Distribution of Tax Burden by Quintile
By David Henderson
In comments on my post on Rand Paul and David Letterman, some commenters expressed interest in seeing the data on overall federal tax burden, not just the burden of the federal income tax. As it happens, the Congressional Budget Office reports such data. I would reprint their tables but I haven’t yet figured out how to do that. So here is the link for 2006 data. Click on their data and you’ll get an Excel spreadsheet that shows the following:
. The bottom quintile paid 4.3 percent of income in taxes,
. The top quintile paid 25.8 percent of income in taxes,
. The top decile paid 27.5 percent of income in taxes,
. The top 5 percent paid 29.0 percent of income in taxes, and
. The top 1 percent paid 31.2 percent of income in taxes.
In other words, it’s still the case that the higher your income, the higher a percent of your income you pay in taxes.
So the existence of Social Security, while it reduces the “progressivity” of the tax system, does not come close to reversing it. I would note also, though, that most economists who examine the “progressivity” of the Social Security system also take account of the Social Security benefit formula. This gives a much higher percent of income to low-income people than to high-income people. In his article on Social Security in the Concise Encyclopedia of Economics, Thomas R. Saving wrote:
The benefit formula is set up to favor lower-income workers. For example, in 2004, someone with average monthly earnings of $624 received a benefit that replaced 90 percent of earnings. Someone whose average monthly earnings were $3,760 received a benefit that replaced 42 percent of earnings, while someone with monthly earnings at the then-taxable maximum of $7,325 received a benefit that replaced only 28 percent of earnings.
Milton Friedman speculated, in a 1972 debate with Wilbur Cohen on Social Security, that the fact that low-income people enter the work force sooner and tend to leave later and die earlier reversed that “progressivity.” But that was his speculation; I’ve never seen anyone back it up.
Finally, I should note that to reach these conclusions, the CBO needs to make assumptions about the incidence of taxes. Here are their assumptions:
CBO’s analysis of effective tax rates assumes that households bear the burden of the taxes that they pay directly, such as individual income taxes (including taxes on interest, dividends and capital gains) and employees’ share of payroll taxes. The analysis assumes–as do most economists–that employers’ share of payroll taxes is passed on to employees in the form of lower wages than would otherwise be paid. Therefore, the amount of those taxes is included in employees’ income, and the taxes are counted as part of employees’ tax burden. CBO estimates payroll taxes and individual income taxes, including refundable tax credits, with a tax “calculator” that applies the tax law for the relevant year to the tax return data from the SOI.
Excise taxes are assumed to fall on households according to their consumption of taxed goods (such as tobacco and alcohol). Excise taxes that affect intermediate goods, which are paid by businesses, are attributed to households in proportion to their overall consumption. CBO assumes that each household spends the same on taxed goods as similar household with comparable income in the Consumer Expenditure Survey.
Far less consensus exists about how to attribute corporate income taxes (and taxes on capital income generally). In this analysis, CBO assumes that corporate income taxes are borne by owners of capital in proportion to their income from interest, dividends, capital gains, and rents. Over the long term, however, some models suggest that at least part of the burden falls on labor income.
I think their assumption that is most “off” (and they seem to think so too) is this last one–on capital income. Because capital is fairly mobile across borders, much of the corporate income tax is shifted to labor.