters, there is evidence that it became "more progressive" in the economic sense that "taxpayers pay a progressively larger share of their incomes in taxes as these incomes go up".

Granted, the top 1% of taxpayers have seen a modest decrease in total effective federal tax rates since 1979, but since the Wall Street Journal began their comparison after the elimination of the ridiculously high tax rates of the 1970s, it's hard to see what that has to do with anything. While the top 1% paid total effective federal tax rates of 34.6% in 1980 (per the WSJ's "25 years" formulation), it has only gone down to 33.5% in 1999 (33% in 2001), and that's actually more progressive.

In 1980, the spread was 26.9%—in 1999, the spread was 27.4%. That is evidence of "taxpayers pay[ing] a progressively larger share of their incomes in taxes as these incomes go up".

The Wall Street Journal was absolutely correct; Media Matters was absolutely wrong.

What's more, the decrease in total federal tax rate among the Top 1% didn't come from a decrease in their income taxes. In fact, their effective federal income tax rate went from 21.8% in 1979 UP to 24.1% in 2001. Meanwhile, the effective federal income tax rate of the lowest quintile went from 0.0% in 1979, to -5.6% in 2001. That is, they actually made money off the tax system.

But the effective Social Security Tax rate of the Top 1% went up, too, from .9% in 1979 UP to 2.3% in 2001. Meanwhile, the effective Social Security Tax rate of the bottom quintile went up from 5.3% in 1979, to 8.3% in 2001—an increase, but one more than offset by the decrease in income tax rates.

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Now, Kevin Drum and Brendan Nyhan do make a good point about what Nyhan calls "cherry-picked statistics". Still, when critic are doing the cherry-picking as well, expressions of outrage should be taken with a grain of salt.
 
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Previous Comments to this Post 

Comments
The point the left is making, I believe, is that the WSJ didn’t take into account the decreasing income share for the lower quintiles. Following Jon’s format:


Share of Income

Quintile ——- 1979 ——— 2001

Lowest ——— 5.8% ——— 4.2%

Highest ——- 45.5% ——- 52.4%

Spread ——- 39.7% ——— 48.2%


I’m not sure if it is fair to calculate income share since there’s not a set amount of income to spread around, but wouldn’t the highest quintile necessarily pay a higher share of taxes if their income is increasing at a higher rate? The argument on the left is that the highest quintile’s share of income is increasing more than their share of taxes (as per Jon’s calculation of the tax spread increasing from 19.5% to 21.4%).

 
Written By: JWG
URL: http://
We’re conflating two different sets of measurements. The share of total income is relevant when measuring the share of taxes paid as a percentage of the whole. But that has nothing at all to do with the progressivity of the tax system.
 
Written By: Jon Henke
URL: http://www.QandO.net
I’d imagine the decrease in share of income for the lowest quintile is more due to a vast increase in wealth in the country than "the rich getting richer". After all, there is a definite limit to the low end of income ($0), while there’s no upper limit to the high end. But Jon’s right, it has nothing to do with progressivity in the tax system.

However, is progressivity really that important? When it comes to taxes for running the government, what should matter is how much is paid, not whether an individual’s effective tax rate is higher with each dollar earned. I guess that’s a question for another post, though.
 
Written By: Steverino
URL: http://steverino.journalspace.com/
We’re conflating two different sets of measurements
And that will likely remain as the problem, I suppose. The argument is over what "progressive" means for the tax code. I think you are saying that it means higher incomes pay a higher rate. So if the Media Matters article states:
a tax system is "more progressive" if taxpayers pay a progressively larger share of their incomes in taxes as these incomes go up.
and that seems to match the idea that higher quintiles pay a higher tax rate (which is true), are they being dishonest by comparing income shares or are they understanding (or misunderstanding) their definition in a different way?
 
Written By: JWG
URL: http://
MM is correct to say that the relative share of the income taxes paid is a flawed way to measure progressivity. It’s just that I’m not sure what that has to do with anything. As the WSJ said, the total federal tax rates have still gotten more progressive.

I think they’re trying to refute an argument the WSJ didn’t make.
 
