FAIR TRADER

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Friday, July 21, 2006

How Progressive is the U.S. Federal tax system?

A new working paper from UC Berkeley and Paris:
Findings: Tax progressivity in the US declined significantly over time, mostly to the benefit of rich Americans. Top earners' personal and corporate income taxes have substantially decreased, and payroll taxes have become more regressive. In 1960, the top 0.01% earners paid over 70% in taxes, while in 2005 the same group only paid 35%. Despite this reduction in tax rates, total taxes paid by the top 0.01% increased significantly, reflecting a large growth in the concentration of wealth among this group. Trends in tax progressivity appear to be closely linked to the party in power. International comparisons show that, between 1970 and 2005, tax progressivity substantially declined in the United Kingdom too, while increasing somewhat in France.

Novelty: Identifying the burden of taxation is a critical and much studied issue. This paper makes a unique contribution by examining tax burdens over a long period of time and focusing on the tax payments of the top 1% of income earners. While this group is small in number, it holds a significantly large amount of wealth and pays an even larger share of taxes, and should be given special relevance in any study of taxation.
A well-written book on the recent history of the US tax code, is the 2005 classic written by a NY Times reporter: Perfectly Legal. If you want to understand how Washington works, David Cay Johnston's book is a must-read.

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