Potomac Fever: I'm gonna soak the fat boys and spread it out thin!

Tuesday, March 22, 2011

I'm gonna soak the fat boys and spread it out thin!

36 comments:

PBM said...: http://yglesias.thinkprogress.org/2011/03/unequal-incomes-and-the-unequal-tax-burden/s; March 22, 2011 at 9:11 AM
TJE said...: According to original post, data include income *and* payroll taxes.; March 22, 2011 at 9:16 AM
TJE said...: http://www.taxfoundation.org/publications/show/27099.html; March 22, 2011 at 9:39 AM
PBM said...: Isn't them paying the largest share of the taxes, though, a function of them disproportionately having the most wealth?; March 22, 2011 at 9:41 AM
TJE said...: "By contrast, column #2 shows that the richest decile in America earned 33.5 percent of the market income in the country in 2005 - the year in which this snapshot was taken, but little has changed since then. But, a few other countries do have a greater or similar concentration of income as does the U.S. For example, the OECD table shows that the wealthiest decile of households in Italy and Poland earn a greater share of their country's market income than do our "rich" - 35.8 percent and 33.9 percent respectively - while the share of income earned by the top decile of households in the U.K. is about on par with those in the U.S. at 32.3 percent.

The table then adjusts for the underlying allocation of income by showing the ratio of income taxes paid to the share of income earned by the top decile in each country. The ratio for U.S. households is 1.35, far greater than the ratio of taxes to income in any other country. Even in the three countries with a comparable distribution of income, the ratio of taxes to income was less, 1.18 in Italy, 0.84 in Poland, and 1.20 in the U.K."; March 22, 2011 at 9:44 AM
Ross Perot said...: A thousand tiny violins are playing to mourn the plight of the wealthy American.

Also, that data is from 2005. The author is confident that, "little has changed since then," but we're 6 years and an economic meltdown past the 2005 sugar-high years. Considering the disparity between different socio-economic brackets' income growth over the past several years, I would rather get to see more relevant data than just take the word of a Koch-funded think tank.; March 22, 2011 at 10:28 AM
PL said...: 1) Federal income taxes- as we've discussed on the blog before, is a very poor measure of the overall progressivity of the tax system- which if you combine all forms (income, payroll, sales, excise, property, etc.) and all levels (federal, state, local) you get a modestly progressive system for the United States.

2) I’ll give you two ways to disprove the Tax Foundation’s real argument, which is that the U.S. places an unusually high burden on its wealthiest citizens (They are using a very narrow and misleading presentation of the facts to give this larger impression which the Tax Foundation is always trying to push- for instance in this hearing testimony he cites, which Megan and I actually both watched for our internships. I’ll discuss their more narrow, technical argument in point 3).

a) Taxes are just one side of the government equation and its level of progressivity. The overall progressivity is also affected by the spending priorities of government programs, which are far less progressive in this country versus our OECD peers (in fairness, we're still more progressive on our spending side then we are on the revenue side.)

If you combine a full picture of the U.S. revenue collection system with our spending priorities, the U.S. is far less redistributive and progressive than our OECD peers. For instance, using the same report the Tax Foundation's data is from, you can find the Gini coefficient after taxes and transfers (AND YES, I know the Gini coefficient is an imperfect measure. However, it still is one of the best aggregate measures of inequality and progressivity across a society, and it’s certainly the standard measure because of its many strengths and advantages). (Fyi, I know most of you know how a Gini coefficient works, but in case you don't-just realize that the higher a number is, the more unequally a society's income is distributed. I.E. a higher number means we are less progressive).

