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Distribution: Are federal taxes progressive?

Taken as a whole, the federal tax system is progressive: on average, households with higher incomes pay a larger share of their income in federal tax than do those with lower incomes. In other words, the overall average effective tax rate-total tax paid as a percentage of income-rises as income rises. But not all taxes within the federal system are equally progressive. The estate tax is the most progressive federal tax. The individual and corporate income taxes are also progressive. In contrast, payroll taxes for Social Security and Medicare are regressive, claiming a larger share of income from lower-income than from higher-income households.

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  • We estimate that the average effective individual income tax rate across all tax units in 2008 will be 9.5 percent. About 40 percent of tax units will pay no individual income tax or will receive a net subsidy for 2008; the 1 percent of tax units with the highest incomes will pay an estimated 18.3 percent of their income in individual income tax on average.
    • Individual income tax averages 15.0 percent of income for the top-earning fifth, compared with -8.1 percent for the bottom 20 percent of earners.
    • At very high incomes, the average effective individual income tax rate actually declines, primarily because much of these taxpayers’ income is in the form of capital gains, which are lightly taxed.
  • The corporate income tax is also progressive. Average effective corporate tax rates are roughly the same for the bottom 80 percent of the income distribution but rise substantially for those at or near the top of the scale.
    • The average effective corporate tax rate for the top fifth of households, 5.1 percent, is more than five times the 0.9 percent average for those in the middle fifth of the income spectrum.
    • Households in the top 1 percent, who tend to get a much larger share of their income from capital, pay an average effective corporate tax rate of 8.6 percent (using the Tax Policy Center’s method of imputing corporate income tax to households based on their receipt of capital income).
  • In 2008 about 90 percent of estate tax revenue will come from the top 10 percent of cash income earners.
    • The average effective estate tax rate is essentially zero for the bottom 80 percent of the income distribution. The top 20 percent pay an average of 0.4 percent of their income, the top 1 percent pay 0.7 percent, and the top .1 percent  - the richest 1 in 1,000 - pay 0.8 percent.
    • Many estate taxpayers whose cash incomes appear low actually have substantial unrealized wealth. When taxpayers are categorized by a more comprehensive measure of income that includes this unrealized wealth, the top 10 percent pay virtually all the estate tax.
  • For 2008 average effective payroll tax rates are estimated at 8.4 percent for the bottom fifth of income earners, and 10.4 percent for the next fifth, but only 5.7 percent for the top fifth. Households in the top 1 percent will pay an estimated average of only 1.5 percent of their income in payroll taxes.
    • This regressivity of payroll taxes stems from two factors. First, the Social Security portion of payroll taxes is subject to a cap: in 2008 individuals pay Social Security tax on only their first $102,000 in earnings. Second, higher-income households tend to receive more of their income from sources other than wages, such as capital gains and dividends, which are not subject to the payroll tax.
 
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