Federal Taxes and Inequality in the U.S. — and Ontario’s HST
Today the U.S. Congressional Budget Office (CBO) published analysis and data on the incidence of different US federal taxes by income group.Â
They are a model of summary data and accessibility, with easily downloadable spreadsheet files, that Canada’s federal agencies (whether Revenue Canada, Statscan or the Parliamentary Budget Office) would do well to emulate. The data show the incidence of individual income taxes, social insurance taxes, corporate income taxes and excise taxes by quintiles and top income groups over the 1979 to 2007 period.
A couple interesting things of note:
1.  Everyone should know by now just what an enormous increase in inequality there has been in the  United States and Canada over the past few decades, as Emmanuel Saez, Thomas Picketty, Armine Yalnizyan, Michael Veall and others have demonstrated, but this also illustrates how the tax system has become increasingly regressive.
Average pre-tax incomes increased by 51% for all income groups in the U.S. during the 1979 to 2007 period. For the lowest quintile, the increase was only 11%, while for the top quintile, the increase was 89%.  In fact, for all income grouops below the top quintile, the increase in average incomes was less than 30%.  For the very top 1% of the income spectrum, the increase in average incomes was a champagne-cork popping 241%.  Â
The really sobering fact is that the increase in inequality on some measures after taxes  is even greater as a result of regressive tax changes: The after tax incomes of the top 1% after taxes increased by 281%, more than the increase in their pre-tax incomes, and the relative share of their income compared to the lowest income group increased more after tax than before federal taxes.
These figures don’t include the impact of other taxes at the state or local level, including income, sales, payroll and property taxes, that are probably more regressive.
2. The CBO analysis attributes corporate income taxes by income group based on their receipt of capital income, with 80% of this going to the top ten percent  in 2007.   (Their notes acknowledge that some models suggest that some of the tax may be borne by workers in the form of reduced earnings, but they choose to do it this way.)  Â
 This is the same method I used to analyze the impact of Ontario’s HST tax reform package, building on the work that Statscan did for the Ontario NDP and included in the June 2010 issue of our Economic Climate for Bargaining.   The share of investment income (dividend and capital gains) going to the top income group that I calculated from Revenue Canada data for Ontario was similar: 75% for the top 8% of taxfilers.
This analysis shows that, yes, the Ontario tax reform package is progressive at the lower end, but as a result of these corporate tax cuts, the impact is also quite regressive at the top end.  There’s a chart in the ECB document that vividly illustrates this.  Ontario’s Ministry of Finance belatedly responded to the NDP’s analysis with their own technical paper. This in effect affirms the Ontario NDP’s analysis despite a number of problems that Erin recent wrote about.   In contrast to the U.S. CBO’s straightforward approach on the distrubutional impact of CIT cuts, the method used by the Ontario Ministry of Finance to model the impact of these corporate tax cuts seems tortuous and is ultimately incomplete. Â
The Finance study assumes that some of the benefits of CIT and capital tax cuts will flow through through lower prices and includes that in its tables, but doesn’t model the impact of CIT and capital tax cuts on investment income.  It also neglects to model the impact of any business savings that are not passed through on investment income.  That’s another reason why their results are unfortunately baised.  Â
Economic impacts are often complex, and analyzing the impacts of course involves many simplifying assumptions.  But from my perspective, it is better to be balanced and relatively more simple about these assumptions than to be complicated and inconsistent.  The U.S. CBO provides a good model for this.
The shares of federal tax liabilities table was particularly interesting, in that it shows that the share of income taxes paid by the top 10%, 5%, and 1% have increased dramatically since 1979 (the last year Carter was in office). Makes you wonder if Arthur Laffer was right.
No doubt many, including those with rand-diseased brains, such as Neil Reynolds, will draw that simplistic conclusion, but I think the evidence shows other factors are at play here. The rationale behind the “Laffer curve” is that at higher tax rates, people will work less or find ways to evade taxes, leading to lower overall tax revenues. This will of course likely happen, but the question is at what point on the 0% to 100% tax rate spectrum?
With higher rates of income and lower tax rates, what we’ve seen instead is high income families working fewer hours, not more, as shown by both Armine Yalnizyan in her “The Rich and the Rest of Us” report. In effect, those with higher after-tax incomes are sensibly trading off paid work for more leisure–something I would probably do as well if I could! I’m sure a lot of people have seen evidence of this in their neighbourhoods: it’s the people with money who can afford to have a spouse at home or retire early. This suggests there may be some inverse relationships occuring along this curve.
I think the increase in incomes at the top end is explained other factors, including higher levels of capital and investment income, etc. Others have of course explored this.
I don’t have any ready evidence on whether tax evasion has increased or decreased and how this is related to income tax rates. There are a lot of other factors at play, such as ease of evasion, cost and enforcement. It’s clear there is still lots of evasion that takes place through Swiss bank accounts, as we’ve recently seen.
It would be worthwhile for Statistics Canada to do an update of the “Slicing the Pie” study (http://www.statcan.gc.ca/pub/11-621-m/11-621-m2005024-eng.pdf), published 2005 based on data to 2003. At that time more than half the Canadian federal income tax was paid by the top 10% of tax filers. Stats Can didn’t try to attribute corporate taxes in the study.