Tax day: US tax code is fairer than people realize
Everyone likes to complain about taxes. But America’s tax system is more fair than people on the right or the left tend to give it credit for — in part because of big changes under President Barack Obama.
When you look at all taxes combined, the breakdown of “who pays what” looks about like a lot of people say it should: Almost everybody pays something, and rich people pay a much higher share of their income than poor people.
The chart below is based on 2017 federal tax estimates from the Tax Policy Center, which employs alumni of Republican and Democratic administrations; and 2015 state and local tax estimates (the most recent available) from the liberal Institute on Taxation and Economic Policy:
From: Tax day: US tax code is fairer than people realize – Business Insider
The United States has long had a pretty progressive tax system at the federal level, its the lack of social spending that distinguishes it from other developed countries.Report
Those two things are related. The US is pushing up against the limits of what it can extract by taxing income over $250k/year. Marginal rates are already over 50% in some areas. Push them much higher (e.g. by uncapping Social Security taxes), and you start running into Laffer effects. To get enough tax revenue to push spending up to 50% of GDP, you need to start tapping the middle class, which is exactly how they do it in Europe.Report
@brandon-berg
Where are marginal rates over 50%?Report
@kazzy
I should clarify that I mean top marginal tax rates, if that wasn’t obvious. Currently taxpayers in California, New York, and Hawaii face top total marginal rates slightly over 50%; in several other states the top total marginal rate is at least 49%. The New York number may only be applicable to New York City, as New York’s state income tax is moderately high, but not extraordinarily so.Report
@brandon-berg
Maybe I’m a big dummy but the idea of a “top marginal rate” makes no sense to me.
My understanding of a “marginal tax rate” is the actual percentage of income someone pays in taxes. Because of how our tax system works, someone whose salary puts them in a 25% tax bracket actually pays a lower marginal tax because different “buckets” of that money are taxed at lower rates and only the final bucket is actually taxed at 25%. And that is before accounting for deductions and credits and the like.
So when you and that article refer to “top marginal tax rate”, does that just mean the highest marginal rate anyone in that state is paying? Again, by my understanding, marginal tax rates are almost by definition specific to the individual (though obviously people can end up with the same number whether because of similar or very different circumstances) so any definitive statements about what they are feel… off? Then again, even if they are estimates, they are likely within a reasonable ballpark so this is less a counter than it is an eye towards clarification.
Of course, I may just be a big dummy…Report
Because of how our tax system works, someone whose salary puts them in a 25% tax bracket actually pays a lower marginal tax because different “buckets” of that money are taxed at lower rates and only the final bucket is actually taxed at 25%.
You have the concept right, just not the terminology. If you’re in the 25% tax bracket, your marginal rate is 25% (actually quite a bit higher because of payroll and state income taxes, probably in the 40s). The marginal rate is the rate you pay on an additional dollar of income. Your “average” or “effective” tax rate is equal to your total tax bill divided by your pre-tax income.
Your average rate will generally be lower than your marginal rate, although people with low incomes may have low or even negative average rates but face high marginal rates due to the phase-out of welfare benefits and low-income tax credits (the so-called “welfare trap” or “welfare cliff”). Come to think of it, if you include the phase-out of welfare, the highest marginal rates are not on people with very high incomes, but people with moderately low incomes, who may face marginal rates approaching 100%.
Both of them matter. The effective tax rate is important because it determines how much of your income you get to keep, but the marginal rate is also important because it affects your incentive to earn additional income.Report
Got it. Thanks for clarifying. You are correct that both matter.
I’m continually stunned by the people who don’t realize these things are different. There are people who genuinely think that a salary of $X in one bracket and a salary of $X+1 bumping them up to the next tax bracket means less take home pay because now they’re being taxed more.
You *never* lose money by making more money. You just take home less of your gains.Report
In a similar vein, a lot of people seem to think that corporations and rich people can actually increase their after-tax income by donating money to charity.
You *never* lose money by making more money. You just take home less of your gains.
I’ve heard that there may be some cases where you actually can lose money by increasing your earnings due to the phase-out of welfare benefits, but I can’t vouch for this.Report
That was the one exception I considered but if it occurs, it’s not because of a progressive tax system.Report
You can’t increase their after-tax income by donating money to charity. You can by donating things whose value as a deduction exceeds its actual value. That used to be possible with cars, though the IRS has tightened the rules for their valuation. I expect there are still some loopholes in that area.Report
What is your evidence that 50% is at (or close to) any “Laffer effect” (presuming such a creature actually exists outside of conservative think tanks)?Report
just look at California’s collapsing economy compared to Kansas’s!
(or something)Report
Yeah, didn’t expect a response on this one.Report
Pretty much. The big money is in a high VAT, which is how a typical Scandinavian government makes ends meet. Most of the econo literature on tax policy seems to see this as sensible, as its the better way to raise revenue without introducy market distortions.Report
My understanding of VAT research is that a clean and ideally-implemented VAT would be way better than income tax. About as much better as a clean and ideally-implemented income tax would be than the version we have.
(and, of course, any consumption tax like a VAT is going to be less progressive than a progressive income tax, which is fine if you have a Scandinavian social safety net, but something of a problem in the USA)Report
I never liked paying 0% in taxes anyway.Report
Much to my surprise last week, I discovered that despite not doing any contract work, and having nothing withheld from other income sources, we paid negative income tax: $1 refund from the feds, $6 from Colorado. Still paid thousands overall in property and sales taxes.Report
Oh sure, maybe if you look at one thin slice. I however, look at my total taxes paid: income, gas DMV registration fees, “emissions testing fees”, and all other other taxes. Things look a lot different that way.Report
@damon
Why count “fees” as a tax? This isn’t a gotcha question and I realize that sometimes politicians and the like use word games to disguise things so I’m trying to better understand how we decide what does and does not get counted as a tax.Report
Why not count them? It’s not an optional thing, you must pay it if you want to drive in the state.Report
I’m not saying not to. Just asking where the line is.
What about passport application fees? Wedding license fees? Anything paid to the government?Report
Any payments mandated by the government in order to participate in an activity. Can’t travel outside the country without paying the passport fee. Can’t get the benefits of a state-blessed marriage (automatic medical power of attorney, say) without paying for the marriage license. Can’t drive a car you buy without paying (1) sales/use tax in most states, (2) registration and annual taxes, (3) drivers license fee, (4) mandatory insurance premium*, and (5) fuel taxes. Even if it’s an electric car, look at your electric bill and note the various fees and taxes.
* New Hampshire does not require auto insurance. Virginia does not require insurance, but requires that you pay a $500/yr fee if you go uninsured. Mississippi allows you to post a bond instead of purchasing insurance. In some states, this tax is so onerous that the state has to create assigned risk pools with capped premiums. State Farm has stated publicly that they oppose mandatory auto insurance because of its impact on the poor.Report
“State Farm has stated publicly that they oppose mandatory auto insurance because of its impact on the poor.”
meaning: because auto insurance is mandatory, poor people are required to buy it, and so SF can’t just charge out the ass because then poor people wouldn’t be able to afford it and SF would get in trouble.Report
Damon, Kazzy,
I’m hoping it’s not bribes.Report
What Micheal Cain said.Report
Sure, those cost money, but they’re nothing compared to Europe, where you pay a VAT of 20+% on everything.Report