Students / Subjects

Handbook >> Elasticity >> Apportioning the Tax Burden >>

Vertical Equity in the United States

What can we say about the progressivity, proportionality, or regressivity of the major kinds of taxes used in the United States?

Personal Income Tax:

The Federal Personal Income tax is mildly progressive with marginal tax rates ranging from 15% to 31%. The deductibility of interest on home mortgages and property taxes, along with the exemption of interest income from state and local bonds, partly erodes the progressivity of the tax.

Sales Tax:

At first glance a general sales tax with, say a 3% rate would seem to be proportional. However, with respect to income, it is a regressive tax. A larger portion of a poor person's income is exposed to the tax than is the case with a rich person; the latter avoids the tax on the part of income which is saved, whereas the former is unable to save.

Corporate Income Tax: The Federal Corporate Income Tax is essentially a flat rate proportional tax with a 34% tax rate. But this assumes that corporate owners (shareholders) bear the tax. Some tax experts argue that at least a part of the tax is passed through to consumers in the form of higher product prices. To the extent that this occurs, the tax is regressive like a sales tax.

Payroll Taxes:

Payroll taxes are regressive because they apply to only a fixed absolute amount of one's income. For example, in 1992, payroll tax rates were 7.65%, but this figure applies only to the first $55,500 of one's income. Thus a person earning exactly $55,500 would pay $4245.75, or 7.65% of his or her income, while someone with twice that income, $111,000, would also pay $4245.75 (only 3.825% of his or her income).

Property Taxes:

Most economists feel that property taxes on buildings are regressive for essentially the same reasons as are sales taxes. First, property owners add the tax to the rents which tenants are charged. Second, property taxes, as a percentage of income, are higher for poor families than for rich families because the poor must spend a larger proportion of their incomes for housing. The alleged regressivity of the property tax may be reinforced by the fact that property tax rates are not likely to be uniform as between various political subdivisions. 


Back to Apportioning the Tax Burden
