The tilt, or lack thereof, in the tax code

Jared Bernstein Posted by Jared Bernstein.

From 2009 to 2011, Bernstein was the Chief Economist and Economic Adviser to Vice President Joe Biden, executive director of the White House Task Force on the Middle Class, and a member of President Obama’s economic team.


The tilt, or lack thereof, in the tax code

I recently touted the benefits of a financial transaction tax (FTT), and in the intro, I made a comment about how our tax code is titled toward the wealthy. Chris Edwards very reasonably takes issue, correctly noting that our federal tax code is, in fact, quite progressive, meaning that low-income households face a much lower tax burden as a share of their income than higher income households.

My piece wasn’t about the broader code so I didn’t take the time to elaborate what I meant. My bad, but let me do that here.

The fact is that our tax system contains a large number of provisions that disproportionately benefit wealthy taxpayers, many of whom are the same folks on whom the incidence of the FTT will fall. So while I did not sufficiently articulate the point, for which Chris fairly dings me, I was trying to say that one distributional rationale for the FTT is that it pushes against some of the tax preferences I’m about to show you.

For example, the following chart shows how much after-tax incomes go up for different income classes based on the tax code’s preferential rates for capital gains and dividends:

The pattern is clearly “tilted towards the wealthy,” as low and middle-class households get zip from this part of the code.

Turning more broadly to the tax code’s largest special preferences, the regressive skew towards the top is muted relative to the prior chart but still evident. The top 1 percent gets a full 16.6 % of the benefit of these deductions, exemptions, and credits, almost as much as the entire bottom 40% of the population.

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These regressive aspects of the federal tax code are particularly operative in the effective rates (taxes as a share of income) paid by the very richest taxpayers. The average tax rate for the top 400 taxpayers in 2012 was only 16.7%, not that different from the effective rates for upper-middle class households shown in Chris’s tables.

Finally, unlike their federal counterparts, state and local taxes are regressive, as those in the bottom fifth pay twice the average rate faced by the top 1%. When you put it all together (last figure below), the all-in pattern of effective rates is still mildly progressive, but only up to about the fourth income quintile, where average incomes are around $80K.

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Source: Institute for Taxation and Economic Policy

So good for Chris for pushing me to explain myself, but more to the point, I take the fact that he said nothing about the central theme of the oped—it’s time to seriously consider implementing a small FTT—to be an implicit endorsement.

Progress!!