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But even as economic inequality grew over the past three decades, so did the progressivity of the tax code, according to a Tax Foundation analysis of CBO data. The code’s progressivity dipped in 1981, after top marginal rates were cut from 70 percent to 50 percent but soon recovered with the Tax Reform Act of 1986. That law cut the top marginal rate again, from 50 percent to 28 percent, while making changes near the bottom of the income scale that made the code more progressive — increasing the value of the standard deduction and personal exemption and expanding the Earned Income Tax Credit.
The years since have seen repeated expansions of the EITC and the creation of other deductions, such as the Making Work Pay credit; those breaks disproportionately help lower-income earners.
“It’s been the changes at the bottom that’s what’s made it more and more progressive,” Tax Foundation Chief Economist William McBride said, noting that top rates have risen and fallen over the years while credits aimed at the poor have generally grown consistently.
Congress may be girding to look at the entire tax code over the next year, as some lawmakers look to advance the first broad overhaul in a generation. But for those looking at fiscal issues such as the minimum wage and unemployment insurance, the code provides a fertile field for potential offsets and tweaks aimed at amending the tax system to address what they see as a growing problem of the distribution of economic progress.
Of the top four federal taxes, individual and corporate income are progressive, while payroll taxes are fairly flat among groups and excise taxes are regressive. The wealthiest 20 percent of taxpayers paid 92.9 percent of income taxes in 2010. The top 1 percent paid 35 percent of income taxes in 2011, according to the IRS, and the CBO predicted in its December report that for that group, “average rates under 2013 law will be higher than in any year since 1997.”
As part of the deal (PL 112-240) to avoid automatic tax hikes and spending increases last January, Congress passed a law to raise rates for families making more than $450,000 annually, with the income rate going from 35 percent to 39.1 percent. A new tax under the Affordable Care Act (PL 111-148, 111-152) also took effect in 2013, imposing a 3.8 percent tax on the wealthy.
“The income tax during the course of my professional career has gone from a broad-based revenue raiser to a surtax on the rich,” said Douglas Holtz-Eakin, an economist and former CBO director. “So it’s hard to describe this as something that’s helping the rich.”
Critics, however, point to the preferential rates on capital gains — which are taxed at 15 percent for most taxpayers and at a graduated scale for the wealthy as of 2013 — as a major break for the wealthy. The low rate on capital gains and dividends and various breaks that disproportionately benefit upper-income earners, in part because lower-income earners are less likely to itemize deductions when they file taxes, are targets for groups like Citizens for Tax Justice, which advocates for a more progressive code.
“If you look at the tax code as a whole, it’s really almost not progressive at all,” said CTJ Legislative Director Steve Wamhoff, who noted state and local taxes are frequently flat and sometimes regressive.