Wednesday, January 2, 2013

Progressivity or Lack Thereof

Now that the mountain has labored and brought forth a mouse, herewith a little doodling to show how the likely new tax rate would compare to a genuinely progressive income tax. In the example shown, I have subdivided a minimum household income of $17,000 and a hypothetical top income (for purposes of this illustration) of $500,000 into even ranges. Then I’ve assumed a minimum tax of 10 percent and a maximum of 50 percent divided into segments the same way. This then represents a progressive form of taxation. Against this I have charted the likely 2013 taxation level, thus using the existing rates up to $450,000 and a top rate of 39.6 after that.

What emerges from this view is just how far our current tax code diverges from the ideal of a progressive pattern. Note especially that rates for households between $125,000 and $286,000 are well above the progressive rate—and the income of those from $339,000 to the top, which is here arbitrarily defined as $500,000, is below the line where a progressive taxation system would put the rates. One could also calculate a progressive line, for these data, topping out at 39.6 percent. In that case, all groups but two would get a lower tax rate. The two exceptions would be the very bottom and the very top.

As things stand, those in the well-off middle get the whack, those in the upper reaches get the miss. Genuine tax reform? We’d need a Napoleon for that.

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