In a letter to the editor of Tax Notes, Alan D. Viard explains that the federal tax system is highly progressive, with the highest-income 1 percent of the population paying one-quarter of all federal taxes and the lowest-income 60 percent paying less than one-sixth of all federal taxes.

Resident Scholar  Alan D. Viard

When I started reporting on taxes, I had no idea that . . . the tax system actually . . . takes from the many to enrich the few at the top. . . . If you just look at individual income taxes in isolation, you get a distorted picture. You have to look at the whole system, not just the income tax, to understand that we have a socialist redistribution system that is not trickle-down, but Niagara-up.[1]

I write to note that Johnston's statement is squarely contradicted by available data, particularly the Congressional Budget Office's latest annual tabulation of the distribution of the federal tax burden.[2]

Households in the top 1 percent of the income distribution should be a good representation of the "few at the top" to whom Johnston referred. To begin, CBO found that this small group paid a staggering 38.8 percent of all federal individual income taxes in 2005. Johnston is correct, though, that it is best to look at the "entire system" rather than only individual income taxes. After adding social insurance taxes, corporate income taxes, and excise taxes to the picture, the top 1 percent still paid 27.6 percent of federal taxes. Since this group had 18.1 percent of before-tax income, it paid a higher fraction of its income in federal taxes than the remainder of the population.

Moving below the top 1 percent, the progressivity of the federal tax system continues to hold. Households in the next 4 percent of the income distribution paid 16.2 percent of federal taxes and those in the next 5 percent paid another 10.9 percent. In total, households in the top 10 percent paid 54.7 percent of federal taxes; this group had 40.9 percent of before-tax income.

In contrast, households in the bottom 20 percent of the income distribution paid a mere 0.8 percent of federal taxes and the next 20 percent paid only 4.1 percent. The next 20 percent, the middle of the income distribution, paid only 9.3 percent. In total, the lowest-income 60 percent of the population paid only 14.2 percent of federal taxes; this group had 25.8 percent of before-tax income.

A more recent study, by Jeffrey Rohaly of the Brookings-Urban Tax Policy Center, uses different data, assumptions, and income definitions and looks at different years, but obtains very similar results.[3] Rohaly finds that the top 1 percent will pay 24.6 percent of federal taxes in 2010, the next 4 percent will pay another 16.2 percent, and the next 5 percent will pay another 10.6 percent. In total, the top 10 percent will pay 51.4 percent of federal taxes. The lowest-income 20 percent will pay 0.8 percent of federal taxes, the next 20 percent another 4.0 percent, and the middle 20 percent another 10.9 percent. In total, the lowest-income 60 percent of the population will pay only 15.7 percent of federal taxes.

Of course, those numbers cannot settle the question of what tax burdens various income groups ought to bear. Johnston may well contend that, in view of significant and rising income inequality, high-income households should pay still more than they currently do. Others, including myself, may respond that extracting substantial amounts of revenue from those households would require damaging increases in marginal tax rates.[4]

Ultimately, those disagreements must be resolved through the democratic process; the appropriate distribution of the federal tax burden is likely to be an important issue in the upcoming election. Whatever our views, though, we have a responsibility to accurately describe the current system. When households in the bottom 60 percent of the income distribution pay less than one-sixth of all federal taxes and those in the top 1 percent pay a quarter of all federal taxes, it is simply false to claim that the tax system engages in "Niagara-up" redistribution or takes from the many to enrich the few at the top.

Alan D. Viard is a resident scholar at AEI.

Notes:

1 Joseph J. Thorndike and Christopher Bergin, "Conversations: David Cay Johnston," Tax Notes, June 2, 2008, p. 918. The quoted statement appears on page 921.
2 Historical Effective Tax Rates: 1979 to 2005, Dec. 2007, http://www.cbo.gov/ftpdocs/88xx/doc8885/12-11-HistoricalTaxRates.pdf. The cited statistics are in Summary Table 2 on page 7 of the report. The CBO provides a spreadsheet with detailed data at http://www.cbo.gov/ftpdocs/88xx/doc8885/Appendix_tables_toc.xls.
3 Jeffrey Rohaly, "The Distribution of Federal Taxes, 2008-2011," June 2008, http://www.taxpolicycenter.org/UploadedPDF/1001189_federal_taxes.pdf. The cited statistics are in Table 4 on page 6 of the study. Rohaly finds even greater progressivity for 2008, presumably due to this year's stimulus rebates.
4 See Alan D. Viard, "The Trouble with Taxing Those at the Top," AEI Tax Policy Outlook, June 2007, available at http://www.aei.org/publication26354/.