This post originally appeared at https://www.badgerinstitute.org/its-time-to-put-away-progressive-taxes-wisconsin/

Let’s forget about economic pie-growing for a minute (just a minute) as our legislators start to debate tax reform in Madison.

Let’s, just for now, debate the issue on the left’s turf.

How much do we — whether rich or poor or solidly middle-class — give the government? And how much do we get?

I don’t mean how much do we get in “public goods” like fire protection or decent roads, though those are interesting questions. I mean how much each of us pays in taxes and how much we get back through federal, state and local government transfer programs.

In other words, just how progressive is our so-called “tax and transfer system”?

“Overwhelmingly” so, according to a fascinating, comprehensive, data-driven study of taxes and transfers at all levels of income and government by the Tax Foundation.

Everyone knows that wealthier Americans pay more in taxes, though you might be surprised to learn just how much more. On average, households in the top quintile in 2019 had a total estimated federal, state and local average tax burden of $125,700 — five times as much per household as those in the middle quintile and nearly 23 times as much as the average $5,500 paid by households in the lowest quintile.

The numbers include everything from income taxes to payroll taxes to gas and sales and property and estate taxes — a total, all told, of 28 taxes at the federal, state and local level.

What’s normally lost in the equation is the amount of money transferred from government to individuals through everything from, for instance, housing assistance to Medicaid to welfare programs to unemployment compensation.

Virtually all Americans will at some point, no matter their income, receive some transfer payments from the state or federal government for things like Social Security and Medicare. But the amounts vary dramatically. According to the Tax Foundation, the average household in the bottom quintile received $34,092 in government transfers in 2019. The average household in the middle quintile received $22,510, while the average household in the top quintile received $13,621.

The Tax Foundation isolated those taxes that fund government transfer programs (so only some of the 28 taxes cited above) and found that, after accounting for the cost of the transfer programs, the bottom quintile came out $32,400 ahead. The middle quintile came out $10,200 ahead, and the average top quintile household paid $61,000 to fund transfers to others.

In essence, the top two quintiles were responsible for the income redistributed to the bottom three quintiles, and the top quintile alone was responsible for funding over 90%.

Looked at another way, government transfers account for 59% of the bottom quintile’s comprehensive income. For each dollar they earned, they received another $1.27 from the government. For each dollar of taxes they paid, according to the Tax Foundation, they received over $6 from the government.

It’s different at the other end. For each dollar of taxes paid by the top quintile, they received 11 cents. Out of each dollar earned they paid almost 31%, or just under 31 cents.

To really get a handle on the extent of progressivity in our country, the Tax Foundation then did one other thing. They looked at what the wonks call “effective fiscal incidence rates,” or the effective tax burden. That’s not the same thing as the tax rate. It’s the amount of tax a party is estimated to bear, directly and indirectly, relative to their comprehensive income, including payments from government transfer programs.

Even before government transfer programs, fiscal incidence rates throughout the country were generally progressive — and even more so in Wisconsin than most other places.

After transfers, total effective fiscal incidence rates were “markedly progressive,” according to the Tax Foundation:

• 10% for the bottom quintile (i.e. 10% of total income including government transfers.)
• 22% for the middle quintile
• 41% for the top quintile

The point that is too often overlooked is that progressivity works in two ways in America: through higher taxes on high earners and by giving a greater share of taxpayer dollars to lower-income households. When considering new tax policy, Wisconsin’s elected officials should look at both and also consider the impact of the federal tax code.  

As the Tax Foundation notes, states have different roles and challenges than the federal government — namely, “active competition with each other for people, jobs and investment — all of which are considerably more mobile at the subnational than the international level.”

America is irrefutably, overwhelmingly progressive in its total tax and transfer system. Wisconsin neither needs to nor can afford to be.

There, the minute is up.

Next time, the even stronger argument: the one about pie-growing and opportunity.

Mike Nichols is the President of the Badger Institute. Permission to reprint is granted as long as the author and Badger Institute are properly cited.

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