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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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