Sen. Jeff Merkley, D-Ore., wrongly asserted Wednesday that the federal tax code is regressive, hurting low-income workers more than the rich. During a Senate Budget Committee Hearing on the benefits of a balanced budget, Merkley sparred with former Gov. John Engler, R-Mich., the president of the Business Roundtable.
Merkley asked Engler, “Why should low-income or middle-income Americans pay a higher tax rate for every $1,000 they earn than the rich?”
“I thought our tax code was progressive,” Engler responded.
Merkley replied, “Well then you’re deeply misinformed and I encourage you to read up a little on it.”
To the contrary, Merkley is the one deeply misinformed about how progressive the federal tax code is.
The wealthy pay far higher tax rates than the poor do. The highest fifth of income earners pay the government 12 times more of their income than the lowest fifth of income earners. The top one percent of income earners are hurt even more by the tax code, paying an average federal tax rate of 29 percent, compared to the two percent paid by the lowest-fifth.
Some tax breaks are claimed more often by high-income earners, such as the home mortgage interest deduction. But the size of these deductions and credits does not offset the higher tax rates the wealthy pay.
The progressiveness of the federal tax code is largely driven by the individual income tax, which provides nearly half of all federal revenue. The top fifth of income earners pay an average individual income tax rate of 14 percent, while the bottom fifth instead face an average rate of negative eight percent.
Part of the debate over the tax code’s progressiveness stems from the payroll taxes that go toward Social Security. Payroll taxes are capped at a certain amount each year, with a maximum taxable earnings of $118,500 in 2015. Since every dollar earned above that maximum is payroll tax-free, some low-income earners pay a higher payroll tax rate than high-income earners.
On payroll taxes specifically, the bottom-fifth through the middle-fifth of income earners each pay about a seven percent average tax rate. The fourth-fifth pays nearly an eight percent tax rate, while the highest-fifth of earners pays six percent.
For the highest fifth of income earners compared to the lowest fifth, the one percentage point smaller payroll tax rate is clearly offset by the 22 percentage point difference in income tax rates.
Contrary to Merkley, the slight regressiveness of the payroll tax is an argument to cut it for the poor, not force the rich to pay more.
Merkley’s question came on the heels of a discussion about how to measure cost-of-living-adjustments for Social Security benefits, so it is possible he was asking specifically about the payroll tax. But the point remains that, combined with other federal taxes, the tax code is clearly progressive, punishing the wealthy more than the poor. The progressiveness of the tax code should be measured all-inclusively, not separately.
To be fair, state-level tax codes are typically less progressive than the federal tax code because of higher reliance on sales taxes that charge everyone the same rate, regardless of income. But the state-level tax burden is smaller than the federal tax burden.
Liberals can try to push higher taxes on the rich, but it is false to argue the tax code is not progressive or that the rich are not paying their fair share.