The U.S. after taxes and transfers (government revenue and spending) Gini coefficient is .38, putting us above the OECD average of .31. The only countries we do better than are Mexico and Turkey. The U.S. pre-taxes and transfers Gini Coefficient is .46, which is lower (more equal) than Poland, Portugal, New Zealand, Italy, France, Germany, the Czech Republican, and Belgium (there is no information for Mexico and Turkey). This disparity between pre- and post-government intervention income dispersions clearly shows how all of these listed countries have a much more progressive government sector than the U.S. does, because before government intervention they were less progressive than the U.S., but after they are more progressive.; March 22, 2011 at 10:37 AM
PL said...: b) http://www.oecd.org/document/49/0,3746,en_21571361_44315115_46737201_1_1_1_1,00.html

Here you can find some OECD data on tax systems. The U.S. in 2008 collected 26.1% of GDP as tax revenue. The only countries who collect less revenue as a % of GDP are Mexico, Chile, and Turkey. Some examples from other countries: Japan was 28.1%, Canada was 32.3%, the U.K. was 35.7%, and Denmark (the high-end) was 48.2%. The only way for countries to collect that much revenue is by placing high burdens on all of its citizens, particularly the wealthiest ones because they are the ones with the most income. This data is just one good example of an alternative and more persuasive statistic which disproves the Tax Foundation’s message.

c) Clearly the Tax Foundation is incorrect with the perception they are trying to create- that somehow the U.S. is unusual in how much of a burden it places on the wealthiest Americans for our government. That is completely, completely false!

3) In this report from the Tax Foundation, they are comparing the tax burden of the top 10% of income earners to the tax burden of the other 90% (they show that in the U.S., the top 10% pays more of the total share of income taxes than in other countries). However, our OECD peers collect a great deal more in total taxes than the U.S. does. I have amply demonstrated that the U.S. has a much less-consuming tax system than other OECD countries. Basically, the U.S. collections a significantly lower amount of the taxes as a fraction of our economy than our OECD peers do, we just collect a slightly higher proportion at the federal level (ignoring many state and local taxes, which is more important for us than many other countries due to our federal system) through taxes on the top 10% of household. One can either foolishly think the international lesson here is that the U.S. has a worse ratio than similarly-situated countries, or one could take the real trend- the U.S. has a much smaller tax system. If we want to be our like our OECD peers, than nearly EVERYONE should pay more taxes, it’s just that middle-class household would see a greater increase in the amount of taxes they paid. Somehow I don’t think that’s what the Tax Foundation wants, but by carefully extracting certain OECD data, they open the door to educating the American people on the real differences between the U.S. and our peers on taxes and government spending. I’m not saying the U.S. wants to or should look like these countries (mostly European or Commonwealth nations), but it’s quite clear the U.S. has a much smaller government state than these countries, which means that it places much less of a burden on our higher-income households.; March 22, 2011 at 10:37 AM
PL said...: 4) Once again, I’ll reiterate that you have to consider all federal, state, and local taxes, as well as how the government spends its money, to get an accurate picture of how the U.S. treats its top 10% versus how it treats the bottom 90%, or versus how other countries treats their top 10%. The evidence is overwhelming that the top 10% (or any measure of wealth, income, most affluent household) deals with far less intervention and redistribution of income than found in any similarly-situated country.

5) Now some might justify this based on the argument that our much lower redistribution/tax system/progressive government is because we value having a society with greater freedom of opportunity. Of course, if that’s our goal- then the evidence proves we’re not doing it very well. Ron Haskins and Isabel Sawhill from the Brookings Institution in their book, Creating an Opportunity Society, document how the U.S. has lower social mobility (a sign of equal opportunity) than most of our peer nations. In particular, we have stickiness around the high and low-ends of our socioeconomic distribution. Basically, if you’re poor in the U.S. it’s harder for you to escape poverty than it is in other nations. If you’re rich, it’s much less likely that you’ll end up middle- or low-class. If you’re not born in the high-end of the socioeconomic distribution, your less likely to break into the high-end than if you were in another country.

The Tax Foundation is wrong that “No Country Leans on Upper-Income Households as Much as U.S..” In fact, we lean less on them- and even if you think that’s a good thing because it allows for more social mobility and equal opportunity, than just know that the system’s failing and the U.S. does not have greater social opportunity than other countries which do lean more on upper-income households as part of their conception of an ideal society.; March 22, 2011 at 10:37 AM
TJE said...: Are you arguing that change since 2005 is unique to US. If so, your argument is with OECD.; March 22, 2011 at 10:38 AM
TJE said...: Patrick, not sure what you mean by "you have to consider." Do you mean "this is the way CBPP counts things"?

