Previously, we’ve discussed the widespread effects of the numerous credits and deductions that have littered our tax code. There’s also been talk about income inequality and how to address it — and part of the answer is in the tax code.
Well, there’s another part of the puzzle that we don’t talk about — and that’s “horizontal equity” in the tax code. Specifically, that means looking at how much taxes are paid by people with similar incomes. The latest Economic Report of the President shows just how out-of-whack we are on this measure as well, as pointed out by conservative economist Bruce Bartlett.
What the graph above shows is the distribution of tax rates for each income quintile. For instance, the middle 20% of income earners (households with income between $38,000 and $61,000) see a range of effective federal tax rates between 1.7% and 23.5%. That’s a massive swing, which depends on the composition of your income (wage income is at a higher rate than capital gains) and the particular specialized tax credits and deductions you are eligible for. Most people would consider it unfair for two households with $60,000 income to have tax bills that differ by as much as $10,000.
So, as we look to reform the tax code, we need to keep in mind horizontal equity issues along with “vertical equity” (income inequality) as well.