HOW THE TAX BURDEN IS DISTRIBUTED Much debate over tax policy concerns whether the wealthy pay their...

HOW THE TAX BURDEN IS DISTRIBUTED

Much debate over tax policy concerns whether the wealthy pay their fair share. There is no objective way to make this judgment. In evaluating the issue for yourself, however, it is useful to know how much families of different incomes pay under the current tax system.

Table 12-8 shows how all federal taxes are distributed among income classes. To construct this table, families are ranked according to their income and placed into five groups of equal size, called quintiles. The second column of the table shows the average income of each group. The poorest one-fifth of families had average income of $9,880; the richest one-fifth had average income of $174,000.

The next column of the table shows total taxes as a percent of income. As  you can see, the U.S. federal tax system is progressive. The poorest families paid

Â	AVERAGE	TAXES AS A	PERCENT OF	PERCENT OF
QUINTILE	INCOME	PERCENT OF INCOME	ALL INCOME	ALL TAXES
Lowest	$ 9,880	8.0%	4%	1%
Second	26,100	15.6	11	7
Middle	44,300	20.3	16	13
Fourth	68,200	23.1	20	19
Highest	174,000	29.1	49	59

Table 12-8

8.0 percent of their incomes in taxes, and the richest paid 29.1 percent of their incomes.

The fourth and fifth columns compare the distribution of income and the distribution of taxes among these five groups. The poorest group earns 4 percent of all income and pays 1 percent of all taxes. The richest group earns 49 percent of all income and pays 59 percent of all taxes.

This table on taxes is a good starting point for understanding the burden of government, but the picture it offers is incomplete. Although it includes all the taxes that flow from households to the federal government, it fails to include the transfer payments, such as Social Security and welfare that flow from the federal government back to households. Studies that include both taxes and transfers show more progressivity. The richest group of families still pays about one-quarter of its income to the government, even after transfers are subtracted.

By contrast, poor families typically receive more in transfers than they pay in taxes. The average tax rate of the poorest quintile, rather than being 8.0 percent as in the table, is a negative 30 percent. In other words, their income is about 30 percent higher than it would be without government taxes and transfers. The lesson is clear: To understand fully the progressivity of government policies, one must take account of both what people pay and what they receive.

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