Your optimal public sector seems to be maximum taxes (of all sorts) and maximum spending. Not sure that fits the American polity.; March 22, 2011 at 10:44 AM
Megan said...: Patrick, your arguments are all based on spending and taxing. Other OECD countries have worse debt crises than ours because they spend money they don't have, so I don't think we should aim to be like them in that sense.

Do you have evidence that local taxes in OECD countries are progressive? I know that many of them have VAT taxes, which are regressive.; March 22, 2011 at 11:12 AM
PL said...: The Tax Foundation is arguing that “No Country Leans on Upper-Income Households as Much as U.S.” How does a country lean on people? Through the government- in both taxes and spending. That’s why when we think about how the government impacts people (or leans on them), we have to take into account taxes and spending. It’s not a CBPP point, it’s a logical point. Taxes affect everyone, and so does spending. Some spending programs actually advantage the wealthy- though as I pointed out, “we're still more progressive on our spending side then we are on the revenue side.”

Think of it this way. Imagine a society of two people- one making $10k and one making $100k. We tax the $10k person at a 10% rate, raising $1k. We tax the $100k person at 20%, raising $20k. This is clearly a progressive tax system- raising a total of $21k available for government spending. However, the society thinks it’s important to promote success and achievement, so they give all the revenue to whoever does best, the $100k person. Except for now he’s the $101k person, and the $10k person is now a $9k person. This example shows why it’s important to take into account what a government does on both the taxes and spending side when considering how much a government “leans” on people- in this case, the government is actually leaning on the low-income person, even though if you just looked at the tax system you’d think the government was leaning on the high-income person.

The U.S. tax system is modestly progressive overall- the only way to make the U.S. look really progressive is by throwing in the spending side. So by including spending, one might think I’m worsening my position. However, since taking into account both sides of the equation is important, we have to do that for the U.S. AND any countries we wish to compare ourselves to (which the Tax Foundation does here, comparing us to OECD nations). Using Gini coefficient data, I’ve shown how these countries are far more progressive and redistributive of income than the U.S. How does a country do that? As a conservative might say, “by stealing from the rich (through taxes) and giving to the poor (through spending).” The evidence is overwhelming- the U.S. is far less progressive than our peers, so when the Tax Foundation says “No Country Leans on Upper-Income Households as Much as U.S.,” they are wrong! I discussed their underlying statistic used to justify their claim- and I accepted it as fact, but pointed out how it is a very narrow figure that can’t be used to justify the Tax Foundation’s overall argument.; March 22, 2011 at 11:14 AM
PL said...: Now, regarding my “optimal public sector seems to be maximum taxes (of all sorts) and maximum spending. Not sure that fits the American polity.” I clearly said:

“I’m not saying the U.S. wants to or should look like these countries (mostly European or Commonwealth nations), but it’s quite clear the U.S. has a much smaller government state than these countries, which means that it places much less of a burden on our higher-income households”

There are legitimate arguments about how much of a burden taxes are, just as there are legitimate arguments about how much we value the government providing various services and programs like national defense, public safety & health, retirement security, a social-safety net, investment, etc. Everyone accepts that there must be a balance of taxes and spending, since all taxes/spending and no taxes/spending would both be disastrous. The question is what that balance should be? That decision includes empirical questions like how do we maximize economic growth and resulting long-term prosperity and steadily increasing standards of living, as well as value judgments about how much we care about current living standards for, safety from life’s unexpected and unavoidable hardships, how much social stability do we want, etc?

I ended by pointing out that the many people, including the “American polity,” are willing to accept greater inequality as a price to pay for having a society with greater freedom of opportunity.. The survey data on this is extensive- there are real differences of opinion on this question between people in the U.S. and people in Europe for instance. However, there is a wealth of literature, including the work covered by Sawhill and Haskins (a real conservative- he’s a big pusher of people taking personal responsibility for instance), that shows the U.S. doesn’t actually IN REALITY have more equal opportunity. One could argue that we are paying a price (greater inequality, and resulting hardships in the living standards of the most disadvantaged) for a benefit (more equal opportunity) that we’re not actually receiving!

