Taxes: Are They Really "Too" Progressive?

[Before we continue, I'm not entirely sure if this tax model I will reference includes cash transfers from local, state, and federal programs to individuals.  That would reduce the effective tax rate for the individuals receiving them.  And, on the graphic you'll see below, income doesn't seem to include cash transfers.]

Now, I agree our tax code is hugely flawed.  Our tax base is small, with large tax loopholes (which are tax expenditures!) available largely for the wealthy individual and business.  That's a fact.

Read Showdown at Gucci Gulch: Lawmakers, Lobbyists, and the Unlikely Triumph of Tax Reform.

As I was saying, though, when you include all taxes--local, state, and federal taxes--the idea that the poor don't pay taxes, and that the taxes in the United States are extremely progressive seems uncertain and potentially flat out wrong (again, I say that as I look for information otherwise).  From the Economist:

The fact of the matter is that the American tax code as a whole is almost perfectly flat. The bottom 20% of earners make 3% of the income and pay 2% of the taxes; the middle 20% make 11% and pay 10%; and the top 1% make 21% and pay 22%.

 Now, look at this interesting graphic from Citizens for Tax Justice:

Taxes don't seem all that progressive now.  The conventional wisdom reasons that poorer folk still have to pay local and state taxes, which takes up larger chunks of their income compared to their much wealthier fellow Americans, who can also avoid a lot taxes through tax-sheltered accounts and other financial tools widely available to wealthier Americans.

The tax code seems to be progressive at first, and then becomes regressive. It's essentially flat.

Who really pays taxes, and at what rate?

It’s often claimed that the richest Americans pay a disproportionate share of taxes while those in the bottom half pay nothing. These claims ignore the many taxes that most Americans are subject to — federal payroll taxes, federal excise taxes, state and local taxes — and focus instead on just one tax, the federal personal income tax. The other taxes are mostly regressive, meaning they take a larger share of income from a poor or middle-income family than they take from a rich family.

Let's just get the facts straight, people.

Now, if we include both local and state cash transfers, but only federal taxes (including federal excise taxes), we have a very progressive tax system, according to the Congressional Budget Office, which Greg Mankiw references:

Because transfer payments are, in effect, the opposite of taxes, it makes sense to look not just at taxes paid, but at taxes paid minus transfers received.  For 2009, the most recent year available, here are taxes less transfers as a percentage of market income (income that households earned from their work and savings):

Bottom quintile: -301 percent
Second quintile: -42 percent
Middle quintile: -5 percent
Fourth quintile: 10 percent
Highest quintile: 22 percent

Top one percent: 28 percent

The negative 301 percent means that a typical family in the bottom quintile receives about $3 in transfer payments for every dollar earned.

But then he notes,

Update: A reader points out the CBO's transfer data includes state and local transfers, but the tax data includes only federal taxes.  If state and local taxes were included, or if state and local transfers were excluded, the middle quintile might well turn positive, though the CBO does not provide the data to establish that conclusion definitively.

Side note: I SAW THIS FIRST, AND I SHOULD HAVE E-MAILED HIM!  UNFAIR!  Gosh darn it.


Boom.