What percentage of your income goes to Uncle Sam's pocket?
Your answer will vary depending on how much you earn. Data show that low and middle income families pay a much larger share of their income to state and local taxes than wealthy families.
Today's visualization uses data from Institute of Taxation and Economic Policy (ITEP) to map effective tax rates (or taxes paid as a part of family income) between income groups at the state and local level.
Crunching the numbers
The data reflects the effect of the tax changes promulgated until September 10, 2018, using the 2015 income levels (the last year for detailed income data available). Single and married taxpayers are included, while older taxpayers, dependent taxpayers and those with negative income are excluded.
The report includes state and local taxes for all 50 states and the District of Columbia. Taxes are divided into 3 large groups:
- Consumption taxes: general sales taxes and specialized special taxes
- Property taxes, including taxes on homes, businesses and motor vehicles
- Income tax: paid by individuals and companies
Federal taxes are not considered.
Editor's Note: It is worth noting that the federal personal income tax has progressive rates, with the lowest income level with 10% and the highest income level with 37% in 2019. Nationally, the property taxes are not charged and there is a very low dependence on excise taxes, which tend to be regressive as described below.
The report includes taxable and tax-exempt income, such as workers' compensation benefits. It also includes estimates of the amount of undeclared income.
What states have the most unequal tax burdens?
In the United States, there is a great disparity in how taxes affect different income groups. This is how everything is broken down, classified in order of inequality of the tax system:
Total state and local taxes as part of income
By state and income group
Washington has the most unequal tax burdens. Proportional to their income, Washington taxpayers in the bottom 20% pay almost 6 more times than those in the top 1%.
At the other end of the scale, California has the most progressive tax system. As part of their income, the poorest families in the state only pay 0.84x what the richest families pay.
However, in general, the vast majority of tax systems are regressive.
On average, the lowest 20% of those who pay income pay 1.54x more of your income in taxes compared to the top 1%.
The main causes
Two main factors drive the (lack of) equality of a tax system: how the state designs each tax and the dependence of the state on different tax sources.
To better explain how this works, let's take a closer look at each type of tax.
Sales and special taxes
These taxes apply only to income spent and exempt income saved. From families with a senior family income They are able to save a much higher percentage of their income, and the poorest families can barely save, the tax is regressive by nature.
Particular types of items that are subject to tax also affect equity. Many states include food in their sales tax base, and low-income families spend most of their income on groceries and other needs.
Not only that, excise taxes apply to a small subset of goods that generally have a practical maximum per person. For example, a person can only use so much fuel. As the income of a rich family increases, they generally do not continue to increase their spending on these assets.
The states depend on these taxes more than any other source of taxes, which only exacerbates the problem.
For the average household, the household represents the majority of its total wealth"Which means that most of his wealth is taxed." However, the composition of the wealth of the richest families leans much more towards stock portfolios, commercial capital and other assets, which are exempt from property taxes.
While these types of assets are subject to taxes such as capital gains and dividends, the distinction is that these taxes apply only to the profits obtained. In contrast, property taxes are simply owed as a result of owning the asset.
What happens to those who do not own houses? Landlords generally pass the cost of property tax to tenants in the form of higher rents. Since the rent comprises a much larger part of the expenses for the poorest families, this makes the property tax even more unequal.
State income taxes are typically progressive. This means that effective tax rates increase as income increases. This is how the US averages break down. UU .:
- Low-income families: 0.04%
- Middle-income families: 2.1%
- 1% higher: 4.6%
However, certain policy options may change this head. Some states have a flat rate for all income levels, a lack of deductions and credits for low-income taxpayers, or tax loopholes that can be beneficial for richer income groups.
Nine states do not charge any income tax, obtaining reputations as "low tax" states, but this is true only for high-income families. To compensate for the loss of income, states rely more heavily on tax sources that disproportionately affect those who earn less.
Obviously, states with personal income taxes have more equitable effective tax burdens.
Address systemic problems
Regressive state tax systems negatively impact after-tax income of low and middle-income families. This means they have less to spend on daily expenses, or to save for the future.
Not only that, since richer families do not contribute a proportionate share of tax money, state revenues grow more slowly.
For states that seek to create a more equitable tax system, states with progressive systems offer some guidance:
- Graduated income tax rates
- Additional tax on a high income threshold (for example, $ 1 million)
- Tax exemption limits for high-income taxpayers
- Targeted low-income tax credits
- Less dependence on regressive consumption taxes.
By implementing such policies, governments can see more tax equality and more tax dollars for programs and services.