Once again, I’ll say it again “I’m not saying the U.S. wants to, or should, look like these countries (mostly European or Commonwealth nations).” However, I do reject the Tax Foundation’s argument that we are placing an unusual burden on high-income U.S. households, and I do reject people assuming that the U.S. society has greater opportunity and social mobility.; March 22, 2011 at 11:14 AM
TJE said...: Patrick, I think you are reading more into the blog post than I see. The author is making one simple point: U.S. *income* taxes are relatively progressive compared to other OECD countries.; March 22, 2011 at 11:23 AM
Megan said...: I understand what you mean when you say spending and taxing need to be taken into account, but can't the progressiveness of much OECD country spending be attributed at least in part to the fact that they provide services that they cannot pay for?; March 22, 2011 at 11:31 AM
Megan said...: It seems that the difference between the U.S. and OECD country spending lies in the fact that they provide services to the poor that we don't (not entirely convinced that America has a more progressive or regressive tax structure). Therefore, if we wanted a progressive spending system like other OECD countries it seems like we would either have to destroy our economy with taxes (which it seems none of the other countries have done; They have simply added to their debts instead of making taxes incredibly progressive) OR cut other programs that benefit everyone (infrastructure, defense, etc.); March 22, 2011 at 11:38 AM
Megan said...: or cut the extremely expensive programs that only benefit the wealthy, but I can't really think of any.; March 22, 2011 at 11:47 AM
Megan said...: This comment has been removed by the author.; March 22, 2011 at 11:47 AM
PL said...: To Megan’s first points:

Debt has nothing to do with how much spending and taxing a government has- it has to do with the ratio between these two factors. For instance, a country could collect 50% of GDP as revenue and spend 50% of GDP as government spending- and would have no debt. Another country could only spend 20% of its GDP through the government, but only collect 10% of GDP as revenue- that means it would be adding a deficit each year the size of 10% of GDP (this figure is similar to the U.S. current deficits). Debt crises have nothing to do with total government spending and taxes- some European countries have more burdensome debts (higher as a % of GDP) because they were even worse than the U.S. at keeping revenues and spending in balance. If you think debt is important, than theoretically you could love a government that was a country’s entire economy- aka 100% of GDP, because it would also be every cent of revenue so there would be no debt.

This leads to an important distinction between “spending” and “deficit” hawks. Spending hawks like Cato want a tiny government, so they might like a government the size of 10% of GDP. Deficit hawks might hate that level of government if we were only collecting 5% of GDP as revenue, because we’d still have big annual deficits which would accumulate over time to become a very large debt that would stifle our economy. Deficit hawks in theory would have nothing wrong with a government maintaining a balance between spending and revenues at 10%, 20%, 50%, etc. of GDP.

Economists like VAT taxes because it creates better incentives for long-term investment by more heavily promoting investment relative to spending than an income-based tax system. Unmodified VAT taxes are regressive- however, there are many things you can do to compensate for that regressive-quality through either the tax system or spending side. European countries do both, though generally they do it more through the spending side. To give an example, as I’ve mentioned before on the blog, this is related the reason why many European countries passed much smaller stimulus’s than the U.S. did- European countries have very extensive social safety-nets that step in when people face hardship. So in a recession, European government’s set of priorities means their economy has more automatic stabilizer effects (quick increases in government spending on food assistance or income security for instance), so they don’t need to enact a temporary stimulus because their permanent system is designed to do it automatically without needing a political haggle that could drag on for months. I, like many liberals, strongly support a progressive consumption tax (which could be like modified VAT tax for instance) to replace much (but not all- we’d lose too much revenue and progressivity on the tax side that couldn’t be made-up for on the spending side) of our current income-based tax system.; March 22, 2011 at 12:41 PM
PL said...: Also, Professor Eismeier- I'd point to the title "No Country Leans on Upper-Income Households as Much as U.S." What does that sound like- a technical point about a small aspect of our tax system, or an attempt to create a sweeping rebuttal to the arguments that we should allow the Bush tax cuts to expire(for the wealthiest 2%, though many would favor letting all of them expire- Obama's number is stupid and is based off on a dumb political promise he knows he can't keep with the spending priorities he wants), or that the U.S. should do more through the tax system to address the past few decades of disparities in income growth? The Tax Foundation here is just laying one piece of groundwork for the ideological argument that the United States excessively taxes the rich. Many conservatives want deficit reduction to come 100% from the spending side, or even worse. Did you know that Paul Ryan in his “Roadmap for America” included massive tax cuts, once again disproportionately flowing to the wealthiest Americans? Does that sound like responsible policy when we have such high deficits projected for decades to come?

