New IRS data published for tax year 2004 show the code was more progressive in 2004 than it was in 2000. That trend also sheds light on the surge of revenue that cut the federal deficit so sharply in the summer and fall of 2006.
The commonly accepted definition is that a tax system is progressive if high-income people pay a larger fraction of their income in taxes than lower-income taxpayers.
For each income group of U.S. taxpayers, the accompanying table compares the shares of tax paid to the shares of income earned.
In a purely proportional income tax system, each income group’s share of tax payments would be the same as its share of income.
For example, if tax returns with adjusted gross income (AGI) between $200,000 and $500,000 account for 9.97 percent of personal income (as the table shows they did in 2004), then they would pay 9.97 percent of the taxes. And if tax returns with AGI between $40,000 and $50,000 account for 6.97 percent of income (as they did in 2004), then they would pay 6.97 percent of the taxes.
In a proportional tax system, then, the ratio of tax share to income share is equal to 1.
Big Earners Socked
Because the U.S. federal tax system is progressive, however, the $200,000-to-$500,000 group didn’t pay 9.97 percent in 2004; it paid much more, 17.89 percent. And the $40,000-to-$50,000 group didn’t pay 6.97 percent; it paid much less, 4.20 percent.
Because all of the major Bush tax cuts took effect in May 2003, tax year 2004 is the first to reveal their full effect. For many who predicted these cuts benefited only “the rich,” these data showing greater progressivity will be a surprise.
It may be tempting to conclude the tax cuts targeted explicitly at low- to middle-income people–the new 10 percent bracket, the doubled child credit, the marriage penalty relief, and reduction of the 28 percent rate to 25 percent–outweighed those targeted at high earners. However, it is difficult to distinguish between the impact of Bush’s tax cuts and other developments in the economy.
We can say with certainty, though, that the tax cuts targeted at higher earners did not tilt the tax burden away from those high-income people.
Load Lightened for Most
As illustrated in the accompanying graph, the break point is $100,000 a year. People who made more than that carried a heavier tax load in 2004 than in 2000 for the same amount of income. People who made less than $100,000 saw income gains outpace tax payment, and therefore appear to have gotten a good deal from the Bush tax cuts.
Many reporters have settled on $200,000 as the income threshold for being “rich.” Whether this is true or not, it turns out the $200,000-and-over crowd is the only income group to have its share of the nation’s income shrink while its share of tax payments grew.
In 2000, tax returns with an adjusted gross income over $200,000 earned 26.7 percent of all income, and they paid 47.3 percent of all income taxes. That’s a tax-to-income share ratio of 1.79. Four years later, in 2004, their share of income had fallen from 26.7 to 25.5 percent, but their share of taxes had risen to 50.0 percent. That brought the ratio up from 1.79 to 1.96 in 2004.
$25K-$30K Won Big
The biggest winners were in the $25,000-to-$30,000 range.
If the Bush tax cuts are the determining factor, then the logical conclusion is the new 10 percent bracket and the doubled child credit caused dramatic reductions in tax payments for lower-income earners. As a result, the ratio of tax share to income share for the $25,000-30,000 group was cut in half.
Two other income groups stand out. Taxpayers in the $75,000-to-$100,000 group benefited more than the group below that earned $50,000-$75,000.
Most likely, the higher income group earned enough to benefit from elimination of the marriage penalty and from cutting the 28 percent rate to 25 percent, but they didn’t make so much that they lost the benefit of the doubled child credit or the new 10 percent bracket. Their share of the nation’s income grew substantially, and their tax share barely grew at all.
People making between $200,000 and $500,000 saw their tax share increase even more than the groups above them. That is the effect of the Alternative Minimum Tax, which takes away many of the Bush tax cuts for people in this range. Tax filers earning above $500,000 don’t “fall into” the AMT, because they already owe more under the regular income tax code.
Overall Progressivity Grew
Overall, the federal income tax became markedly more progressive between 2000 and 2004. Without knowing exactly how much the Bush tax cuts caused this growing progressivity, one can tentatively conclude that in the mix of tax cuts passed in 2001 and 2003, the ones aimed at people earning less than $100,000 turned out to be more powerful than those aimed at people earning more than $100,000.
