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Wednesday, December 12, 2007
Higher Tax Rates = Higher Income Inequality
New figures released by the CBO indicate that overall effective federal tax rates have increased from 20.1% in 2004 to 20.5 in 2005%. Through a process known as "real bracket creep," Americans are paying higher tax rates without changes in the tax code. As incomes grow faster than inflation, taxpayers will find themselves paying taxes at higher marginal rates.
But the real story here is that this increase in effective tax rates is due primarily to increases in income inequality. As overall effective tax rates increased from 2004 to 2005 so did the share of income that goes to the top quintile of the income distribution. Meanwhile, shares going to the bottom four quintiles declined.
And an interesting twist to this report, the overall effective tax rate would have been higher in 2005 except for the fact that income from non-wage sources grew faster than than wage income. Because capital gains tax rates are lower than wage income tax rates, this boost in income actually dragged down the increase in effective federal tax rates.
| Shares of Pre- and After-Tax Income, 2004 and 2005 |
| Shares of Pre-Tax Income | Shares of After-Tax Income |
| Quintile | 2004 | 2005 | 2004 | 2005 |
| 1st Quintile | 4.1 | 4.0 | 4.9 | 4.8 |
| 2nd Quintile | 8.9 | 8.5 | 10.0 | 9.6 |
| 3rd Quintile | 13.9 | 13.3 | 14.9 | 14.4 |
| 4th Quintile | 20.4 | 19.8 | 21.2 | 20.6 |
| 5th Quintile | 53.5 | 55.1 | 50.1 | 51.6 |
| Top 10% | 38.9 | 40.9 | 35.5 | 37.4 |
| Top 5% | 29.0 | 31.1 | 25.9 | 27.8 |
| Top 1% | 16.3 | 18.1 | 14.0 | 15.6 |
| Source: CBO, "Historical Effective Federal Tax Rates: 1979 to 2005" |
Posted by Craig Jennings
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