You are a student of history- you know how the idea of cutting taxes was floated in conservative circles for decades, but no one thought it was politically likely to happen. Then Reagan came along and massively cut taxes (quickly followed up by a series of tax increases, including in 1982 the largest since 1968 according to this Treasury Department analysis from the Bush Jr. years- and we can’t even compare with confidence to anything before then). Similarly, no one thought we’d cut taxes after the Clinton years when we experienced strong economic growth and unified budget surpluses (and don’t give me that blowback about how they weren’t really surpluses- I said unified budget so I’m being factually correct, and at the very least- the Clinton years got us to a fiscally sustainable path. Bush Sr. deserves lots of credit as well). But then Bush Jr. came along and we massively cut taxes again, massively increasing our deficits, disproportionately flowing the benefits to the wealthy, and stimulating… weak growth fueled by a housing sector bubble and massive financial speculation- a sure-fire recipe for economic success!!!!; March 22, 2011 at 12:41 PM
PL said...: People don’t realize- whether it’s intentional or not, conservatives have been doing the “starve the beast” strategy for decades (since they are unable to even show spending restraint within their own party). The American people are in for a rude awakening when the social safety net, their health care, their retirement security, etc. disappears overnight. Conservatives want none of that, and they’ve been pushing this objective for decades and it’s working- even though they are actually going against what the American people clearly wants- a modest government financed by a modest tax system, not a European-level state, and not a government which does one thing- fund national defense and government regulation of social behavior.

The Tax Foundation here, as they have been doing for decades, is laying just one piece, one baby-step as part of their overarching strategy. I know where it’s going, and I’m going to fight it every step of the pay by pointing out the bigger picture, pointing out where this path leads us. I am very familiar with the Tax Foundation’s work- watch the March 9th hearing and you’ll get a taste for what impressions and beliefs they like to leave people with. I’ll say it again- with a title like “No Country Leans on Upper-Income Households as Much as U.S.,” does anyone doubt their intention to deceive? It doesn’t matter if the most narrow technical argument they base their assertion on is correct (I never said it wasn’t’)- I’m just pointing out how it is a VERY NARROW (and therefore misleading) look at the issue. The U.S. does NOT “Lean on Upper-Income Households” more than other countries. The Tax Foundation is one of those organizations that blathers on and on about how “47% of all Americans don’t pay taxes”- even Thune, a Republican senator, had the brains and integrity in the hearing to ask him (Scott Hodge) if that included anything beyond the federal income tax system. So what if “U.S. *income* taxes are relatively progressive compared to other OECD countries?” Our overall taxation system isn’t, and our overall government impact isn’t. I’d be fine if they wanted an honest and open debate about our comparative situation- but they don’t.; March 22, 2011 at 12:42 PM
PL said...: Back to Megan: Many European countries, including those Scandinavian countries with the most extensive social states, have lower debt-to-GDP ratios than the U.S. https://www.cia.gov/library/publications/the-world-factbook/rankorder/2186rank.html The problem with the PIGS (Portugal, Italy, Greece, Spain) and similar countries is that they tried to give their citizens Western Europe standards of living when their economy’s weren’t that wealthy and affluent- they gave them false standards of living. More mature countries like the Continental nations (France, Germany) and Scandinavian countries, or the U.S., can afford a robust public-sector, strong social safety-net, AND economic growth.

