From my understanding of the US tax system, I disagree about the progressivity of the overall US tax system. What I will focus on for my response to this debate are the payroll taxes, after-tax rates on income, excise tax burdens shifted to consumers, and the ability to pay principle. "For one, “The federal income tax system in the US uses increasing marginal tax rates (Roach, p. 5)” and this process levies higher tax rates on higher incomes, thus making it progressive. However, accounting for all taxes within the federal system, Social Security and Medicare payroll taxes distorts this progression. The Social Security portion of payroll taxes is subject to a cap of 12.4% tax on the first $106,800 of income (in 2009) with being responsible for only 6.2% if not self-employed. So someone making $500, 000 is exempt from further Social Security tax after the first $106,800 of their income which would be a tax burden of $6,622. Then there is the Medicare portion of payroll taxes that is subject to 2.9% on all income but an individual only being responsible for 1.45% if not self-employed. An individual with $500,000 in income would be taxed $7,250 on the Medicare portion making their overall Social Insurance tax burden $13,872. Now a person with only $40,000 would be charged on that entire $40,000. There tax burden would be $2480 in Social Security taxes and $580 in Medicare amounting to a collective $3060 in Social Security taxes. At first glance, it appears that the overall Social Security taxes are progressive and equally distributed over income but. However, when accounting for the overall tax rate on overall income (including the income that is not calculated after the Social Security cap), the person with the higher-income will pay a lower rate of taxes which makes the Social Security tax regressive as there is a “relatively smaller tax burden as incomes rise above the cap (Piketty & Saez, p. 1)”. Because these payroll taxes account for the biggest tax burden on income, the overall tax system is not as progressive as purported (Piketty & Saez). Social Security Insurance tax should be revised to account for this disproportion.
Secondly, individuals can exclude a portion of their total income with deductions like personal exemptions, investment income and other adjustments so the income that is taxed is lower than total income. The Tax Reform Act of 1986 simplified the US tax system and “eliminated the ability to exclude from taxable income 60 percent of long-term capital gains of the most affluent taxpayer (Slemrod).” However, capital gains are lightly taxed and this disproportionately benefits higher-income individuals that derive much of their income from investments where the “average effective individual income tax rate actually declines (Tax Policy Center).”
Lastly, the tax incidence analysis suggests that while individuals are not taxed directly for everything, all taxes are ultimately paid by them as “the final incidence of taxation is contingent upon how a specific tax translates into changes in prices and changes in economic behavior among consumers and businesses (Roach, p. 19).” Take for instance excise taxes, which are levied on the production, sale, or use of a commodity. Excise taxes are progressive and paid directly by the manufactures. However, because excise taxes are usually incorporated into a price of a product, excise taxes are transferred to the consumer in the price paid for a product. This can have a huge impact on lower incomes as a significant bulk of their income goes to goods that incur excise taxes; such is the case with gas and cigarettes. While one would argue that gas and cigarettes may not be necessity items, they are both inelastic as they are both highly demanded commodities based on addiction and the need to fuel cars for transportation. This is where the ability-to-pay principle is also seen. Low-income households have relatively less money to finance their basic needs like rent, food, medical care and even gas. Money is further reduced after accounting for tax burdens. A flat rate or regressive rate in any tax would “impose a larger burden, in terms of foregone necessities, on low-income households as compared to high-income households (Roach, p. 3)” where high-income households only pay a fraction of their income to these same basic needs. Excise taxes can be seen as a flat rate as it’s shouldered by all consumers within the income distribution and not to mention how I have already demonstrated the imposition of the Social Security tax on lower incomes. Thus, I conclude that “when all taxes are considered, the US tax system is much less progressive” and that many taxes are actually regressive, “hitting low-income households at a disproportionately high rate (Roach, p. 2).” This has been further exacerbated by the Bush tax cuts passed in 2001 that looked to lowering individual income tax rates across the board but adversely reduced the overall progressiveness of the federal income tax as high-income taxpayers received a disproportionate share of the total cuts (Roach). Progressivity of the US tax system has decreased in the last few years and would further decrease if the Bush tax cuts are made permanent.
Work Cited:
A Citizen’s Guide for the 2008 Election and Beyond. 2008. Tax Policy Center: Urban Institute ad Brookings Institution.
Piketty, Thomas and Emmanuel Saez. 2007. “How Progressive is the U.S. Federal Tax System? A Historical and International Perspective.” A Journal of Economic Perspectives, 21 (1), 3–24.
Roach, Brian. 2010. "Taxes in the United States: Basic Concepts, History, and Progressity. Global Development & Environment Institute,Tufts University MA.
Slemrod, Joel B. “Progressive Taxes.” The Concise Encyclopedia of Economics.Assessed November 8, 2010: http://www.econlib.org/library/Enc1/ProgressiveTaxes.html
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