Report Decries Decline of 'Progressive' Tax Code

By Nathan Burchfiel | July 7, 2008 | 8:23 PM EDT

( - Top income tax rates have fallen by nearly half in the last 50 years, adding to growing income inequality in the United States, according to a report released Thursday by the Center on Budget and Policy Priorities.

"[D]uring a period in which economic forces have been generating increased pre-tax inequality, changes in the tax system have exacerbated rather than mitigated the widening of the income gap," the report states.

The study examined tax data between 1960 and 2004 and found that "the progressivity of the U.S. federal tax system at the top of the income distribution has declined dramatically since the 1960s."

In a "progressive" tax system, earners with higher incomes pay a higher tax rate than middle- and lower-income workers. According to the CBPP, a tax system is considered progressive if the distribution of after-tax income is more equal than the distribution of pre-tax income.

In 1960, the tax rate for earners in the top one-hundredth of one percent was more than 70 percent. In 2004, the same group fell into a tax bracket demanding less than 40 percent. During that time period, the tax rate on the middle fifth of earners remained relatively stable, fluctuating between 15 and 20 percent.

In 2005, the top one percent of American families - those with an income above $340,000 - accounted for more than 19 percent of nationwide pre-tax income, according to the study. With an average federal tax rate of 33.7 percent, those families accounted for 17.1 percent of post-tax income.

The study also examined the historical distribution of income and found that the top one percent of households accounted for less than 10 percent of nationwide income in 1960 but gathered 19 percent of income in 2005. The top one percent's income share was roughly the same in 2005 as it was in the first four decades of the 20th century.

Income inequality declined sharply in the middle of the 20th century, due in large part to the economic effects of World War II, according to Emmanuel Saez, one of the authors of the study. Income inequality began its return in the 1980s.

"Concerns about growing inequality are wide-ranging," CBPP Executive Director Robert Greenstein said in a conference call with reporters on Friday. "These findings suggest that it would be singularly unfortunate to make decisions that aggravate these trends and make income inequality even greater than it has already become."

"The economy ... is indeed growing fast at over 3 percent over the last three years," Saez said.

"If inequality is increasing so much that a large fraction of that growth goes to the top, people won't have the feeling that the economy is going so well and would call possibly for reforms that could take the form of changing the tax system," Saez added.

Bill Beach, an economic analyst at the conservative Heritage Foundation, criticized the CBPP's characterization of what makes a progressive economy. The group's use of income tax rates is inaccurate, according to Beach, who said progressive economies are graded on the share of income taxes paid.

According to IRS data, the top one percent of income earners in 2004 paid nearly 37 percent of all income taxes received by the government, up from almost 26 percent in 1986.

"That would indicate to me that our system has become more progressive," Beach told Cybercast News Service. "The rich paying a higher proportion of taxes, ... that would be the essence of a progressive tax system."

Beach said the system has become more progressive because fewer people are paying taxes than in 1960.

"Fifty years ago, nearly everybody paid income taxes, but today we have so redefined the base that nearly 52 million people who are working don't pay them," he said. "That has made our system very much more progressive if you think about it."

He said the rising income inequality could be due to fast economic growth. "When economies are rapidly growing and rapidly changing, you have ... an increasing disparity between the wealthy and the poor.

"Settled economies like we were in the '50s and '60s and '70s ... have a distribution of income that's more equal, but they're also growing at slower rates," Beach said. "They're not producers of a lot of jobs, and incomes aren't rising rapidly."

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