US Federal Taxes Haven't Done Much For Wealth Redistribution

Mitt Romney

Photo: AP

To what extent do US federal taxes redistribute wealth? That’s a question that comes up because “redistribution” is a hot word in American politics at the moment.Republicans in recent days have been brandishing a newly released 1998 tape on which then-state Sen. Barack Obama of Illinois endorses the concept of government redistributing wealth from one group to another.

“I actually believe in redistribution, at least at a certain level, to make sure that everybody’s got a shot,” says Mr. Obama on the 14-year old recording.

Yes, the GOP is pushing this to counter that video of Mitt Romney saying that 47 per cent of Americans believe they are “victims” entitled to government aid. Yes, as our colleague Liz Marlantes notes, Mr. Romney supports some level of redistribution himself – unless he wants to end Medicare, Medicaid, Social Security, and other transfer programs, as well as progressive taxation.

Still, we thought we’d take a look at the tax system itself to see what level of redistribution it contains as a means of beginning to explore how this concept works in the American political system.

In July, the Congressional Budget Office released a study that looks at this issue pretty thoroughly up through 2009, the latest year for which comprehensive tax data are available.

According to CBO, in 2009 the lowest quintile (20 per cent) of US households accounted for 5.1 per cent of the collective before-tax income. The middle quintile had 14.7 per cent of before-tax earnings. For the top quintile, the figure was 50.8 per cent.

That’s right – the top 20 per cent of earners receive about 51 per cent of the cash that’s flowing into US households.

Now let’s look at the share of total federal taxes these same groups paid out. The lowest quintile paid 0.3 per cent of this tax burden. The middle quintile paid 9.4 per cent. The top quintile paid 67.9 per cent, according to CBO.

As you see, the share of US taxes owed by the lowest and middle quintiles is less than their corresponding share of national income. For the top 20 per cent, the share of taxes is higher than their share of income.

This state of affairs is due to the fact that the US tax code is progressive. It taxes higher incomes at higher rates. Some of this money is then redistributed to lower-income households in the form of transfer payments: Social Security, Medicare, unemployment insurance payments, and so on.  

So how has this gap changed over the years? Well, it bounces around a bit due to tax code changes and the state of the national economy. Perhaps we should take a look at figures from 1998 – the year Obama mentioned the “r” word on the new tape.

In 1998, the lowest quintile of households earned 4.9 per cent of the nation’s income, and paid 1.4 per cent of the federal tax burden. The middle quintile earned 14.1 per cent of the cash, and paid 10.5 per cent of the federal taxes. The highest quintile got 52.1 per cent of the income and paid 64.1 per cent of the taxes.

We’ll save you some eyestrain here – the distribution is about the same.

“Differences between before- and after-tax inequality are little changed since the mid-1990s,” concluded CBO analysts Ed Harris and Frank Sammartino in an August presentation to a National Bureau of Economic Research conference.

In light of that, why is “redistribution” a controversial political word? Well, to oversimplify, many Democrats are focused on the rapid income gains of the very top earners – the 1 per cent – and the amount of money they’ve saved as a result of the Bush-era tax cuts. Some conservative Republicans argue that progressivity is wrong, and that a flat tax, in which every income is taxed at the same rate, would be a fairer way of administering the federal system.

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