More, still

by von

Ezra Klein tries to push back on the notion that American top quintile pays a disproportionate share of federal taxes, particularly when compared to most European countries. (See My prior post & Clive Crook.)  Klein doesn't wholly join the argument, which involves, among other things, a comparative analysis between the US and relevant EU countries.  Instead, he misinterprets his own graph:

When you look at percentage of total tax liabilities, the rich do in fact bear a heavier burden. But it's because they have so much more money. They are not bearing a heavier burden as a percentage of their incomes. They're bearing it in relation to everyone else's incomes.

Umm, no.*  Even if you are in the fifth quintile, 25.8% is still a greater percentage of your income than 17.6% (the fourth quintile burden).  You may have more money left over after you pay your taxes:  the fifth quintile might be, in absolute terms, better off than quintiles First through Fourth.  But the fifth quintile is unquestionably bearing a heavy burden based on the percentage its income.  It's not bearing a heavy burden "in relation to everyone else's incomes," as Klein erroneously asserts.

Tom Maguire has much more, and he is worth a read.

You can misunderstand the numbers, but the numbers don't change. The US is almost unique among developed countries in that taxes are disproprotionately paid by the wealthy.  Moreover, even as the wealthy have (and are) bearing a greater absolute tax burden, the gap between US rich and poor has widened. 

These gaps are not sustainable over the long term.  You cannot have a smaller and smaller percentage of the population bearing more and more of the ultimate tax burden. Leave aside the stimulus package: Taxes are going to go up on everyone solely because of Obama's structural deficits in his budget.  Moreover, thus far, we have not been able to progressively tax our way out of the income disparities between rich and poor.  Tax policy is not the right lever for that concern.  The 'ole class warfare ain't working, folks. 

*For the sake of argument, I'll grant Klein the fuzzy numbers presented on his graph. (Tom Maguire explains why Klein's numbers are fuzzy here.) 

Comments

[anonymous]

The US is almost unique among developed countries in that taxes are disproprotionately paid by the wealthy. Moreover, even as the wealthy have (and are) bearing a greater absolute tax burden, the gap between US rich and poor has widened.

That about sums it up. Massive, Brazil-like inequality is the story here.

[Populuxe]

You cannot have a smaller and smaller percentage of the population bearing more and more of the ultimate tax burden.

Haven't these unfortunates all "gone Galt" already?

[Total]

You cannot have a smaller and smaller percentage of the population bearing more and more of the ultimate tax burden.

Why not?

And, on a larger note, the rich have been bearing a larger part of the tax burden and yet...have gotten richer? Yeah, that's a system that's punishing them...

[Jon H]

"You cannot have a smaller and smaller percentage of the population bearing more and more of the ultimate tax burden."

Why not, if their income is increasing?

[Chuchundra]

First of all, if you add in state and local taxes, the percentage paid per quintile is nearly even. State and local taxes, which generally rely on sales and property taxes, are much more regressive, balancing out the more progressive federal taxes. I don't think that many other western industrialized countries have any sort of similar tax structure.

Second, you get this absolutely backward.

Moreover, even as the wealthy have (and are) bearing a greater absolute tax burden, the gap between US rich and poor has widened.

It's the massive income equality that's causing the shift in tax burden. The rich are paying more and more in taxes because THEY HAVE ALL THE MONEY.

[kjblair]

And Tom Maguire's numbers are fuzzier than Erza's. Anyone that tries to argue that payroll taxes aren't taxes really can't be taken seriously. (His argument is that since SS taxes are designed to fund SS payments, you have to exclude them from the calculation. Never mind that there are a host of other taxes that do the same thing, gas taxes for example. In addition, excess SS taxes that aren't required to fund current expenses are used to minimize general debt obligations.)

[Doctor Science]

Moreover, thus far, we have not been able to progressively tax our way out of the income disparities between rich and poor.

Possibly because we haven't *tried* for the past 3 decades or so. I'm thinking it's worth looking at Eisenhower-type marginal rates, myself.

[CaseyL]

Oh, my stars and garters, those poor put upon babies in the Top 1%. I will be more than happy to help them pack and move to the No-Taxes Capitalist Paradise that is Somalia.

Seriously? I'm supposed to feel sorry for these people? The ones who basically push paper around, and talk about leveraging this or that, and spend their days actually producing not a goddamn thing, and yet manage to earn multiple millions doing so?

I'm supposed to feel sorry when they whine about being called on to help support the country that enables their parasitic asses to live long and prosper?

Frak that. Really, really frak that. And them. FOAD, and all that.

[Jeff Darcy]

The US is almost unique among developed countries in that taxes are disproportionately paid by the wealthy.
What definition of "disproportionate" is being used here? I'm sure one could be concocted that makes the whole statement true, but that would be a rather pointless exercise. The more important question is whether the statement is true according to a commonly acceptable definition of proportionality. I'm not sure that it is, and even if it were I'd question whether it's an insightful or misleading truth. Where's a good comparison to similar tax-distribution figures for other countries? Is the ratio between the tax rate for the wealthy (let's say the fifth quintile) and the remainder all that different for the US than for other developed countries (also undefined but let's say OECD)? If it is, is that because the top quintile pay more than elsewhere, or because the remainder pay less than elsewhere? If it's the latter, I'd say the statement is true but misleading, since that would mean not so much over-taxing the rich as under-taxing the rest.

