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Tuesday, April 17, 2018

Progressive Taxation Makes Everyone Worse Off

While not as aggressive as some countries, America's progressive taxation system still has negative impacts across the board.

It’s Tax Day. Every year, the American people spend about $30 billion on accountants and software to file their taxes. That’s on top of taxes themselves. Approximately 26 percent of the average American’s income is collected, in some form or another, in taxes. This includes all forms of taxation, such as state and local taxes, as well as federal. If we look at just federal taxation, that still comes to a very respectable 16 to 18 percent (on average) of GDP. But how does that all break down when it comes to federal taxation? Are the poor really getting bent over the taxation barrel every April? Are the rich not really paying their “fair share”? And how did we even get to this point? Join Antony Davies and James Harrigan as they discuss this and more on this week’s Tax Day edition of Words and Numbers.

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Topic of the Week: Federal Taxes

 Bottom 20%Next 20%Middle 20%Next 20%Top 20%Top 1%
Market Income$15,800$31,300$53,000$88,700$253,000$1,572,000
Labor Income as % of Market Income     36%
Before-Tax Income$25,400$47,400$69,700$103,700$265,000 
Federal Taxes$800$4,000$8,900$17,600$69,700$534,000
After-Tax Income$24,500$43,400$60,800$86,100$195,300$1,037,000
Average Effective Tax Rate on Before-Tax Income3%8%13%17%26% 
Average Effective Rate on Market Income-56%-39%-15%3%23%34%

“Market Income” = income from voluntary activities

“Before-Tax Income” = market income plus government transfers

“Federal Taxes” = all monies paid to the federal government

“Transfers” = cash and in-kind payments from the federal government to people not made in exchange for goods or services

“After-Tax Income” = before tax income minus federal taxes

“Average Effective Tax Rate on Before-Tax Income” = federal taxes divided by before-tax income

“Average Effective Tax Rate on Market Income” = (federal taxes – transfers)/market income

The top 1 percent earns 20 percent of all income but pays almost 40 percent of all federal taxes.


Country comparison of tax revenue from all levels of government per GDP

US = 26 percent; Denmark = 45 percent; Ireland = 22 percent.

This ignores borrowing. If government taxed enough to balance budget, US would be at 31 percent, putting it on par with Canada.


Overview of federal taxes

Summary of the Latest Income Tax Data, 2016 Update


60 percent of US households receive more money back from the federal government than they pay


How taxes and transfers trap the poor


The income tax was originally a tax on the rich.

As Sure as Death and the Estate Tax


Number of pages in the Standard Federal Tax Reporter


Fun tax facts


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  • Dr. Antony Davies is an Associate professor of Economics at Duquesne University, and co-host of the podcast, Words & Numbers.

  • James R. Harrigan is a Senior Editor at the American Institute for Economic Research. He is also co-host of the Words & Numbers podcast.