Is the federal tax code progressive?

In his State of the Union address, President Biden unveiled plans to raise taxes on the wealthy so that they “finally pay their fair share.” The unspoken argument: The wealthy do not They are already paying their fair share.

Two-thirds of Americans would agree, but what does the data show?

Data is answer Question, can they help? Inform Question: They can tell us who pays how much, so we can understand whether the U.S. tax system privileges or relies on the wealthy.

The federal tax system is generally progressive

The federal tax system is made up of personal taxes, corporate taxes, payroll taxes, excise taxes, and estate taxes. There are progressive taxes (higher income earners pay higher tax rates) and regressive taxes (lower income earners pay higher tax rates). However, overall, the federal tax system is a progressive tax system.

Is this because the wealthy make up a larger share of the country's income? Not exactly. High-income earners actually pay more in taxes than their share of the country's income and are taxed at a higher rate on their income.

For example, in 2018, the top 1% of earners received 18.3% of market income but paid 25.9% in federal taxes. Similarly, the top 20% of earners received 59.1% of market income but paid 68.9% in federal taxes. Their tax share exceeds their income share.

What are the trends?

The US federal tax system has become more progressive over the past few decades, but especially in the past few years. During the pandemic, the federal government passed relief programs to help people get through hard times, but these programs also made the tax and transfer system more progressive. For example, people in the bottom fifth of income brackets: Average tax rateThe average tax rate is the total amount of tax paid divided by your taxable income. While the marginal tax rate tells you how much tax you pay on your next income, the average tax rate tells you the overall proportion of your income that goes towards tax.
It fell by 17 percentage points, while the average rate for the top fifth fell by less than 1 percentage point.

What drives the progressivity of the federal tax code?

Federal income taxes promote the progressivity of the tax code: in 2021, higher-income taxpayers paid a much higher average income tax rate than lower-income taxpayers.

And, as with the entire system, the income tax share of high-income earners exceeded their share of income.

In 2021, the top 1% of earners paid 45.8% of all federal income taxes, but only 26.3% of the nation's income. The top 50% of all taxpayers paid 97.7% of all federal individual income taxes, while the bottom 50% paid the remaining 2.3%.

Pros and Cons progressive taxA progressive tax is a system of taxation in which the average tax burden increases with income. High-income households bear a disproportionate tax burden, while low- and middle-income taxpayers bear a relatively small tax burden.
code

A progressive tax system tries to match taxes to people's purchasing power (i.e., ability to pay). For example, someone who earns $1 million a year can afford to pay more in taxes than someone who earns $50,000 a year. Thus, a progressive tax system reduces the burden on those who can least afford it.

But progressive tax systems come with trade-offs, the most prominent of which is reduced economic growth. Higher marginal tax rates can change incentives to work, invest, and innovate, with adverse effects on jobs, wages, and people's living standards.

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