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Tom Fixes the Tax System!

by Tom

Nathaniel’s snark below aside, I am technically a co-contributor to this site and will keep blogging occasionally until Nathaniel removes my access.

The issue that I really wanted to get into was an issue of marginal tax rates.  This may seem like a bit of an esoteric topic, but I wanted to talk about it in the context of the income inequality that we see in America today.  My question then is at what rate should the marginal tax rates be set to insure that each income group is paying its proper share of federal income tax.  My guiding principle in doing this is that the percentage of total annual income earned by each quintile should be equal to the percentage of total tax paid by each group.  I know that I’m ignoring local and state tax rates, earned income tax rates, tax expenditures, every tax deduction out there, and using gross generalizations, but this is my thought experiment and I’m going to do it how I want.

Click image to make big… and see Tom’s genius.

If we then assume everybody in each grouping has the average income, the marginal tax rates for each quintile would be below:

Lowest fifth Second fifth Third fifth Fourth fifth Highest fifth Top 5 percent
29.51% 29.21% 29.60% 29.29% 12.22% 41.37%
4.33% 5.27% 6.18% 16.56% 18.74% 27.97%
173.13% 158.61% 79.01% 10.64% -13.26% -3.18%

There are three different scenarios above.

The top one is what happens if we assign tax rates based on percentage of income earned by each quintile.  I was frankly surprised at how much needed to be paid by those in the bottom quintile to pay for their share of the national income.  It was also interesting how the data separated out the top 5% from the other 15% in the top quintile.  It shows that those at the very top are pulling away from the upper middle class and that those below them are frankly not doing quite as well.

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