Before we get too excited about what may happen in the future, it's good to get an idea of where we stand now. To get a baseline estimate of the present overall distribution of the country's tax burden, I found data on the percentage of income paid by each quintile (as well as the 80th - 94th percentile, the 95th-99th percentile, and the top 1%) in all Federal (i.e., the income tax, corporate tax, estate and gift tax, payroll taxes, and all other miscellaneous taxes) and all state and local taxes. You will notice that while the Federal tax system is quite progressive (though inadequately so, especially as to the very very rich), state and local taxes are, on balance, quite regressive. The result is that the U.S. tax regime, taken in its entirety, is progressive but not overwhelmingly so. Does it seem right that households making between $37,258 and $65,634 a year should pay an average of 25% of their income in all taxes while households making $601,907 and up should pay an average of 35%? That's an awfully modest increase in percentage tax burden for a ~10-fold or potentially much, much greater increase in income (to get an idea of the spread at the very top, hedge fund manager John Paulson made $3.7 billion in 2007).
I could not obtain state and local tax data for the top 0.1% (which starts at a household income of about $2.9 million a year), but the Federal tax burden of the top 0.1% (31.6%) shows that the percentage of income paid in Federal taxes increases very slowly as taxpayers' income increases dramatically. I'd be willing to wager serious bones that the overall percentage tax burden begins to decline as we move up the income ladder into the absurdly wealthy (i.e., households that make hundres of millions of dollars a year and therefore that will pay a negligible percentage of their income in state and local taxes and will receive most of their income in the form of capital gains taxed at the lower 15% rate under the Federal income tax code). I am not alone (read this and this) in this view.
Total Taxes Paid as a % of Income by Income Group
Am I wrong that this (i.e., the fact that the Federal tax code appears to have the potential to be somewhat fair while the state and local tax regimes do not) is another argument in favor of abolishing federalism? Just to speculate here, might it be the case that jurisdictional competition between states to attract higher income residents (or, more maliciously, to chase away lower income residents) is driving down the relative state and local tax burden on the well off? Higher earning New Yorkmen can move to Jersey or Connecticut or Chicagokaaners can move to Indiana to try to lower their state or local tax burden. But it's a little harder to leave the country 'cause your miffed at the tax burden (besides, where would you go? Seoul? Guadalajara?). I really struggle to see the benefits of our federalist system.
Note: The Federal data is for 2008, while the state and local data is for 2002. There probably are some minor comparability issues, but I seriously doubt that anything has changed very dramatically since 2002, or that there is any massive methodological difference between the two reports significant enough to alter the overall picture.
Also Note: The Federal tax burden percentage for the 80th - 94th percentile and the state and local tax burden percentage for the top 20% are estimates based on the percentages given for the most similar available income groups.
