The US federal tax system is not a progressive tax system.
The following chart sets out the marginal tax rate a family pays for each incremental dollar of income it receives:
Important to remember that two of the most important tax breaks – preferential capital gains rates and deductible mortgage interest – mainly taken advantage of by higher earners.
The main reason the marginal rate of tax is flat is the operation of payroll taxes, which imposes a total (employer and employee) tax of 15.3% from $1 and for the first $137,700 of income, then reduces down to 2.9%, finally maxing out at 3.8%.
When originally conceived payroll taxes were dedicated to funding the pool from which retirement benefits were to be paid. But social security as a ring fenced, participant funded, retirement plan is a fallacy explored elsewhere in Crunchicrant.com [Pay-as-you-go social programs].
If social security is not, in fact, ring fenced from the government’s general programs, those programs are not ring fenced from social security.
All that ‘funding’ in past years contributed (as payroll tax) by ‘working and middle class’ Americans has been deployed by the federal government to pay for general government programs, reducing the perceived need for taxes to be raised from Americans of all income levels: as payers of the most taxes (in relative and absolute terms), higher paid individuals in years past have benefited most from the ‘non-ring fencing’ of social security.
Payroll taxes are just taxes.
The world, the economy, is changing – what was desirable/optimal in the past may not make as much sense now and into the future: is it time to make the tax system more progressive?
