How is paying taxes like watching a movie? They’re both activities that you do alone — with other people. In a movie theater, you watch the same flickering images as everyone else, but you experience them very much by yourself, without talking, texting, or sharing. And when you pay taxes, you’re making the same calculations and filling out the same forms as tens of millions of other people, but you don’t work with them. You have your numbers, and I have mine.
Because we don’t work together on our taxes, we don’t really know what other people pay. When all the forms are filed and all the numbers counted up, does everyone pay more or less the same percentage of their income? Do higher-income people pay more? Less?
The answers look very different depending on whether we’re talking about federal taxes or Massachusetts taxes.
The chart attached shows what poor, wealthy, and middle-class people really pay in federal taxes. Don’t be put off by the “quintile” jargon, it’s not that complicated. You just divide the US population into five equal groups. The bottom quintile is the poorest 20 percent of households, the second quintile has slightly more money, and the top quintile is the richest 20 percent.
What the chart shows is that the more people earn, the more they pay in federal taxes. When I say that higher earners pay more, I don’t just mean they contribute more dollars; they also pay a higher percentage of their earnings. Let’s say you are in the top quintile and you earned $200,000 last year. Then, roughly speaking, you’ll pay 25 percent of it in federal taxes. By contrast, if you earned $60,000, you’ll be closer to the middle quintile and you’ll pay a smaller percentage of your income, more like 14 percent.
This kind of system, where higher-income households pay a larger share of their income, is called a progressive tax system. Not all tax systems work this way.
State and local taxes
When it comes to state and local taxes, you find precisely the opposite: higher-income families pay a smaller share of their income in taxes while lower-income families pay more. It is called a regressive tax system, and you’ll find it in virtually every state, including Massachusetts.
The poorest families in Massachusetts pay over 10 percent of their incomes in state and local taxes while families in the top quintile pay 6.5 percent. The difference is even more dramatic if you look at just the top 1 percent. They pay 4.9 percent of their income in state and local taxes.*
What does this mean?
When you’re thinking about how much people pay in taxes, you really need to distinguish between the federal system and the states. At the federal level, we have a fairly progressive tax system. At the state and local level, not so much.
You could, of course, put them together and try to get a picture of how the two systems interact (here is an example), but they are very much separate. The federal tax code is set in Washington, D.C., while state taxes reflect the choices of 50 different state capitals.
Also, your own policy preferences may lead you to approach these two systems in different ways. If, for instance, you support progressive taxes, you will likely applaud the federal system while advocating for change on the state and local level. If you favor a flat tax, where everyone pays the exact same percent of their income in taxes, you might argue that the wealthiest households need to pay less in federal taxes but perhaps more in state and local taxes.
Finally, if you support regressive taxes — actually, there isn’t a strong philosophical or political movement for regressive taxes. A regressive tax system is just what you get when you rely on sales and property taxes. But if we wanted we could redesign our state and local tax system so that everyone paid the same share of their income or, alternatively, so that wealthier households paid somewhat more.
- Massachusetts Budget and Policy Center, Examining Tax Fairness
- Institute on Taxation and Economic Policy, or ITEP, Who Pays
- Center on Budget and Policy Priorities, Where Do Federal Tax Revenues Come From?
* To make more accurate comparisons across states, ITEP looks just at nonelderly people. Doing so can change the picture in some states, but it doesn’t make a big difference in Massachusetts.
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