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Federal Income Tax Has Become More Progressive Since 2000 |
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|---|---|---|---|---|---|---|---|
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A ratio of tax share to income share for each group in 2000 and 2004 shows how progressivity has increased. The rightmost column of the table shows the change in the tax-to-income share ratio. A positive number means the income group’s tax share has grown faster than its income share. If the number is negative, the income share has grown faster than the tax share. |
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|
Income Group (AGI) |
Income Group’s Share of AGI |
Income Group’s Share of Federal Income Taxes Paid* |
Ratio of Income Share to Tax Share |
Change from 2000 to 2004 |
|||
|
2000 |
2004 |
2000 |
2004 |
2000 |
2004 |
||
|
$1 to $5,000 |
0.54% |
0.46% |
– 0.16% |
-0.23% |
-0.296* |
-0.492** |
na |
|
$5,000 to $10,000 |
1.51% |
1.34% |
– 0.65% |
-0.90% |
-0.432* |
-0.673** |
na |
|
$10,000 to $15,000 |
2.38% |
2.14% |
– 0.53% |
-1.32% |
-0.223* |
-0.617** |
na |
|
$15,000 to $20,000 |
3.20% |
2.90% |
0.22% |
-0.85% |
0.069* |
-0.294** |
na |
|
$20,000 to $25,000 |
3.53% |
3.21% |
1.09% |
-0.11% |
0.311* |
-0.033** |
na |
|
$25,000 to $30,000 |
3.60% |
3.44% |
1.65% |
0.75% |
0.458 |
0.219 |
– 0.239 |
|
$30,000 to $40,000 |
7.40% |
7.11% |
4.22% |
3.18% |
0.570 |
0.447 |
– 0.123 |
|
$40,000 to $50,000 |
7.31% |
6.97% |
4.81% |
4.20% |
0.658 |
0.602 |
– 0.055 |
|
$50,000 to $75,000 |
16.41% |
16.34% |
12.19% |
11.86% |
0.742 |
0.725 |
– 0.017 |
|
$75,000 to $100,000 |
11.59% |
12.85% |
10.51% |
10.98% |
0.907 |
0.855 |
– 0.053 |
|
$100,000 to $200,000 |
16.75% |
18.98% |
19.39% |
22.51% |
1.157 |
1.186 |
0.029 |
|
$200,000 or more |
26.71% |
25.52% |
47.27% |
49.98% |
1.770 |
1.958 |
0.188 |
|
$200,000 to $500,000 |
9.64% |
9.97% |
15.42% |
17.89% |
1.600 |
1.795 |
0.195 |
|
$500,000 to $1,000,000 |
4.23% |
4.32% |
8.01% |
9.17% |
1.894 |
2.123 |
0.229 |
|
$1,000,000 to $1,500,000 |
1.89% |
1.85% |
3.70% |
3.99% |
1.953 |
2.160 |
0.207 |
|
$1,500,000 to $2,000,000 |
1.21% |
1.15% |
2.37% |
2.50% |
1.969 |
2.179 |
0.21 |
|
$2,000,000 to $5,000,000 |
3.13% |
2.86% |
6.13% |
6.16% |
1.957 |
2.151 |
0.194 |
|
$5,000,000 to $10,000,000 |
1.89% |
1.59% |
3.62% |
3.31% |
1.908 |
2.075 |
0.166 |
| $10,000,000 or more | 4.72% | 3.78% | 8.02% | 6.96% | 1.701 | 1.842 | 0.141 |
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*”Federal income taxes paid” equals income taxes after credits minus the refundable portions of both the Earned Income Tax Credit (EITC) and the additional child tax credit. **Certain values are negative because those income groups as a whole receive more back from the IRS (i.e., negative taxes) than they pay in federal income taxes. Source: Internal Revenue Service, Tax Foundation calculations. |
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With no data for 2005 and 2006 available yet, no one can say definitively that the income tax has continued to become even more progressive since 2004. However, the recent wave of “unpredictable” tax receipts is powerful evidence that it has, because increasing progressivity typically causes sudden waves of tax revenue when the economy booms and shocking fall-offs when it falters.
Gerald Prante ([email protected]) is a staff economist at the Tax Foundation in Washington, DC. A version of this article appeared in the Tax Foundation’s Fiscal Fact No. 70, published October 17. Used by permission.
