Have Federal Income Taxes Gotten More Progressive Since 2000?

August 10, 2007

There are conflicting views on whether federal income taxes have gotten more or less progressive since 2000, a time frame that includes the Bush tax cuts that some have portrayed as flowing disproportionately to the rich. Below, we take a look at new IRS data, released this week, in an attempt to answer the question.

The answer ultimately depends on how you measure progressivity. There are multiple ways of measuring progressivity. Some attempt to measure progressivity based upon the pre-tax share of income versus the after-tax share of income, implicitly stating that the goal of progressivity is to redistribute income. The problem with such measures is that almost any tax cut will appear as if the tax code has gotten less progressive, even though it is possible that the dollar amount of redistribution to the poor could increase in the process.

The method of measuring progressivity that we present below does not suffer from such a fallacy. Specifically, we take the tax share for an income group and divide it by the group’s income share, and see how that ratio has changed over time for different income groups. The larger the number, the worse off the income group is as a result of the progressivity. Under a purely flat tax with no exemption, if a group earned 15 percent of AGI, it would pay 15 percent of the nation’s tax burden. Under a progressive system, if a poor income group earned 15 percent of the nation’s income, it would pay less than 15 percent of the nation’s tax burden (ratio less than 1); while a rich group that earned 15 percent of the nation’s income would pay more than 15 percent of the nation’s tax burden (ratio greater than 1).

The results suggest that the amount of progressivity within the federal individual income tax system increased from 2000 to 2005, even though income inequality increased slightly.

Ratio of Tax Share to AGI Share: 2000 vs. 2005

Income Group (AGI)

Ratio in 2000

Ratio in 2005

$1 – $5,000

-0.272

-0.448

$5,000 – $10,000

-0.380

-0.605

$10,000 – $15,000

-0.192

-0.538

$15,000 – $20,000

0.088

-0.296

$20,000 – $25,000

0.320

-0.037

$25,000 – $30,000

0.463

0.193

$30,000 – $40,000

0.574

0.410

$40,000 – $50,000

0.662

0.562

$50,000 – $75,000

0.748

0.694

$75,000 – $100,000

0.914

0.812

$100,000 – $200,000

1.165

1.128

$200,000 – $500,000

1.611

1.721

$500,000 – $1,000,000

1.908

2.031

$1,000,000 – $1,500,000

1.967

2.094

$1,500,000 – $2,000,000

1.982

2.092

$2,000,000 – $5,000,000

1.971

2.069

$5,000,000 – $10,000,000

1.922

2.003

$10,000,000 and above

1.712

1.772

Note: These numbers include the refundable portions of the Earned Income Tax Credit and the Additional Child Tax Credit, meaning that the effective tax rate paid for by those at the bottom can be negative. Negative income returns were excluded. Source is IRS Statistics of Income.

The numbers above show that for all income groups above $200,000 in AGI, the ratio of tax share to income share increased. For all income groups below that, the ratio decreased. The 1.712 number for the $10 million-and-above group in 2000 means that for every percent share of the income this group earned, its tax share increased by 1.712 percentage points. In 2005, that number has risen to 1.772, implying an increase in progressivity over this time period. (Technically, in order to get a true measure of the progressivity/regressivity of the Bush tax cuts themselves, one would have to hold the income distribution constant and calculate tax burdens under pre-tax cut and post-tax cut law.)

One final note with regards to progressivity: while addressing the issue of the progressivity of a given tax is important, a true measure of progressivity would also take into consideration the distribution of government spending. Therefore, in order to measure the true change in progressivity from any tax cut (or hike), one would need to also take into consideration the change in the distribution from the reduced (increased) government services that financed that tax cut (hike). For more on the need to measure progressivity by looking at the entire fiscal system, check out our working paper on the issue.


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