Economic Report of the President

FairnessA traditional standard for fairness is that taxes should be levied accordingto individuals’ ability to pay. Thus, proponents of income taxation argue thatit is fair because income best reflects the ability to pay taxes. In addition, acommon view is that individuals with higher incomes should pay a greaterproportion of their income in taxes—the tax system should be progressive. Asshown in Box 3-3, the current income tax system is highly progressive.Box 3-3: What Is the Current Distribution of the Tax Burden?A major criterion for judging a tax system is whether it is fair. Oneway to examine this question is to look at the shares of the tax burdenborne by taxpayers in various parts of the income distribution. Nearlytwo-thirds of the total Federal tax burden is borne by the top 20 percentof taxpayers. This includes individual and corporate income taxes,payroll taxes, and excise taxes, but not the effects of temporaryeconomic stimulus provisions that expired at the end of 2004. Asshown in Chart 3-1, the share of taxes of the top 20 percent increasedas a result of the tax cuts enacted since 2001.Another way to look at fairness is in terms of taxes as a percent ofincome. As shown in Chart 3-2, Federal taxes take a larger share ofincome for higher-income groups, both before and after the tax cuts.78 | Economic Report of the President