Federal taxes can be further broken down into personal income taxes, payroll taxes, corporate income taxes, and excise taxes. The following graph shows average federal tax rates for each type, illustrating the way the progressivity of the federal tax code changes by tax source.
While the general federal tax system is advanced, not every tax which comprises it is. The individual income tax is the most progressive, falling most heavily to the highest quintile. The lowest two quintiles encounter a negative income taxation –in other words, their income rises –as a result of lien tax credits like the Earned Income Tax Credit and the Child Tax Credit. In 2015, the lowest quintile’s average payroll tax rate was 9.8 percent, in comparison with the maximum quintile’s rate of 6.5 percent. In the same way, the lowest quintile’s typical annual tax rate was 2.4 per cent, in comparison with the highest quintile’s speed of 0.4 percentage.
Even though some taxes fall more heavily on lower quintiles, the net result of federal transfers and taxes is reduced incomes to get high-income Americans and higher incomes for low-income Americans. The next chart shows the shares of income by revenue category prior to and after transfers and taxes.
Taxpayers face greater average federal tax rates as income rises. As an example, individuals at the lowest quintile paid an average national tax rate of 1.5% in 2015, whereas those in the maximum quintile paid an ordinary rate of 26.7 percent.
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The end result of all federal transfers and taxes is a redistribution of revenue in large – to low-income households. According to the CBO,”In 2015, average household income before accounting for means-tested transports and national taxes was $20,000 for the lowest quintile and $292,000 for the maximum quintile. After transfers and taxes, these averages were 33,000 and $215,000.”  Quite simply, the lowest quintile’s average family income rose by 11,000, while the maximum quintile’s average household income dropped by $77,000.
The lowest quintile’s income nearly doubles, although the second and middle quintiles experience comparatively smaller gains in earnings. The fourth quintile’s income share remains steady, and only the highest quintile has a reduced share of earnings after transfers and taxes. The top 1 percent’s share of earnings, by way of example, falls from 16.6 percent to 13.2 percent.
As policymakers debate means to raise taxes on the wealthy, they ought to keep in mind the degree to which the federal government already transfers earnings between income classes and remember that America currently has a innovative tax program . This circumstance is essential for productive discussions on the best way best to improve the tax code, rather than weaken it.