As my blogroll would indicate, I am avid reader of Greg Mankiw’s Blog even though some of our politics diverge. I’ve become somewhat backlogged on my reading, and only recently came across a december post in which he highlighted a study from the COB (Congressional Budget Office) on historic taxation. Dr. Mankiw given his views on taxation uses the study to highlight the fact that rich are not paying less in taxes today than they have historically. If anything they are footing a greater portion of the tax bill. Below is a chart of effective tax rates for the different income quintiles from 1979 to 2005. The chart on the right is normalized in that I’ve expressed the effective tax rate as ratio of the average tax rate. Everyone is paying less in taxes today on the most part, and the bottom quintile more than any other group.

Since taxation is something I know I have disagreed with Dr. Mankiw in the past, I was curious to take a deeper look into the actual report. My first questions was, “How is the effective tax rate being measured?” Many times studies will ignore payroll taxes such as social security and medicare which impact lower income families more since both are flat taxes and in the case of social security maxes out (i.e. only the first 97,500 of income is taxable by social security for 2007). I read through the COB FAQ and was reasonably assuaged that their methodology was appropriate.

However, looking more into the data it becomes clear that effective tax rates, and contribution to the taxroll is only one part of the story. The other and more important part of the story is income distribution. The rich are getting richer. The share of income that is accruing to the top quintile has been steadily increased, while the bottom quintiles has seen stagnation.  Below is a chart from the same study which shows the share after tax income by quintile over the same period.  The dip in 2000 I suspect is attributable the huge stock market declines which led to lower capital gain income for the top earners.  On the Y axis is the share of total after tax income each quintile earned.

Numbers don’t lie, but what conclusions we draw from the numbers are often a function of personal beliefs and politics. I’m not the the type of person who believes taxes for sake of taxes, but I am believer when poorer Americans are failing to make economic progress while rich Americans are making money hand over fist there’s something wrong. I certainly don’t feel like rich Americans should be punished for our success via higher taxes, but I also question why is that the poor have failed to enjoy the economic boon that the top of America has? I know personally I would not be opposed to paying higher taxes to make sure those at the bottom of the ladder have better health care and more opportunities for advancement.