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1 Gerald Prante, New IRS Data: Tax Code More Progressive in 2004 than in 2000 1 (2006)

handle is hein.taxfoundation/ffhaxz0001 and id is 1 raw text is: r:OuU NDAT10N. October 17, 2006 New IRS Data: Tax Code More Progressive in 2004 than in 2000 by Gerald Prante Fiscal Fact No. 70 The debate over the impact of the Bush tax cuts will continue for many years, but new IRS data, just published for tax year 2004, will certainly shape that debate by showing that the code was more progressive in 2004 than it was in 2000. This trend also sheds light on the surge of revenue that has cut the federal deficit so sharply in the summer and fall of 2006. Some commentators try to change the definition of tax progressivity, either to prove that high-income people are paying too much or too little. Here we use the widely accepted definition: a tax system is progressive if high-income people pay a larger fraction of their income in taxes than lower-income taxpayers. For each income group of U.S. taxpayers, we compare the shares of tax paid to the shares of income earned (see Table 1 ). A ratio of tax share to income share for each group in 2000 and 2004 shows how progressivity has increased. In the rightmost column of the table, we show the change in the tax-to-income share ratio. A positive number means the income group's tax share has grown faster than its income share. If the number is negative, the income share has grown faster than the tax share. In a purely proportional income tax system, each income group's share of tax payments would be the same as its share of income. For example, if tax returns with AGI between $200,000 and $500,000 accounted for 9.97% of income (as they did in 2004 - see table), then they would pay 9.97% of the taxes. And if tax returns with AGI between $40,000 and $50,000 accounted for 6.97% of income (as they did in 2004), then they would pay 6.97% of the taxes. That is, in a proportional tax system, the ratio of tax share to income share is equal to 1. Because our system is progressive, the $200,000-to-$500,000 group didn't pay 9.97%; they paid much more, 17.89%. And the $40,000-to-$50,000 group didn't pay 6.97%; they paid much less, 4.20%. Because all of the major Bush tax cuts took effect in May 2003, tax year 2004 is the first to reveal their full effect. For many who predicted that these cuts only benefited the rich, this data showing greater progressivity will be a surprise.

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