“The CBO [Congressional Budget Office] has released a new report on effective tax rates (total taxes divided by total income). Compared with previous reports, it includes more information about thin slices at the top of the income distribution. Here are the total effective federal tax rates for 2005, the most recent year available:
Lowest quintile: 4.3 percent
Second quintile: 9.9 percent
Middle quintile: 14.2 percent
Fourth quintile: 17.4 percent
Percentiles 81-90: 20.3 percent
Percentiles 91-95: 22.4 percent
Percentiles 96-99: 25.7 percent
Percentiles 99.0-99.5: 29.7 percent
Percentiles 99.5-99.9: 31.2 percent
Percentiles 99.9-99.99: 32.1 percent
Top 0.01 Percentile: 31.5 percent
N.B.: These figures include all federal taxes, not just income taxes”
N. Gregory Mankiw, “The Progressivity of the Tax System”, Greg Mankiw's Blog: Random Observations for Students of Economics (4 January 2009).
http://gregmankiw.blogspot.com/
N. Gregory Mankiw is professor of economics at Harvard University and a former Chairman of President George W. Bush’s Council of Economic Advisors. His textbook is used in Regent’s Principles of Economics course. He is also a Republican policy advisor.
A note on the data: The Congressional Budget Office has derived the effective Federal tax rates on the basis of IRS data, supplemented by information from the Census Bureau’s Current Population Survey. The income of a household is measured as the sum of wages and salaries, proprietors’ and other business income, interest and dividends, profits from capital gains and pension income, and any monetary or in-kind transfer payments such as Social Security and Unemployment benefits and food stamps, school lunches, housing assistance, and the value of Medicare and Medicaid received. Federal taxes paid by the household encompass the total of individual income taxes, Social Security contributions and corporate income taxes, as directly paid or imputed. Essentially, the income and corresponding tax data of millions of households are ranked from highest (probably Bill Gates’) to lowest (probably that of some poor Regent grad student sinking under the weight of his growing debt) and then is divided into cohorts such as quintiles and percentiles, from which the above data have been computed.
Contrary to prevailing opinion, the data compiled by the CBO on taxes paid by different income groups show the United States has a highly progressive tax system. It collects in Federal taxes alone over 30 per cent of the income of the top one-half of one per cent of country’s income earners. In contrast, the poorest one-fifth of the population pays only 4.3 per cent of their income in Federal taxes.
The burden of taxes on the population is higher than the effective Federal tax rate indicates. First, it does not include state and local taxes. Second, it does not include the cost of compliance with the tax code, which is expensive and has generated a major industry of baffled accountants and confused lawyers. Third, the cost of government is not only appropriated through taxation. It is also the output that would have been produced had the tax burden been lower. High taxes reduce incentives for work, saving and investment. Economic growth slows and unemployment rises. The loss is difficult to measure but it must be substantial. Lastly, the burden of taxes is becoming increasingly centered in a smaller and smaller proportion of the population, a trend that is not healthy for the polity at large.
The burden of taxes today is now heavy and mounting everywhere, the complexity of tax systems beyond comprehension and compliance, their effect on economic performance negative and corrupting. Yet we seem headed for a substantial increase in the tax burden on Americans.
Cheerleaders for the welfare state believe higher taxes (particularly, higher taxes on those already paying high taxes) is the solution for all funding shortfalls as they press to expand the scope of government. But governments should be increasingly apprehensive about The Iron Law of Taxation B high and rising taxes inevitably bring strong and growing resistance followed by evasion and rebellion. Wise governments fear the economic effects and political consequences of raising taxes, and rightly so.
The economic stimulus package now under consideration will place an extraordinary burden on government finances in coming years, whether it comes in the form of spending or tax cuts. Any money borrowed must be paid back, either by higher taxes or by printing money. As noted in yesterday’s Tdj, it is not just that it is difficult when crafting a stimulus package to spend huge amounts of money efficiently and effectively or to distribute the benefits of tax reductions fairly. One also runs up against The Iron Law of Deficit Financing -- at some point investors become unwilling to finance the deficits and the credit worthiness of the government becomes so compromised it cannot function.
We are entering a very, very difficult moment for economic policy. If the stimulus is successful it will lead to higher incomes and an enhanced capacity to pay the increased debt associated with the larger deficits incurred by the higher spending and lower taxes comprising the package. But if it fails, or even if it in the end it proves to have been unnecessary as the economy recovers by itself, the stimulus package will leave in its wake a huge intergenerational transfer from our children to ourselves imposed by higher future taxes that must be paid on the higher debt. Let us pray that any package passed by Congress is successful and the current downturn in the economy is reversed.
But let me in closing note that the idea of allowing politicians to increase public spending or lower taxes for purposes of a temporary stimulus to the economy, even in as bad a situation as we are now in, is a dangerous one. It is not just that whatever is done is subject to the shifting and changing political tides of the moment. That is mere inefficiency, lamentable but passing. No, it is that the spurious rationales for reckless deficit spending and huge national debts become part of a permanent political culture where politicians find it impossible to control their appetites for spending, and the size and power of government ratchets up and up, never to be reduced. Let us also pray that stimulus package truly comprises temporary spending.
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