This pattern illustrates a general point made by Lindert (2004): countries in which government pending is a fairly high share of GDP have always relied on a mix of taxes that create relatively low distortion, with less progressivity, large exemptions for capital income, and so on. Meanwhile, Anglo-Saxon countries in which government spending is a relatively low share of GDP have historically relied on more progressive taxes. According to Lindert, this pattern is the key reason why the huge rise of social transfers in high government-spending countries such as France did not generate large efficiency losses and hence reductions in aggregate growth. Although Lindert’s point holds true if one adopts a long-run perspective, the novelty from the recent decades is that Anglo-Saxon countries have gone through a series of significant top rate cuts since the 1970s, and have converged towards (and overshot) the average of the OECD countries in terms of the progressivity of their overall tax code.

On the tax side, Picketty (http://www.econ.berkeley.edu/~saez/piketty-saezJEP07taxprog.pdf ) looked at just our federal (not state or local taxes) tax system compared to the U.K’s and France’s and found some relevant results. I’ll note that these aren’t a definitive treatment of tax policy issues for these countries- tax policy is very complicated, and it can be very hard to estimate progressivity because there are so many things to take into account, while there is often limited data). Here I’ll quote some key points that I think are relevent:; March 22, 2011 at 12:42 PM
PL said...: “This pattern illustrates a general point made by Lindert (2004): countries in which government pending is a fairly high share of GDP have always relied on a mix of taxes that create relatively low distortion, with less progressivity, large exemptions for capital income, and so on. Meanwhile, Anglo-Saxon countries in which government spending is a relatively low share of GDP have historically relied on more progressive taxes. According to Lindert, this pattern is the key reason why the huge rise of social transfers in high government-spending countries such as France did not generate large efficiency losses and hence reductions in aggregate growth. Although Lindert’s point holds true if one adopts a long-run perspective, the novelty from the recent decades is that Anglo-Saxon countries have gone through a series of significant top rate cuts since the 1970s, and have converged towards (and overshot) the average of the OECD countries in terms of the progressivity of their overall tax code.” (this speaks to your general point about tax and spending mixes)

They find that the U.S. has a less progressive federal tax system than either the U.K. or France:
“Progressivity of the overall tax code has unambiguously declined in the United States and in the United Kingdom. The average share of income paid by those at the very top of the income distribution has dropped substantially. However, progressivity in the overall French tax code did not change much from 1970 to 2005, and may even have increased somewhat, especially at the very top end of the distribution. This is due to a combination of two factors: the estate tax and the wealth tax.”

The reason why these countries are able to be so much more progressive on the spending side is because their health care costs are so much less. If we could have their health care costs, our government’s fiscal health would be great, and we’d be able to devote far much more of our wealth to other things than just health care. We don’t have to massively increase taxes or cut programs that benefit everyone- instead we just have to reform the health care system. Clearly Europe and Japan have found successful models- let’s pick one 1) Nationalized system (U.K.), 2) Single-payer (Canada) 3) Heavily Regulated and Modified Multi-payer system (France, Germany, Switzerland-, etc. Individual mandate anyone? Switzerland has that!). Your choice- and the Affordable Care Act is a version of 3, though it could be better- for instance, it could be completely universal!!!! These countries manage to do universal coverage no problem, even though their health care costs are about 50% of ours and they have equivalent or better outcomes.

The U.S. could easily maintain economic growth, increase progressivity, reduce poverty, etc. all at once while reducing our deficits. Tax reform and health care reform modeled after the cross-Atlantic examples of Europe is a great way to start. At least that’s what the evidence says, but I know that goes against American exceptionalism, so we get the “Error: Cannot Compute. Not possible- America is best” response from so many on the right.; March 22, 2011 at 12:42 PM
PL said...: Whoops- here's the link to the Treasury Report on tax cuts and increases: http://www.treasury.gov/resource-center/tax-policy/tax-analysis/Documents/ota81.pdf

By the way, can we NOT talk about issues I'm interested in during the work day. It's hard enough to get all my work done as it is...
Just kidding- I know that's not possible, and I know how much FUN we all have posting these arguments all over the blog; March 22, 2011 at 12:53 PM
TJE said...: Patrick, this short blog post about what share of income taxes are paid by top decile seems to have become a Rorshach test.; March 22, 2011 at 2:24 PM
PL said...: Sorry for the delay- I was at a meeting on the Hill.

I take from your “Rorshach” comment that you think we are seeing different things here, and that I am allowing my paranoia perhaps to creep into my judgment?

