By Geoff Colvin
FORTUNE -- The approach of tax day reliably cranks up the volume of chatter about America's screwed-up tax system, inevitably featuring outraged recollections of something about Mitt Romney paying only a 15% rate, and Warren Buffett saying his cleaning lady pays tax at a higher rate than he does.
America's tax system is indeed screwed up in a thousand ways, but when it comes to progressivity -- higher tax rates on higher incomes -- the reality might surprise some people. As the chart below shows, America's income tax system is very progressive. (All data, the most recent available, are for tax year 2011.) Those with low incomes actually pay a negative rate on average, receiving money through "refundable" tax credits, meaning credits such as the Earned Income Credit that are paid to filers even when they don't owe any tax.
Moving up the income ladder, the percentage of income that people actually pay in income tax increases steadily until topping out at 25% for those with incomes between $1.5 million and $2 million. It's virtually the same -- 24.9% -- for those with incomes between $2 million and $5 million.
So for Americans covered by 99.99% of all tax returns filed in 2011, the income tax system is progressive -- those with higher incomes pay higher rates. Of course that won't necessarily be true of every person; with over 145 million returns filed, anomalies are certain. But the big picture is clear.
Still, you can see what happens when incomes climb above $5 million: Effective tax rates go down. The system becomes regressive. Is that a problem? You could certainly argue that it is, although it would be a fairly minor one, for Americans covered by 99.4% of all tax returns still pay, on average, an effective tax rate lower than the 20.4% rate paid by the very highest earners, those with incomes of $10 million or more. In addition, it appears that many of those in that highest group are different from year to year; IRS data suggest that many of the taxpayers in that group are there because they've realized a huge capital gain -- selling a business or block of stock, for example -- and then don't see that kind of money again for a long time, maybe ever. The capital gain of course accounts for the lower tax rate.
Some people argue that in judging fairness we must look also at Social Security and Medicare taxes, which take a bigger chunk from the incomes of low earners than from high earners. But those taxes are collected separately for a reason; they're specific programs into which people pay early in their careers and from which they receive benefits later. If we want to make those programs fairer -- and we must -- we should lean on the rich by means-testing them and lowering their benefits accordingly.
So by all means get outraged about our individual income tax system -- about the insane, sacred-cow loopholes that distort incentives, like tax-free employer-provided health insurance and (dare I say it?) the mortgage interest deduction.
But when it comes to progressivity, give your blood pressure a break.
The IRS on Tuesday said that bitcoin will be taxed like property, creating another hurdle for its widespread use as a currency.
FORTUNE -- Be thankful he doesn't take it all, George Harrison advised us about the Taxman nearly 50 years ago.
Those words are cold comfort to bitcoin boosters, who learned Thursday that the IRS expects users of the virtual currency to report their bitcoin transactions and pay capital gains taxes on their holdings, just as MOREChristopher Matthews - Mar 26, 2014 5:00 AM ET
It's the taxman, rather than any private institutional failures, that will relegate the cryptocurrency to niche status.
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Millions of Americans could face draconian fines and penalties for offshore tax evasion.
By Lynnley Browning
FORTUNE -- Cuddly Beanie Babies have become a bizarre icon of tax horror ever since their billionaire American creator, Ty Warner, was socked last September with jaw-dropping fines for not disclosing his secret Swiss bank accounts.
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The next big private equity buyout will likely involve an offshore affiliate, a flurry of money exchanges, a lower tax bill, and higher returns. But the IRS is knocking.
By Lynnley Browning
FORTUNE -- Private equity firms, buffeted by challenges to long-held tax breaks and growing scrutiny from regulators, have an ugly new headache: a wary look by the Internal Revenue Service at one of their preferred acquisition techniques.
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Oracle, Google, and Amazon are just a few of the hundreds of large companies that have cut confidential deals with the IRS to help lower their tax bills, and critics want the agency to disclose the details of these complex pacts.
By Lynnley Browning
FORTUNE -- When Oracle reported its latest quarterly earnings last month, most investors focused on the fact that its dividend doubled. The number that got less notice MOREJul 22, 2013 5:00 AM ET
The real lesson of recent scandals should be this: Civil service reform is desperately needed in Washington.
By Tory Newmyer, writer
FORTUNE -- What's becoming clearer now probably should have been obvious from the beginning: The IRS scandal sprung from bureaucratic incompetence -- and not some grand conspiracy to stifle the Obama administration's opponents that goes all the way to the top.
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Now that Switzerland has agreed to cooperate with a broad U.S. tax evasion probe, thousands of wealthy American account holders may soon be exposed to the IRS.
By Lynnley Browning
FORTUNE -- Are you among the suspected tens of thousands of Americans with a secret Swiss bank account that you are still hiding from the Internal Revenue Service? If so, you are about to acquire a Matterhorn-sized headache.
Switzerland made a desperate MOREMay 30, 2013 5:00 AM ET
Before Douglas Shulman ran the IRS, he ran FINRA.
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How well-heeled money to conservative tax exempts triggered confusion and chaos inside the IRS -- and why the big bucks may be likely to surge.
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