The Chart That Eviscerates Five Terrible Talking Points About Taxes

Discussions of tax progressivity tend to have a low ratio of signal to noise. The following chart should clear up a few things.

2013 tax distribution

Here are the big takeaways: Our tax code is highly progressive. Almost everybody pays something. Even the poorest 20 per cent of American households (who make on average about $11,000) pay 13 per cent of their incomes in tax. The wealthiest 1% pay a rate of 43%, about 3.5 times as much.

Now that you’ve seen the chart, I have a few instructions:

1. Stop talking about “non-payers” or “the 47 per cent or using any other talking point about how a worrisomely large share of Americans don’t pay taxes. Don’t call people who don’t pay federal income tax “lucky duckies.” Almost everybody pays taxes.

2. Stop ignoring state and local taxes. In his paper “Defending the One per cent,” Harvard economist Greg Mankiw responds to liberal claims about tax regressivity by citing Congressional Budget Office data showing that the bottom quintile of earners pay just 1% of their income in federal tax while the top 1% pay 29%. But state and local taxes are modestly regressive, partly offsetting the figure Mankiw cites.

2. Stop fretting about the progressivity of any specific tax. There are good reasons for some taxes to be more progressive than others. Particularly, the federal government is in a better position to levy a highly progressive income tax than states or localities are. If the whole tax system isn’t progressive enough, worry about that. Don’t fixate on the fact that some component, such as Social Security payroll tax, has a regressive structure.

4. Stop talking about a flat income tax like it were some especially fair and natural thing. Conservatives often talk about flat taxes as being fair because everyone pays the same share of their income. Setting aside whether that’s actually fair, it isn’t even true; a flat tax on income would combine with other components of the tax code to make our overall system regressive.

5. Stop fixating on Warren Buffett. Buffett likes to talk about how his tax rate is lower than his secretary’s. That’s misleading. Buffett’s tax return doesn’t reflect the corporate income tax paid by the companies he owns equities in. Exactly who bears the burden of corporate income tax is a controversial topic, but the most common view is that a majority is borne by owners of capital, while a minority of the tax gets shifted to workers in the form of lower wages. If you distribute the burden of corporate income tax according to that assumption, you find that effective tax rates keep going up as you get into the top 1% and top 0.1%. It is not typical for the ultra-wealthy to pay lower tax rates than the affluent workers under them.

Data for the chart above are drawn from calculations by the Tax Policy centre and the Institute on Taxation and Economic Policy.

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