How Do Transfers and Progressive Taxes Affect the Distribution of Income?

Policymakers have recently proposed various ways of raising taxes on the richest Americans and making the tax code more progressive, including wealth taxes, estate taxes, and a higher marginal income tax rate. Changing the tax system, however, requires first understanding how it currently operates, and what kinds of transfers are already in place. Data from the Congressional Budget Office (CBO) illustrates the progressivity of the federal tax code and the impact of transfers from high-income to low-income Americans. The following figure shows average federal tax rates—total federal taxes divided by total income before transfers and taxes—by income group in 2015. Taxpayers face higher average federal tax rates as income increases. For example, those in the lowest quintile paid an average federal tax rate of 1.5 percent in 2015, while those in the highest quintile paid an average rate of 26.7 percent. The top 1 percent of Americans had an even higher rate of 33.3…

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