Thursday, January 8, 2009

Progressivity of Federal tax system

In yesterday's class, we had an interesting discussion about the progressivity or regressivity of different kinds of taxes, so you may be interested to read the following analysis from a blog post by Harvard's Greg Mankiw, based on a recently released Congressional Budget Office (CBO) report.

According to Prof. Mankiw's analysis of the CBO data, taking all federal taxes into account (not just income taxes, but also payroll, excise, and corporate taxes), here is the impact of taxes on households of different income levels.

Lowest quintile[*]: [paid]4.3 percent [of its income in taxes]
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

[*Terminology note: The "lowest quintile" refers to households in the bottom 20 percent of the income distribution, the "second quintile' refers to households in the 20th to 40th percentile range, and so on.]

Graphing Prof. Mankiw's data gives us the following picture, in which the horizontal axis shows households arranged by percentile in the income distribution from poorest to richest and the vertical axis shows the average percentage of income paid in all federal taxes combined by households in each income grouping.

As I mentioned yesterday, the fact that there is an increasing trend in the data shows that the federal tax system overall is progressive. (If connecting the dots had instead yielded a horizontal line, we would have concluded that the system was proportional. If connecting the dots had instead yielded a downward sloping trend, we would have concluded that the system was regressive.)

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