Our unequal tax system, in one HTML table

Bruce Bartlett and Kevin Drum point to a striking table in the 2012 Economic Report of the President (pdf) showing that there’s a huge variation in what people of similar income levels actually pay in federal taxes:

Taxes include income tax, corporate tax, and payroll tax. (Department of Treasury)

Those in the middle income quintile, for instance, can pay anywhere between 1.7 percent and 23.5 percent of their income in federal taxes. About a quarter of the wealthiest Americans, meanwhile, have a lower average tax rate (17.4 percent) than many of those in making far less money.

What explains the wild variation? Part of it is that some Americans — Mitt Romney is the most famous example — get a sizeable chunk of their income from capital gains, taxed at a lower rate than salaries. There are also a variety of deductions and credits in the tax code that only certain people either can or do take advantage of. In theory, the Alternative Minimum Tax was supposed to even things out, to make sure that higher-income Americans weren’t paying lower taxes. “[B]ut,” the White House report says, “its poor design has caused it to fall primarily on upper-middle-income families from high-tax states, as well as on those with many children.”

Bruce Bartlett comments that the tax code has become misaligned with basic fairness principles: “We can see, then, that the tax system in the United States violates the fundamental principles of income taxation. Those are ‘vertical equity,’ which says that those with upper incomes should pay a higher effective tax rate than those with modest incomes — as far back as Adam Smith, ability to pay has always been a core principle of taxation — and ‘horizontal equity,’ which says that those with roughly the same income ought to pay roughly the same taxes.”