The shape of taxes.

Regressive? Progressive? Flat? Huh?

I’m back to my tax series. The last installment, a month ago, discussed fairness. The short answer is that most of us think that a fair tax is one that someone else pays. That’s no surprise, as humans gotta be human.

But someone has to pay a tax. One of the many (many many many) policy issues is who bears the burden. If the burden is heaviest on people with more wealth and income, then a tax is said to be progressive. If the burden is heaviest on people with less wealth and income, then a tax is said to be regressive. A tax that has an equal burden on everyone is said to be fair.

A fair tax is not the same as a flat tax, by the way. And it is very difficult to build a system that affects everyone equally. I want to say it’s impossible, but I’m sure that there’s a tax policy expert who can explain to me how it works. (Is this you? Email me or leave us a note in the chat.)

We all pay lots of different taxes. A sales tax is regressive because people with lower incomes spend more of the income. They don’t have enough money to save it! But you could argue that this is just because there are some benefits that come from paying sales taxes that go to everyone. In Europe, which has a high sales tax (a value-added tax, to be precise), the logic is that everyone gets health insurance, so everyone should have to pay for it.

Sometimes taxes that seem progressive are also regressive. Property taxes, for example, are assessed only on people who own real estate, meaning that they have some wealth. People who own a lot of real estate pay more in real estate taxes, all else being equal. However, landlords pass property tax expenses on to the tenants, who tend to be poorer than property owners, meaning that the tax ends up being regressive.

Income taxes are usually structured to be progressive, with people paying a higher rate on higher amounts of income. Exactly how progressive they are is a matter for debate. Here they are, for 2024:

Of course, this doesn’t include the effect of deductions, which are more likely to be taken by people with high incomes, and it only affects federal taxes. But still: skewing progressive.

It’s important to note that the rates apply only to additional income, not to all income. A married couple filing jointly and making $731,201 a year isn’t paying 37% on all $731,201 of income. They are only paying 37% on the one dollar difference between the amount earned, $731,201, and the upper limit for the 35% rate, $731,200. Some people have argued that higher marginal rates discourage people from earning more money. It depends a lot on how high the higher tax rate is and how high the income cutoff is, which makes it easy for people who want to argue past each other on the Sunday morning political talk shows. No matter your position, you can construct a case that makes your point.

If taxes are more affordable than not, people are more likely to pay them, and that contributes to the overall perception of fairness. If people believe that others evading taxes, they will have greater distrust in the system, and that creates a whole bunch of political problems. That should be an incentive to create a system that works, but I’m not sure it’s enough of an incentive.

Anyway, I have more ideas about tax policy that you will see in upcoming issues. And more ideas about lots of other things, too.

What do you think?