Tax Rates for Geeks

About six years ago, wasting way too much time on Usenet, I took issue with a young gentleman who claimed (as progressives of that time were wont to do):

The only thing the tax cuts for the rich in the 80's led to was a massive redistribution of wealth as the poor and middle class began shouldering much more of the tax burden and the rich much less.
"Oh, yeah?" I said. One of the pieces of evidence I referenced in that discussion thread was the Congressional Budget Office's study on tax rate incidence on each "quartile" income group. Although Usenet discouraged posting graphics in discussion groups (save it for the porn groups), I did generate some graphs on my then-website and posted URLs to them in the discussion.

Now Greg Mankiw notes that the CBO has brought out new figures (CBO director's blog entry here; official report here); I thought I'd use my mad Gnuplot skillz to regenerate the graphs based on the new data. You can click on each graph to show a bigger version.

Here's the "total" Federal tax rate between 1979 and 2005 paid by each income quintile:

[Effective Total Tax Rate]

Professor Mankiw's comment:

Notice that all groups are paying lower tax rates than the historical average. But in contrast to some popular perceptions, the change is not concentrated among the upper income groups. In fact, the opposite is true.
In fact, eyeballing the graph doesn't reveal a major long-term trend for the highest income quintile, where there's a clear downward slope for the other four quintiles.

You can certainly "see" the 2001 tax cut effect in all five lines, though. You can see the Reagan tax cut most strongly in the upper three quintiles, barely in the second quintile, and not at all in the bottom quintile. What's going on?

It's a total tax rate, for one thing: the sum of income tax, "social insurance" taxes, excise taxes, and corporate taxes. The CBO helpfully breaks all these effects out for us. Here's the income tax rates only:

[Effective Income Tax Rate]

Again, income tax rate cuts don't help much when you're not paying much, if any, income tax. The bottom line's downward progress, I'd guess, is largely due to the expansion of the Earned Income Tax Credit over the past few decades; note that the last data point has the lowest quintile "paying" income tax at a negative 6.5% in 2005.

What's zinging the poor? Here's the "social insurance" tax rate:

[Effective Social Insurance Tax Rate]

The middle three quintiles pay at the highest rates here. The highest quintile pays at a lower rate, since Social Security taxes (for now) are capped, with income above the cap remaining untaxed. The rate for the poor has pretty much kept going up, though. (I'm wondering how much of this is due to welfare reform, as people were moved off the roles and into jobs, where these taxes start hitting you at the first dollar earned. Just a guess, don't know for sure.)

A totally different picture for corporate taxes:

[Effective Corporate Tax Rate]

Here, the richies get whacked, although at a relatively low rate. The Rest Of Us kick in a penny or two for each dollar of our household income.

Finally, here's the one that really kicks the lower-income households in the teeth, the various Federal excise taxes:

[Effective Excise Tax Rate]

While income taxes are strongly progressive, this shows the regressive nature of excise taxes: the poor paying at the highest rates, the rich at the lowest. The rate's pretty low, however, which allows the total rates to remain progressive.

Caveats: we talk about "quintiles" as if they represented a fixed bunch of schmoes, doomed to remain in their economic status for life. Of course, that's not true. People move between quintiles easily from one year to the next, and the income levels representing the quintile boundaries change in real terms as well. So don't read too much into this.

Also note that these are average rates over a household's entire income. You don't have to be a supply-sider to believe that marginal rates, the rates you pay on the last dollar you earn, are important as well. They only show up here indirectly.

But I find these interesting despite their limitations, hope you do too. They're certainly handy at disposing of some class-warfare rhetoric even today, as they were six years ago. You might be able to corral a Presidential candidate and ask him or her: where would these lines go under your tax proposals?

Last Modified 2012-10-15 3:42 PM EDT