Exploring the Progressivity of the Federal Tax Code
The debate over the progressivity of the federal tax code has been reignited following President Biden’s State of the Union address, where he emphasized his intention to increase taxes on the wealthy to ensure they “finally pay their fair share.” This statement has sparked a conversation on whether the current tax system is equitable, particularly in its treatment of high earners.
An examination of the data reveals that the federal tax system, which encompasses individual, corporate, payroll, excise, and estate taxes, is indeed progressive. High-income individuals not only face higher tax rates but also contribute a larger portion of taxes compared to their share of market income. For instance, in 2018, the top 1 percent of earners paid 25.9 percent of all federal taxes while earning 18.3 percent of the market income.
When considering the trend of tax progressivity, it appears that the system has become increasingly progressive over recent years. The pandemic-induced federal relief policies have accentuated this trend, with the bottom one-fifth of earners experiencing a significant drop in their average tax rate, while the top fifth saw a minimal decrease.
The driving force behind the federal tax code’s progressivity is the federal income tax. In 2021, the disparity between income share and tax contribution was evident among high earners, with the top 1 percent paying nearly half of all federal income taxes despite holding a smaller proportion of the country’s income.
While a progressive tax system aims to distribute the tax burden according to individuals’ financial capacity, it is not without its drawbacks. Critics argue that higher marginal tax rates can deter work, investment, and innovation, potentially hindering economic growth and affecting job creation and living standards.
The ongoing discourse on tax policy underscores the importance of staying informed about how taxes impact various income groups and the broader economy. As the conversation continues, individuals are encouraged to delve deeper into tax education to better understand the complexities of the federal tax code and its implications on society.
