556556 Chapter 15 | Economic PolicyThe increasing share of tax revenue that comes from the payroll tax has important
implications for the redistributive nature of taxes. Payroll taxes are regressive because
everyone who works pays the same rate of 6.2 percent, up to a certain income level
($128,400 in 2018; in addition, all workers pay an additional 1.45 percent on all income
to support Medicare). Thus, someone who earns $128,400 pays the same amount of
Social Security tax ($7,961) as a wealthy individual such as Bill Gates does, but the
tax represents a much larger share of the lesser-paid person’s income than it does of
Gates’s. Excise taxes are also regressive—poor people spend a larger portion of their
income on cigarettes, alcohol, and gas than wealthier people do. Income taxes, in
contrast, are progressive: upper-income people pay a larger share of their income in
taxes than poorer people.
One criticism of Donald Trump’s tax cut was that a disproportionate share of the
cuts went to the wealthiest people in the country, making taxes less progressive. This
may make sense from one perspective, given that the bottom 45 percent of taxpayers
do not pay any personal income tax. However, poor and lower-middle-income people
do pay a large share of the total payroll tax. Thus, the top quarter of the income
distribution earned 69 percent of total income and paid 87 percent of all income taxes
but only 50 percent of payroll taxes.^44 So income tax cuts will help wealthier people
because they pay most of the income tax, whereas payroll tax cuts will help poor and
middle-income people more. At the same time, the top marginal tax rate is close to
the lowest it has been since the 1920s (see Figure 15.8). As a result, the overall personal
income tax rate for the top fifth of the income distribution dropped from 17.5 percent in
2000 to 16 percent in 2014. This lower overall tax rate for the wealthy is also explained
by the lower 15 percent rate for capital gains and dividends.^45regressive
Describes taxes that take a larger
share of poor people’s income than
wealthy people’s income, such as
sales taxes and payroll taxes.progressive
Describes taxes that require upper-
income people to pay a higher tax rate
than lower-income people, such as
income taxes.FIGURE
15.810
20
30
40
50
60
70
80
90
100%Top
rate1913 1927 1941 1955 1969 1983 1997 2011 2018
Sources: Data from the Internal Revenue Service, “Internal Revenue Bulletin: 2007-45,” November 5, 2007, Rev. Proc. 2007-66,
http://www.irs.gov (accessed 5/12/12); 2008–2018 rates from http://www.irs.gov (accessed 4/24/18).Top Marginal Tax Rates, 1913–2018
The top marginal tax rate, which is the tax rate paid by the richest Americans on their income above some threshold ($500,000
in 2018 for a single taxpayer), plummeted from 94 percent in 1945 to 35 percent in 2012, rose back up to 39.6 percent in 2013, and
then fell back down to 37 percent in 2018. What are the arguments for and against increasing the top marginal tax rate?Full_16_APT_64431_ch15_530-571.indd 556 15/11/18 2:34 PM