What about "death tax?"- used to be called the estate tax.
What about liberals? Now it's a dead word and people are progressives.
Have you ever noticed that Republicans now frequently refer to "the Democrat Senator X" instead of "the DemocratIC Senator X?"

Anyways, you and I both know exactly what the Tax Foundation is trying to do here- provide arguments for lowering taxes on the rich again! Is that smart policy? I’ve accepted their basic fact- but I’ve also shown why it’s completely inconsequential and outweighed by the countless other factors anyone would take into account when rationally considering the position of the top decile of American households. This Tax Foundation article is the equivalent to pointing at a single puzzle piece and claiming you know what the full puzzle looks like. A puzzle piece is worthless and can actually lead you into a misunderstanding- you have to consider the whole picture. The Tax Foundation is not trying to educate people on international tax comparisons- they are trying to push forward their ideology and achieve a policy objective.

I have specifically rebutted the point made in the paper by pointing out that All AMERICANS pay less in taxes than their international peers (the citizens of foreign countries). Rich Americans in the top decile still pay far less in federal taxes than their international top decile peers. This is compensated by the fact that our spending side is far less progressive than other countries, and our state and local tax structure is quite regressive. Rich Americans are certainly NOT worse off than their peers in other countries.

WHO CARES IF THE RICH PAY A GREATER SHARE OF FEDERAL TAXES THAN THEIR SHARE OF INCOME? They're supposed to- it’s called a PROGRESSIVE taxation system for a reason. The alternative is that everyone either pays the same effective tax rate, or we have a regressive system where the rich actually pay less.

Of course, even a flat tax system is really regressive. Let's compare two households: One makes a reasonable approximation of household income- $50,000. The other makes $125k- putting them at the very low end of the top decile. Apply a 20% tax rate to both. Suddenly one household has $40,000 for food, health care, housing, education, retirement security, transportation, etc. The other household has a $100,000. Lower-income household just have less wriggle-room- applying taxes to them equally still hurts them, because they have so much less disposable income and many fundamental expenses have a floor to how much you can spend on them. If you want people to have jobs, they need to have child care options, transportation to work, food on their tables, health care, a roof over their head, etc. These households are the ones who are going to get hit in deficit reduction solely if; March 22, 2011 at 5:49 PM
PL said...: Part of the reason why it appears that wealthy Americans are paying higher taxes is because in this country we do large amounts of social policy through the tax system. Since state and local taxes are far more regressive, and since our spending social policy is far less progressive and benefit-heavy than our developed peers, is it so shocking that we apply very low federal taxes to our low- and moderate-income individuals and families? This is a ratio, so by definition when you when you help the bottom people through the federal tax system (but not on the spending side- so they’re no better off), the situation of the highest-income households on taxes looks worse. These statistics are not just representative of our country only collecting revenues through an income and payroll tax system (which is bad for economic growth), it’s also a story of the U.S. trying to help poor, low- and moderate Americans (including a disproportionate number of children, minorities, and elderly) through the tax system because conservatives scream bloody murder over any help to the “undeserving” poor and they have the political power on spending policy to block assistance. Part of this seeming “burden” on wealthy Americans is the result of the fact in the U.S. we use the tax system to LITERALLY keep MILLIONS out of poverty. This ratio is not all about the rich’s “burden,” it is also a byproduct of our national story of trying to help the poor through the tax system.

I think it’s also important to keep in mind that America has a much smaller tax and government state than any of peers, we have a far less redistributive government, we have far greater inequality, and we have less social mobility. What a delightful state of affairs!

All of this while we’ve had stagnant job growth (let alone wide-spread quality job creation) for decades, and the CBO shows using the best data available that by 2007 the top 1% of households have seen their after-tax income increase by 281% since 1979, while the top 20% saw a 95% increase, the middle 20% only saw a 25% increase, and the bottom 20% only saw their incomes increase by 16%. All of this while households have been adding second workers (aka women) to the labor force in droves, inflating the increases seen in household income gains).

