I was reading Thomas Sowell's brilliant explosion of the myth of "trickle down" economics, and it got me thinking about taxation and progressivity.
One point Sowell makes is that shouldn't matter what the RATE is for the various tax brackets, what matters is the REVENUE contribution each group makes-- that is the real tax burden.
Sowell points out that higher tax rates reduced the amount of tax the rich paid because it created powerful incentive for tax avoidance in tax-free investments (like municipal bonds):
In other words, high tax rates that many people avoid paying do not
necessarily bring in as much revenue to the government as lower tax
rates that more people are in fact paying, when these lower tax rates
make it safe to invest their money where they can get a higher rate of
return in the economy than they get from tax-exempt securities. The
facts are plain: There were 206 people who reported annual taxable
incomes of one million dollars or more in 1916. But, as the tax rates rose,
that number fell drastically, to just 21 people by 1921. Then, after a series
of tax rate cuts during the 1920s, the number of individuals reporting
taxable incomes of a million dollars or more rose again to 207 by 1925.
So where do we stand presently? President Obama has campaigned upon the idea that "millionaires and billionaires" need to pay their fair share.
So I read with fascination this blog posting of Greg Mankiw, Harvard economics professor. Mankiw shows that our present system of taxation is staggeringly progressive.
How progressive? Mankiw notes this CBO report and concludes the following:
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.
Think about that last statement. That means a person in the bottom quintile (lowest 20%) of taxpayer income receives on average THREE TIMES his labor and investment income in gov't transfer payments.
A startling fact-- but no doubt a large fraction of this is someone on Social Security as a sole source of income. Their low income from SSI would place them in the bottom quintile and SSI (a "transfer payment") comprises almost their entire income. Thus, it may be that a part-time Wal-Mart greeter is only making $800 a month and pulls in another$2400 or so in total benefits.
But it is remarkable that only the top 40% of taxpayers actually have a net tax liability-- where taxation is greater than transfer payments.
It does appear that there is some element of Director's Law at work.