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Unformatted text preview: How Progressive is the U.S. Federal Tax System? A Historical and International Perspective Thomas Piketty and Emmanuel Saez O ver the last 40 years, the U.S. federal tax system has undergone three striking changes, each of which seems to move the federal tax system in the direction of less progressivity. First, there has been a dramatic decline in top marginal individual income tax rates. In the early 1960s, the statutory individual income tax rate applied to the marginal dollar of the highest incomes was 91 percent. This marginal tax rate on the highest incomes declined to 28 percent by 1988, increased significantly to 39.6 percent in 1993, and fell to 35 percent as of 2003. Second, corporate income taxes as a fraction of gross domestic product have fallen by half, from around 3.54.0 percent of GDP in the early 1960s to less than 2 percent of GDP in the early 2000s (for example, Auerbach, 2006). Meanwhile, corporate profits as a share of GDP have not declined over the period, suggesting that capital ownerswho are disproportionately of above-average incomesearn relatively more net of taxes today than in the 1960s. Third, there has been a substantial increase in payroll tax rates financing Social Security retirement benefits and Medicare. The combined employeeemployer payroll tax rate on labor income has increased from 6 percent in the early 1960s to over 15 percent in the 1990s and 2000s. Moreover, the Social Security payroll tax applies only up to a capequal to $90,000 of annual earnings in 2005and is therefore a relatively smaller tax burden as incomes rise above the cap. However, the conclusion that these three changes have reduced the progres- sivity of the federal tax system is less obvious than it may at first appear. For example, in the case of the individual income tax, the numerous deductions and y Thomas Piketty is Professor of Economics, Paris School of Economics (PSE), Paris, France, and a Research Fellow, Centre for Economic Policy Research, London, United Kingdom. Emmanuel Saez is Professor of Economics, University of California, Berkeley, California, and Research Associate, National Bureau of Economic Research, Cambridge, Massachusetts. Their e-mail addresses are ^ firstname.lastname@example.org & and ^ email@example.com & , respectively. Journal of Economic PerspectivesVolume 21, Number 1Winter 2007Pages 324 exemptions mean that the tax rates listed in the tax tables might be a poor measure of the actual tax burden faced by each income group. In addition, some forms of income, such as capital gains, have traditionally faced lower tax rates; this benefits disproportionately high-income taxpayers. In the case of the corporate income tax, there are competing theories about who bears the burden of the tax: for example, does it reduce returns for stockholders or reduce the returns on other assets such as bonds or pensions of future retirees; is it paid by workers in the form or lower wages or is it paid by consumers in the form of higher prices?wages or is it paid by consumers in the form of higher prices?...
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This note was uploaded on 04/22/2009 for the course ECON 4626 taught by Professor Zax during the Spring '08 term at Colorado.
- Spring '08
- Progressive Tax