Our Screwed-Up Tax System

For indispensable reporting on the coronavirus crisis, the election, and more, subscribe to the Mother Jones Daily newsletter.

Bruce Bartlett writes today that the federal tax code violates principles of both horizontal and vertical equity. The table below illustrates his point:

Reading across the chart, people who make roughly the same amount of money can pay wildly different tax rates. In the middle quintile, tax rates vary from 1.7% to 23.5%. In the richest quintile, tax rates vary from 12.1% to 29.3%. That’s a violation of horizontal equity, the principle that people who make similar amounts of money ought to pay roughly similar taxes.

The red ovals illustrate the violation of vertical equity, the principle that people who make more money ought to pay higher tax rates. Although the federal tax system is generally progressive, there are startling exceptions. The most heavily taxed segment of fourth quintile, which represents incomes of around $80-100 thousand, pays higher rates than the most lightly-taxed segment of the fifth quintile, which represents incomes of $100+ thousand.

The reason for this is partly because we tax different kinds of income very differently, and partly because the tax code is littered with targeted deductions and tax credits that some people can claim but not others. If you make a lot of money from dividends and capital gains, you pay a much lower rate than someone who makes a similar amount from wages. If you own a big home, you get to take a mortgage interest deduction not available to someone who doesn’t.

In theory, tax rates are lower on capital gains and dividends because this raises the stock of capital, which is good for the economy. But as Bruce dryly points out, “The empirical question of whether sharply lower taxes on capital, and hence the wealthy, has actually raised saving, investment and productivity is one I will revisit. Suffice it to say that since 2003, when the current tax rates on capital gains and dividends were instituted, the economy offers little, if any, evidence on this score.” He has more at the link.

DEMOCRACY DOES NOT EXIST...

without free and fair elections, a vigorous free press, and engaged citizens to reclaim power from those who abuse it.

In this election year unlike any other—against a backdrop of a pandemic, an economic crisis, racial reckoning, and so much daily crazy—Mother Jones' journalism is driven by one simple question: Will America move closer to, or further from, justice and equity in the years to come?

If you're able to, please join us in this mission with a donation today. Our reporting right now is focused on voting rights and election security, corruption, disinformation, racial and gender equity, and the climate crisis. We can’t do it without the support of readers like you, and we need to give it everything we've got between now and November. Thank you.

DEMOCRACY DOES NOT EXIST...

without free and fair elections, a vigorous free press, and engaged citizens to reclaim power from those who abuse it.

In this election year unlike any other—against a backdrop of a pandemic, an economic crisis, racial reckoning, and so much daily crazy—Mother Jones' journalism is driven by one simple question: Will America move closer to, or further from, justice and equity in the years to come?

If you're able to, please join us in this mission with a donation today. Our reporting right now is focused on voting rights and election security, corruption, disinformation, racial and gender equity, and the climate crisis. We can’t do it without the support of readers like you, and we need to give it everything we've got between now and November. Thank you.

We Recommend

Latest

Sign up for our free newsletter

Subscribe to the Mother Jones Daily to have our top stories delivered directly to your inbox.

Get our award-winning magazine

Save big on a full year of investigations, ideas, and insights.

Subscribe

Support our journalism

Help Mother Jones' reporters dig deep with a tax-deductible donation.

Donate