On Income Tax Fairness
Our April Business Conditions Monthly report began the discussion of federal income taxes and equity. It reported IRS data showing that the top 20 percent of income tax filers paid 88 percent of income taxes in 2011.
Of course, the U.S. federal income tax is structured to be progressive, meaning tax rates generally rise as income rises. So, to assess the fairness of the tax system, it is important to know what share of total income the top 20 percent held.
Some will debate whether our tax code is too progressive — that our rates on upper incomes discourage economic activity — or not progressive enough. Others will debate whether or not a progressive system is the best one. Advocates of replacing the income tax with a value-added tax are pushing for a less progressive approach (although, some proposals do include some elements of progressivity).
The Congressional Budget Office has produced a very good overview of the current structure of the federal individual income tax using the same 2011 tax return data and it can be read here.
The chart above, from the CBO report, illustrates the concept of progressivity in tax structure. It is a good point of reference as the debate continues over the fairness of our tax structure.