Written By: Jon Henke
URL: http://www.QandO.net
OK, I think I understand what they are arguing. Take this statement:
This group’s share of total earnings increased by about 50 percent, while its share of federal taxes rose only about 21 percent.
They want the increases in the share of taxes paid to match or exceed the increases in the share of income. But I think mathematically that would require massive tax increases (it might even be impossible) since the tax rates are only taking a proportion of the income increase. So even when tax burden increases, it will still lag behind the income share. Am I wrong somehow?
 
Written By: JWG
URL: http://
Interesting post. I should point out a couple of things. First, these data indicate that taxes have become less progressive since G.W. Bush took office (I realize that nobody said otherwise, but it is relevant to our current political debate). Second, you wrote
Meanwhile, the effective Social Security Tax rate of the bottom quintile went up from 5.3% in 1979, to 8.3% in 2001—an increase, but one more than offset by the decrease in income tax rates.
But the decrease in income tax over that period was 1.6%, which is actually a lot less than the 3% increase (8.3%-5.3%) you just cited. What am I missing?
 
Written By: David in AK
URL: http://
But the decrease in income tax over that period was 1.6%, which is actually a lot less than the 3% increase (8.3%-5.3%) you just cited. What am I missing?
You’re looking at the total effective federal tax rate. The income tax rate of the lowest quintile dropped from 0.0% in ’79 to -5.6% in ’01. (earned income tax credit, you know)
 
Written By: Jon Henke
URL: http://www.QandO.net
Am I wrong somehow?
Seems like it. Suppose you have a flat 50% tax rate
But we don’t have a flat tax rate. Try the same thing with a progressive tax rate. I think your example shows that the results the left seems to be looking for are mutually exclusive: progressive tax rate and increases in tax share than income share. Again, I could be missing something when I set up my spreadsheet and play with the numbers, but I’d like to know what it is!
 
Written By: JWG
URL: http://
It should be noted that, assuming the WSJ’s entire point was that "overall tax burden grew more progressive from 1979 to 1999", this post doesn’t really address the issue. The overall tax burden includes not only federal taxes, but state and local taxes, as well.

It’s also incorrect to issue blanket statements such as "the lowest income bracket made money off the tax system" due to their negative income tax rates (EITC), since those in the lowest income bracket pay most of their taxes in payroll and sales taxes which more than make up the difference (as the fact that their "effective federal tax rate" is net positive makes clear).
 
Written By: Jonathan
URL: http://
The overall tax burden includes not only federal taxes, but state and local taxes, as well.
Unless the additional taxes are regressive, then how will they change the fact that the higher quintiles have been paying more of the tax burden over time?
It’s also incorrect to issue blanket statements such as "the lowest income bracket made money off the tax system"
Didn’t they receive money from the government due to their federal tax status? Since it wasn’t just a refund but additional money, how would you phrase it?
 
Written By: JWG
URL: http://www.qando.net
Now I have to think on what that proves
For me it clarifies that even when the system can be shown to be more progressive, there will always be a way to continue criticizing it as unfair to the poor. If the rich are paying a bigger share they are blasted because their income increased more than their tax share increased (even though that it seems to be a mathematical requirement in a progressive tax structure). The left have a guaranteed argument no matter which way the tax structure moves.
 
Written By: JWG
URL: http://www.qando.net
The left have a guaranteed argument no matter which way the tax structure moves.
Let me clarify this a bit more. Take a look back to the Media Matter complaint I used above:
This group’s share of total earnings increased by about 50 percent, while its share of federal taxes rose only about 21 percent.
The only way for the higher quintiles’ earnings share not to rise more than their tax share increases is for either:
  • a flat tax, or
  • an equal rate of increase in income for the quintiles
Therefore, the left will always be able to use the above argument to attack the upper quintiles, since it is a mathematical requirement in a progressive tax structure. If I am wrong, please tell me.
 
Written By: JWG
URL: http://www.qando.net
Rereading Kevin Drum’s blog on the point, he also makes the mathematical mistake of saying:
If the income share of the super-rich tripled but their tax share only doubled, doesn’t that mean that their tax rates must have gone down? Indeed it does.
It does not mean that their tax rates must have gone down. The income share will always increase more than the tax share, whether their taxes go up or down. No one is actually doing the math.
 
Written By: JWG
URL: http://www.qando.net

 
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