John Lovett
How Progressive is the U.S. Tax System?
TCU
How Progressive is the U.S. (Federal) Tax System?
Data is for 1999 or 2002 depending on the series
First, some Definitions
Regressive Tax System: _______________________________
Proportional Tax System: _______________________________
Progressive Tax System: _______________________________
A 1st Look: Increasing Marginal Rates  Progressivity
2002: Federal Income Tax Rates
… before credits, etc.
Single with 1 kid(s), std.
deduction
60%
50%
38.6% was the
top marginal
rate
40%
30%
27%
Marginal Effective Tax Rate
30%
20%
15%
10%
10%
0%
0%
Exemptions and
Deductions mean no
taxable Income
-10%
Marginal Income Tax Rate
-20%
Average Income Tax Rate
-30%
-40%
$100,000
$90,000
$80,000
$70,000
1
$60,000
$50,000
$40,000
$30,000
$20,000
$10,000
$-
Gross Income
(all earned)
John Lovett
How Progressive is the U.S. Tax System?
TCU
2002: Federal Income Tax Rates
… before credits, etc.
Single
with
1 kid(s),
std.
Single
with
1 kid(s),
deduction
std.
deduction
$24,000
slope
= Taxes/Income
= Marg. Tax Rate
= 30%
$22,000
$20,000
$18,000
Taxes Owed
$16,000
slope
= Taxes/Income
= Marg. Tax Rate
= 27%
$14,000
$12,000
$10,000
$8,000
$6,000
slope
= Taxes/Income
= Marg. Tax Rate
= 10%
$4,000
slope
= Taxes/Income
= Marg. Tax Rate
= 15%
Increasing marginal rates
Income taxes increase
at an increasing rate.
$2,000
$-
$100,000
$90,000
$80,000
$70,000
$60,000
$50,000
$40,000
$30,000
$20,000
$10,000
$-
Gross Income
(all earned)
Fig. 9: Top Marginal U.S. Income Tax Rate
Source: IRS
92%
100%
90%
77%
80%
70%
70%
60%
38.5%
28%
33%
31%
40%
30%
20%
39.6%
50%
50%
7%
10%
1913
1915
1917
1919
1921
1923
1925
1927
1929
1931
1933
1935
1937
1939
1941
1943
1945
1947
1949
1951
1953
1955
1957
1959
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
0%
2
John Lovett
How Progressive is the U.S. Tax System?
TCU
But Wait, There’s More!
 Earned Income Credit: Subsidy (payment) to taxpayers for working.
The government gives a taxpayer a payment
($0.07 to $0.40) for every dollar they earn up to
a certain level of income. This credit is phasedout (taken away) at high income levels.
 Child Tax Credit:
Up to $600 (raised to $1,000 in 2003) reduction in
taxes for each child. In 2002, this could not result in a
payment to families, only a reduction in taxes. Ex., if
one otherwise owed $0 in income taxes, one got $0
child credit. If one otherwise owed $400 in taxes, one
got a $400 credit. If one otherwise owed $600 or
more one got the $600 maximum credit. Phased out
at high income levels.
2002: Earned Income Credit
Single
with
1 kid(s),
std.
Single
with
1 kid(s),
deduction
std.
deduction
$3,000
$2,750
$2,500
EIC: Payment or Credit Received
$2,250
$2,000
Note: The EIC is a payment
or reduction in taxes. The
EIC is not a tax.
$1,750
Phase-out:
Credit (payment)
is reduced for
each dollar
earned.
$1,500
$1,250
Also note, the vertical scale
is different from previous
graphs.
$1,000
Finally, the EIC varies based
on the number of kids, etc.
$750
Phase-in:
credit (payment)
per dollar
earned
$500
$250
$-
$100,000
$90,000
$80,000
$70,000
3
$60,000
$50,000
$40,000
$30,000
$20,000
$10,000
$-
Gross Income
(all earned)
John Lovett
How Progressive is the U.S. Tax System?
TCU
2002: Income Tax with
Child Tax Credit and EIC
Single
with
1 kid(s),
std.
Single
with
1 kid(s),
deduction
std.
deduction
$24,000
$22,000
$20,000
Filer has to
pay the
government.
$18,000
$16,000
Taxes Owed
$14,000
$12,000
$10,000
$8,000
Filer receives a
payment from the
govt. largely due
to EIC
$6,000
$4,000
$2,000
$0
-$2,000
-$4,000
$100,000
$90,000
2002: Effective Marginal Tax Rates
Income Tax with Child Tax Credit and EIC
$80,000
$70,000
$60,000
$50,000
$40,000
$30,000
$20,000
$10,000
$-
Gross Income
(all earned)
Single with 1 kid(s), std.
deduction
60%
50%
40%
Marginal Effective Tax Rate
30%
20%
10%
0%
-10%
Combined EMTR
Income Tax before Credits
-20%
Child Tax Credit
EIC
-30%
Effective Average Tax Rate
-40%
$100,000
$90,000
$80,000
$70,000
4
$60,000
$50,000
$40,000
$30,000
$20,000
$10,000
$-
Gross Income
(all earned)
John Lovett
How Progressive is the U.S. Tax System?
TCU
What’s the point(s) … so far?

Increasing Marginal Tax Rates: The basis of our federal income tax
system is a series of increasing marginal tax rates.

