On Progressive Tax Changes
I have asserted in previous posts that the income tax system has become more progressive except within the upper reaches of income distribution. In this post I will use the Tax Foundation data (which comes straight from the IRS) to prove the point. The key data are the share of income (as defined by AGI) for various cohorts, the share of income tax paid by those cohorts and the relative growth of each. What you will see below is that the federal income tax has become more progressive over time when viewed as the top 5% vs. the bottom 95%, but within the top 5%, and even within the top 1%, it has become more regressive (without allowing for the distortions imposed by tax reform in 1986 and 2000, the double taxation of C-Corp business income, and the implicit taxation of muni bond interest in the form of lower yields, all of which serve to understate the share and percent of tax paid by the highest income taxpayers in this sort of analysis).
Some might say (in fact most conservative/libertarian pundits do say) that the progressivity of the income tax system has increased if the share of taxes paid increases for high income cohorts while decreasing for low income cohorts. By this standard, progressivity has absolutely increased.
However, increasing taxes paid is only part of the picture. the share of income taken by the high income cohorts has also increased, primarily at the very top. Given that reality, an increasing tax share for those with rising income shares would be inevitable even without any change to the tax system. We shouldn’t call that progressivity. Here are the income shares over the same time period:
A more strict definition of progressivity would be to see if the increase in tax share has been greater than the increase in the income share. If that ratio increases for high income taxpayers, and decreases for lower income taxpayers, there can be no doubt that the income tax system is becoming more progressive. Fortunately, this is easy to calculate using the above data:
The ratio of tax share:income share has been declining for all cohorts in the bottom 95%, at the expense of the top 5% (the top two lines), thus it has definitely become more progressive over the last 30 years for the vast majority of taxpayers (95%). The 1% are all over the place (not surprising given this is mostly business income), but the ratio of tax share to income share has clearly declined since 1980. The 2-5%, however, are paying a higher share of tax compared to share of income declared. Within the top 5%, the tax code has become more regressive by these standards.
It is easier to see these ratio changes by normalizing at 1980 levels of tax/income share. First the 5/95 split, demonstrating clear progressivity increases (blue line/top 5% up, red line/bottom 95% down):
And there you have it. The income tax system has definitely become more progressive through the Reagan and Bush tax cuts as well as the Clinton hikes, EXCEPT within the top 5%, where it has become more regressive.
Please remember that the IRS changed the definition of AGI in 1986 and 2000. The 1986 change in particular caused much more income to be reported (you could depreciate your real estate and reduce your AGI before 1986), bringing the calculated effective tax rate and tax share: income share ratio down sharply, ceteris paribus. That effect, rather than a nefarious elitist plot, accounts for the big drop in tax share:income share for the 1% in 1986.
UPDATE: The same data source offers a shorter view of the top 0.1%, demonstrating that the regressivity within the top 5% also exists within the top 1%, as the bottom 0.9% of the top 1% has seen their tax share grow faster than their income share, just like the 2-5%: