Exploding myths about disparity in taxation

As emphasized by the nonpartisan Institute on Taxation and Economic Policy (ITEP), the overall taxation of Americans is a complex interaction of federal, state, and local taxation. For instance, taxpayers commonly deduct federal income taxes in their state income tax returns. The consequence is that the states offset to some degree progressive taxation by the federal government.

Citizens for Tax Justice has prepared a striking brief, America’s Tax System Is Not as Progressive as You Think, on the basis of ITEP data:

Conservative lawmakers and pundits often claim that the richest Americans are paying a disproportionate share of taxes while a huge number of lower-income Americans pay nothing at all. They’re wrong.

It’s true that the very rich pay a large share of federal income taxes, and that many taxpayers are too poor to owe any federal income taxes. But federal income taxes are only part of the picture. Other types of taxes, like federal payroll taxes, federal excise taxes, and state and local taxes are regressive, meaning they take a larger share of income from a poor or middle-class family than they take from a rich family.

Here’s their double-load “money shot”:

The share of total taxes is fairly close to the share of total income at all incomes levels.* The total effective tax rate of the top 1 percent, with average cash income of $1.254 million in 2010, is identical to that of the group with average cash income of just $100 thousand.

Although we’re focusing on taxation, do please note that the first chart conveys vital information about income disparity. The “THEM” of the Tea Party rant “They’re taking our hard-earned money and giving it to THEM” — the lowest 20 percent — have only 3.5 percent of total income. And the lowest 40 percent has only 10.6 percent. I’ll mention also that 97 percent of the net worth of Americans is concentrated on 50 percent of households. If the federal government were to confiscate the wealth of the lower 50 percent, it would not erase the deficit in this year’s budget (one-tenth of the federal debt).

The following improves on the second chart by showing how progressive federal taxation is offset by regressive state and local taxation, but is based on 2009 data [source].

Some concluding remarks from the brief:

All Americans pay taxes. Everyone who works pays federal payroll taxes. Everyone who drives pays federal and state gas taxes. State sales taxes affect everyone who shops, and state and local property taxes affect everyone who owns or rents a home (the tax is passed on to renters in the form of higher rents). Most states also have income taxes, most of which are not particularly progressive.

Many conservative lawmakers and pundits focus only on those federal taxes that affect the rich more, like the federal personal income tax, estate and gift tax and corporate income tax. But as these figures illustrate, the tax system as a whole, including all the types of taxes that people pay, is just barely progressive.

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*Total income “includes employer-paid FICA taxes and corporate profits net of taxable dividends,” and total taxes “include all federal, state & local taxes (personal and corporate income, payroll, property, sales, excise, estate etc.”