Progressive System: The system is basically progressive. Higher
income earners typically pay a higher average tax rate. Progressive,
like elastic, is not just black and white, however. It is also a question of
degree. The basis of our tax system is progressive. This still leaves us
with the question of; “Should we make it more progressive, les
progressive, or keep it the same?”.

“Across the board” cuts in income tax rates result in most of the $
value of the cuts going to the rich: Why? The rich are paying most of
the income tax.1 Check out the charts and table below and on the next
page. Half of all income tax payers could have their income tax reduced
to zero and it would only be a 4% tax cut overall!
Average Income Tax Rate Actually Paid: 1999
Source: (House) Congressional Joint Economic Committee, 2002
30%
27.53%
Average Income Tax Rate Paid
25%
20%
19.68%
15%
15.06%
11.76%
10%
9.12%
5%
4.49%
0%

1
poorest 50% of filers
50% to 74.9%
richest 75% to 89.9%
Adjusted Gross Income; basically one’s income before taxes.
5
richest 90% to 94.9%
richest 95% to 98.9%
richest 1%
John Lovett
How Progressive is the U.S. Tax System?
TCU
Share of U.S. Federal Income Tax by Group: 1999
share of all income tax filers
4.0%
paid by
poorest 50%
29.6%
36.2%
paid by next
40%
paid by
richest 1%
30.3%
paid by next
9%
Group
max AGI(1)
Avg. AGI
richest 1%
lots!
$
914,871
$
Avg. Rate
% of all
income taxes
251,901
27.53%
36.18%
Avg. Tax
richest 95% to 98.9%
$
293,416
$
170,413
$
33,538
19.68%
19.27%
richest 90% to 94.9%
$
120,847
$
101,750
$
15,322
15.06%
11.00%
richest 75% to 89.9%
$
87,683
$
67,428
$
7,930
11.76%
17.09%
50% to 74.9%
$
52,966
$
38,056
$
3,469
9.12%
12.46%
poorest 50% of filers
$
26,416
$
12,430
$
558
4.49%
4.00%

It’s more than the commonly reported marginal tax rates: Anyone
trying to judge the tax system based solely on the 10%, 15%, rates and
their cutoffs is leaving out some very important details.

Complex System: Hey! It’s actually a lot more complex than all this.
Individually, however, each of the additions to the base system, the EIC
for example, makes sense to most people. When added together, they
result in a very complex system.
6
John Lovett
How Progressive is the U.S. Tax System?
TCU
But Wait, There’s Even More!

There’s lot more to the federal income tax system. Examples
include; Itemized deductions (ex. mortgage interest, health care
spending), different taxation of capital gains, etc.
Some make the
system less progressive. Some make it more progressive. 2

Income Taxes are not the only federal taxes. FICA taxes, levied on
payroll income (ex. wages and salaries) are collected to pay for Social
Security and Medicare.3 These taxes are pretty significant. Employers
pay 7.65% of (most earnings) and employees pay the same. That’s
15.3% total (remember, the statutory incidence has nothing to do with
the economic incidence). Further, FICA taxes are not progressive.
They are proportional up to about $87,000, and then regressive
thereafter. Further, “non-payroll” income, dividend income for example,
is not subject to the FICA tax. The rich are more likely to earn nonpayroll income. Corporate profit taxes, albeit only accounting for about
11% of federal revenues, are likely progressive.

State and local taxes further cloud the picture. When will it end?
Sales taxes tend to be regressive (the poor spend a higher percent of
their income). Property taxes tend to be roughly proportional, and state
and local income taxes tend to be mildly progressive.

Taxes are only one side of the picture. Please make it stop! There
are also benefit programs. Transfer programs such as Food Stamps,
TANF (Temporary Assistance to Needy Families), WIC (Women with
Infant Children), etc., if considered part of “the system”, make it more
progressive. Social Security and Medicaid payments, financed by FICA
taxes, also make “the system” more progressive.
2
Please note that the diagrams do not represent every taxpayer. They are drawn for someone with one dependent and
“single” as their filing status. Why, by the way, did I not choose “head of household”? 1) “single” allowed me to assume
away a few more things. Further, the difference between single and “head of household” rates do not change the basic
picture presented by the graphs.
3
FICA stands for “Federal Insurance Contribution Act”. Social Security and Medicare are considered “social insurance”.
7
John Lovett
How Progressive is the U.S. Tax System?
TCU
2002: Effective Marginal Tax Rates
FICA (both halves)
60%
50%
40%
Marginal Effective Tax Rate
30%
20%
10%
0%
-10%
-20%
-30%
-40%
$100,000
$90,000
2002: Effective Marginal Tax Rates
FICA (both halves), Income Tax, Child Tax Credit, EIC
$80,000
$70,000
$60,000
$50,000
$40,000
$30,000
$20,000
$10,000
$-
Gross Income
(all earned)
Single with 1 kid(s), std.
deduction
60%
50%
40%
Marginal Effective Tax Rate
30%
20%
10%
0%
-10%
Combined EMTR
-20%
Avg. Tax Rate
-30%
-40%
$100,000
$90,000
$80,000
$70,000
8
$60,000
$50,000
$40,000
$30,000
$20,000
$10,000
$-
Gross Income
(all earned)