Are federal taxes progressive?
Overall, yes. But that’s not the case for each tax.
Although the overall federal tax system is progressive, with total federal tax burdens a larger percentage of income for higher-income households than for lower-income households, not all taxes within the federal system are equally progressive. Some federal taxes are actually regressive as they are a larger percentage of income for lower-income than for higher-income households.
The individual and corporate income taxes and the estate tax are all progressive. By contrast, payroll taxes for Social Security and Medicare and excise taxes are regressive (figure 2).
Individual Income Tax
The individual income tax is progressive, thanks to the impact of refundable credits for lower-income households (average tax rates are negative for the two lowest income quintiles), the standard deduction and personal exemptions (which exempt a minimum level of income from the tax), and a graduated rate structure (rates on ordinary income rise from 10.0 to 39.6 percent, with an additional 3.8 percent marginal tax on certain investment income of high-income households).
Corporate Income Tax
The corporate income tax is progressive because most of its burden falls on income from dividends, capital gains, and other forms of capital income that are disproportionately received by high-income households.
The estate tax is only imposed on households with high levels of wealth (only wealth in excess of an exemption amount is subject to the tax, and that amount for those who die in 2017 is $5.49 million and effectively double that for married couples). High-wealth is almost always commensurate with high income, so, when households are classified by income, virtually the entire estate tax burden falls on the very highest income households.
The regressive nature of payroll taxes stems from two factors. First, the Social Security portion of payroll taxes is subject to a cap: in 2017, individuals will pay the tax on only their first $127,200 in earnings. Second, as a group, higher-income households receive relatively more of their income from sources other than wages, such as capital gains and dividends, which are not subject to the payroll tax. However, because wages rise as a share of income over the first four quintiles of the distribution, payroll taxes are slightly progressive until high-income levels are reached.
An excise tax increases the price of the taxed good or service relative to the prices of other goods and services. So households that consume more of the taxed good or service as a share of their total consumption face relatively more of the tax burden from this change in relative prices. The regressivity of excise taxes is primarily the result of this relative price effect, because, on average, alcohol and tobacco represent a declining share of consumption as household income rises.
Urban-Brookings Tax Policy Center. Table T16-0094. “Effective Federal Tax Rates—All Tax Units, by Expanded Cash Income Percentile, 2017.”
———. Table T16-0093. “Average Effective Federal Tax Rates—All Tax Units, by Expanded Cash Income Level, 2017.”
Burman, Leonard E. 2007. "Fairness in Tax Policy: Testimony Before the Subcommittee on Financial Services and General Government, House Appropriations Committee." Washington, DC: Urban Institute.
Joint Committee on Taxation. 2015. “Fairness and Tax Policy.” JCX-48-15. Washington, DC: Joint Committee on Taxation.