View all Articles
Commentary By Josh Barro

Do One Percent of Americans Pay 38 Percent of "Taxes"?

Economics, Economics Tax & Budget

A reporter emailed me to ask what I think of this Heritage Foundation blog post from Rob Bluey, headlined "Top 1 Percent Paid 38 Percent of Taxes." After writing up my response, I figured I would share it with all of you, as well.

The main problem with the post is the headline. The 38 percent statistic regards the federal personal income tax, not "taxes." The federal income tax is the most progressive major component of the United States tax code, so showing that it is very progressive does not tell you very much about overall tax progressivity.

Bluey also quotes his colleague Curtis Dubay, to this effect: "According to the CBO, the top 1% of income earners pay 30 percent of their income in all federal taxes." Dubay cites a Congressional Budget Office table which runs through 2007 and includes federal personal income, payroll, and corporate income taxes.

I'd note that high earners have gotten a federal personal income tax cut since 2007, due to the repeal of provisions that stripped high earners of certain deductions. But the main issue here is with corporate income tax. In assigning the incidence of the corporate income tax to individuals, CBO assumes the tax is borne evenly and entirely by owners of capital, which makes its distribution very progressive: the top 1 percent of filers paid 8.8 percent of their income in federal corporate income tax, compared to 0.8 percent for the middle quintile.

Certainly, when thinking about the federal tax burden, it makes sense to count the corporate income tax. The problem with CBO's approach is that some portion of the corporate income tax—perhaps a majority of it—is borne by wage earners, not capital holders. If you assign some portion of the tax to wage earners, you calculate a lower effective tax rate for the top 1 percent.

A 2004 Heritage paper by Stephen Entin offered this take on the incidence issue, criticizing the CBO methodology.

“In years past, the Congressional Budget Office has also suggested that the corporate tax falls about half on owners of capital and about half on the workforce, arguing that the tax depresses capital formation and therefore depresses productivity and wages, shifting at least some of the burden to labor. More recently, the Treasury and the CBO have assumed that the corporate tax is borne by owners of all capital (corporate capital and competing non-corporate capital), and none by workers.

Most economists believe that the burden of the corporate tax is borne to some extent by shareholders, workers, and consumers (who are often the same people in different roles), but they do not agree on the division of the burden. Because of the uncertainty in the profession, the JCT has stopped assigning it to anyone in the official "burden tables." If the corporate income tax were raised and individual income taxes were cut by equal amounts, the burden tables would show a reduction in the tax on the population with no loss of federal revenue–an ultimate (and quite impossible) free lunch!

Of course, someone pays the corporate income tax even if the JCT cannot point out who it is. In fact, a modern view of the corporate tax in the context of an open, globally integrated economy holds that the burden of the corporate tax falls primarily on labor after all adjustments are taken into account.”

I wouldn't go so far as Entin and say the corporate tax falls "primarily" on labor—I think the jury is out. But it certainly falls partially on labor, and I'd be very surprised if Dubay agrees with CBO that it falls entirely on capital, even though that is the assumption underlying the 30 percent figure.

Finally, I'd note that state and local tax systems tend to be more regressive than the federal tax system, and for good reason—the taxes which it is best for state and local governments to rely on structurally (property tax and especially sales tax) are more regressive than income tax; also, the federal government is better positioned to levy a heavily graduated income tax than the states are. So, the federal tax code should exceed the target level of progressivity for the tax system as a whole, so that state and local taxes can be more regressive.

In summary, I don't find it particularly alarming or instructive that the top 1 percent of filers pay 38 percent of the federal personal income tax.

This piece originally appeared in Forbes

This piece originally appeared in Forbes