If we don’t consider revenues as deficit reduction (a real, important discussion where this statistic about taxes might have some relevence), we are going to have to cut the social safety net, Medicaid, Medicare, and Social Security. The safety net and Medicaid are explicitly for the most disadvantaged Americans- mostly those below the poverty line. The overwhelming majority of elderly Americans receiving Medicare and Social Security beneficiaries have either low- or modest-incomes/standards of living. The annual benefit for the average retired worker in Social Security is $14,105. In December 2010, 95 percent of retired workers received monthly benefits of less than $2,000 a month ($16,000 a year). If you throw in the additional income sources of Social Security beneficiaries, you’ll discover that married-couple beneficiaries had a median income of about $35,000, while non-married beneficiaries had just $15,000. Some cuts are necessary and called for, but where are you going to find the money necessary for deficit reduction without maintaining and actually increasing our tax revenue system- which the Tax Foundation is fundamentally opposed to? If we don’t do anything on taxes, or worse yet- we do what Paul Ryan has suggested and cut taxes further, you are going to be severely cutting into the benefits and programs tens of millions of Americans depend on.; March 22, 2011 at 5:50 PM
PL said...: I’ve agreed that this Tax Foundation fact is true- I just really don’t understand why it’s important or noteworthy? In my mind, it has no importance or meaning to any possible discussion. The figure is just an element, an initial-step in any process of thinking about anything. It’s 1/10 of the story. I just really can’t comprehend the value of this statistic- in my mind it has the same value as pointing out that the desk I work at is made out of wood. So? It’s a wood desk? Is that bad for the environment, does it cause splinters, is it expensive, what are the alternatives, etc.? That’s the kind of thinking about this statistic that is needed- and shows that while the U.S. has a progressive income/payroll tax system which by definition means that the richest Americans pay a higher percentage of all tax revenues than they receive in pre-tax income, the wealthy’s situation is mitigated by other facts and they are doing quite well, while the vast majority of Americans have been treading water for decades (experiencing very little in gains).

Similar to what Ryan said earlier- I’m just devastated over the plight of wealthy Americans. Their lives are so hard- it’s a wonder they can get up in the morning.; March 22, 2011 at 5:50 PM
TJE said...: The lesson I draw, which many seem to deny,is that there is only so much blood to be squeezed from rich turnips:

http://taxvox.taxpolicycenter.org/2011/02/17/where-will-new-revenues-for-deficit-reduction-come-from/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed:+taxpolicycenter/blogfeed+(TaxVox:+the+Tax+Policy+Center+blog)&utm_content=Google+Reader

Or is Brookings part of the vast right wing conspiracy?; March 22, 2011 at 6:30 PM
PBM said...: TJE, this is unrelated to website you put up, but is Willie Stark supposed to be Huey Long? I just finished Kingfish but haven't seen "All the King's Men," which is, I believe, where your getting your picture from.; March 22, 2011 at 7:02 PM
TJE said...: Yes, it's one of my favorite novels and films (the original).; March 22, 2011 at 7:24 PM
PBM said...: Are you talking Kingfish or the "All the King's Men" book? Kingfish is probably pretty similar but definitely worth a read. Very entertaining and funny at first, scarier towards the end.; March 22, 2011 at 7:39 PM
TJE said...: All the King's Men.; March 22, 2011 at 7:41 PM
PL said...: I'd recommend Huey Long by T. Harry Williams :P; March 22, 2011 at 7:44 PM
PL said...: I've said before that Obama's promise to not raise taxes of anyone making less than $250k is not compatible with his spending priorities. I also don't think it's fiscally responsible in light of our deficits- we need a mixture of spending cuts and broad-based tax reform that includes revenue increases.

I know there is only so much money we can collect from the wealthiest Americans, though I think the more accurate turnips/blood analogy might be about the Republicans' current focus on just cutting the benefits of safety-net, Social Security, Medicaid, and Medicare. These programs almost entirely go to low and moderate-income Americans with very little room for give.

As I've said before, I support tax reform that increases revenue that should be a minority contributor to deficit reduction. I believe that we can make our government system more progressive (either through taxes or spending) while at the same time combatting our deficits.; March 22, 2011 at 7:51 PM

Potomac Fever

Tuesday, March 22, 2011

I'm gonna soak the fat boys and spread it out thin!

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