The recent claim that in 2018, the 400 wealthiest American families paid, on average, a smaller percentage of their income in taxes (23 percent) than the percentage paid by the bottom half of all U.S. households (24 percent) has generated enormous attention and controversy. This assertion is featured in The Triumph of Injustice: How the Rich Dodge Taxes and How to Make Them Pay, a new book by University of California, Berkeley economists Emmanuel Saez and Gabriel Zucman. The finding that the tax burden is disproportionately higher for lower income families is at odds with common perceptions that the United States has a progressive tax system. And it has particular relevance because the country has seen a marked increase in income inequality over the past several decades.
A finding that the 400 wealthiest households pay a smaller share of their income in taxes than do the bottom half of U.S. households is cause for debate.
The progressivity of a tax system reflects how the proportion of income paid in taxes varies for taxpayers as their income rises. A progressive tax system is one in which people with higher income pay a higher share of their income in taxes. For example, the income tax is generally progressive – people do not pay taxes on their first several thousand dollars of income, and there are rising tax rates with higher levels of income. In contrast, in a regressive system a household’s share of income that goes to taxes falls as income rises. Social Security’s payroll tax is regressive since it is not charged on any earnings above $132,900, so those earning above this threshold pay an increasingly lower percentage of their income to this payroll tax as their income rises (see here for instance). It is important to note however, that looking only at Social Security’s payroll tax gives you an incomplete view of the progressivity of the system. When you take Social Security benefits into account, the overall Social Security program – including benefits – is progressive.