Thursday, October 29, 2009

How progressive is the US tax system?

Answer: Not as progressive as it might appear on the surface.

The graph in our public finance textbook shows the statutory marginal tax rate schedule as follows:

That's the statutory tax rate schedule. As I explained in class today, the reality is a little bit different. As this article in today's New York Times, Easing Impact of a Tax Rise, explains:

“Generally, the higher up you are in the economic pecking order the more flexibility you have to arrange your affairs to make the form of your income fit the tax rules,” Mr. Bartlett said. He was referring to the fact that the 400 highest-income taxpayers, whose income averaged $266 million in 2006, paid an effective total federal tax rate of 17 percent, the same as the Tax Policy Center estimated for people making $50,000 to $75,000.

Essentially, the rich can hire high-priced expert ranch-hands to manage all those bed buffaloes in the tax code to figure out legal ways to keep their tax burden well below what you'd expect based on the statutory schedule shown above. In fact, some of those super high-income taxpayers managed to hold their effective tax rate below 10%, as this IRS study shows.

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