Romney’s stated goal for tax reform is that “high-income people would continue to pay the same share of the tax burden that they do today.” There are two main inputs that impact the share of tax burden paid by high income individuals. One is the tax code, and the other is income distribution. Over the past forty years the two have worked in opposite directions, with the tax code working to reduce the share paid by high income individuals and income distribution working to increase it.
To clearly distinguish the effects of the two trends, let’s begin with a hypothetical where we hold the tax code constant over the last forty years. So, for the sake of clarity, let’s suppose that for the past 40 years we’ve had a flat tax of 20%, no loopholes, no deductions, etc.
Census data (Table H2 All Races) on pre-tax income shows that in 1970, the middle quintile (the 40th to 60th percentile) got 17.4% of the income. Under our hypothetical flat tax, all income is taxed equally no matter who makes it, so if the middle quintile makes 17.4% of the income they pay 17.4% of the taxes. The top 5% got 16.6% and so contributed 16.6% of the federal tax burden. Fast-forward to 2010. The middle quintile receives 14.6% percent of income, and hence shoulders 14.6% of the tax burden. The top 5% now has 21.3% of the income and therefore, in our flat-tax scenario that means 21.3% of the taxes.
So even under our flat tax scenario the wealthy still wind up shouldering a higher percentage of the federal tax burden (moving from 16.6% to 21.3%) even though tax rates didn’t change. Assuming inequality continues to rise, if Romney really wants to have high income people pay the same share of the tax burden as they do today that would actually involve a system more regressive than the flat tax I used as an example.
Conservative media and politicians really love to talk about the tax burden on the wealthy, and in particular of the federal income tax burden on the wealthy. For example, a Republican congressman recently pointed out that in 2008 the top 5% paid 58.7% of federal income taxes. However, if we look at federal, state, and local taxes (including federal payroll taxes) we find a much less progressive taxation picture. Citizens for Tax Justice has a enormously helpful table showing that the 95-99th percentile received 14.3% of total income and paid 15.5% of total taxes. The middle quintile received 11.4% of total income and paid 10.3% of total taxes. (The U.S. Census Bureau does not include capital gains income in their income figures. This is why the numbers between Citizens for Tax Justice and the Census Bureau differ. It also means that Census Bureau data vastly understates the actual amount of inequality in our society.)
Summing up: Over the past forty years, taxes on the wealthy have fallen, but income inequality has risen more quickly than tax rates have fallen, and so the tax burden (particularly only accounting for federal income tax) that is paid by the wealthy has risen. The overall tax code of the United States is now relatively flat.
I’ve been talking about pre-tax income and shares of the tax burden, but I think it’s also worth looking at a more general picture of how after-tax income has changed in the U.S.
Update: My wonderful wife pointed out several changes (that I subsequently made) to make this more easily accessible to those of you who do not spend your Saturday mornings buried in data compiled by various government agencies and non-profits.