I'm not sure whether I make the fifth-quintile cutoff or not, but I have in some years. Even then, both my federal and tax burdens were lower than they would have been in most OECD countries. Most people who have ever been in the fifth quintile could say the same, so by what definitions and according to what figures could the tax burden borne by the rich in the US be considered "uniquely disproportionate"?

[(The Original) Francis]

Try Kevin Drum for a very serious rebuttal. The top 20% of income (not taxpayers) pays only slightly higher federal income taxes than the next lower quintile.

[Wagster]

I think you're nitpicking, von. Elsewhere in the piece Ezra clearly acknowledges that the tax burden slopes up. He just came up with some infelicitous phrasing at the end of his piece.

Meanwhile, you continue to play games with numbers. By only citing the total tax burden of the rich you're pretending the tax burden for them has been going up. It hasn't. Over the last 30 years the top marginal tax rate has been cut by half. Yes, there are structural elements in our economy that are pushing us toward more income disparity, but the tax rates have not helped, so your throwing your hands up as you exclaim "See? Progressive taxation doesn't fix income disparity" is deeply disingenuous.

[El Cid]

Well, if you have a development strategy dedicated to eliminating decent incomes among the working and lower middle classes, while maintaining a progressive tax structure, you shouldn't be surprised that the quantitative burden shifts to the wealthy.

This is a pretty obvious outcome of the 'screw the working and lower middle class' approach we've had for the past 40 years.

Of course, it was Ronald Reagan who introduced the Earned Income Tax Credit to remove the income tax burden from the lowest earners.

Because he thought it was oppressive that government taxation fall so heavily on the lowest income earners.

[d'd'd'dave]

If equality is the goal, it will never be reached. People are different from one another.

If the goal is to raise the standard of living of the poor, then that is more doable.

In my opinion, a prerequisite to the discussion is that you admit that the standard of living of the poor has been rising. At the same time I will admit it can rise at a faster rate.

[Joshua]

Well, since everyone else is piling on von, I guess I'll be a contrary bastard and agree with him on at least one point.

Namely, are progressive taxes a good way, in themselves, of correcting income inequality? They certainly don't hurt. Flat taxes would be worse for everyone except the rich, since the working and middle classes would then bear more tax burden on what little income they have. Doctor Science may have a point, but I think the most salient issue is this, from Chuchundra: "The rich are paying more and more in taxes because THEY HAVE ALL THE MONEY."

We can keep jacking up tax rates on the rich all we want, but it's not clear that it addresses the core problem, namely the structure of the American economy and society that allows useless idiots like our CEOs and the greedy assholes at the banks and investment firms who chased their financial dragon until the entire economy came crashing down to command obscene wages and even more obscene "bonuses" (that aren't tied to performance, defeating the whole purpose) while people who work two or three jobs making sure that our children get educated, that our cars and TVs get built, that the floors of our hospitals are clean, live paycheck to paycheck with the fear of layoffs hanging over their heads like the Sword of Damocles.

Taxing the rich is, at best, a bandage for that problem, but while a bandage might stop the external bleeding it won't suture the severed artery beneath. It allows us to fund programs that ease the pain a little, but just as frequently that money goes right back to the robber barons (*cough*bailout*cough*) or into the military-industrial complex.
I don't claim to know what WILL fix the problem, but it's probably not taxes alone. Jacking up the minimum wage, maybe, or indexing it in a way that ensures people can live off of and support their families by working a single job, rather than two or three. Capping pay and bonuses for the top tier, or at least indexing that to a meaningful measure of how well a company compensates its lower-run employees.

[Nate]

I'll just join the chorus of those pointing out that the rich are paying a higher percentage of income taxes because they're MAKING MORE OF THE INCOME.

I am shocked, SHOCKED at this!

Meanwhile, though I know von eventually drifted into realizing the Iraq war was a bad idea and the Bush crew were bad at government, I don't recall many posts about the "structural deficits" in Bush's budgets and war "emergency funding" and comments on how all of that would require everyone's taxes to go up.

[Turbulence]

Um von, isn't this analysis a little bit ridiculous since it excludes state and local taxes? If you focus exclusively on the progressive parts of the tax system while going out of your way to deliberately exclude the regressive parts of the tax system, you can easily conclude that the tax system is progressive. But that doesn't mean that you're correct.

If I only looked at the stupid things you've done, I might conclude you're an idiot, but that doesn't mean you actually are an idiot.

[von]

I appreciate the arguments against my position, although I don't agree with them. I do think it's interesting that no one is defending Klein .... save Wagster, who acknowledges that Klein's wrong but asserts that I'm "nitpicking". Wagster, where does Klein "clearly acknowledge[] that the tax burden slopes up" -- other than the graph that he misinterprets, that is.

Meanwhile, though I know von eventually drifted into realizing the Iraq war was a bad idea and the Bush crew were bad at government

I'm pretty sure that I consistently criticized the handling of the Iraq War from the get go, even though, like many (including many liberal bloggers), I accepted the rationale to go to war. The difference is that I did not agree with a quick withdrawal, but rather argued for a change in strategy (namely, more troops).

[Ginger Yellow]

Progressive tax structures are not (or at least should not be used as) tools to create income equality. The point of a progressive tax structure is that the government has to be funded somehow, and it's fair and sensible for people with more "spare" money to pay more. 30% tax on a $15,000 income doesn't leave much to live on. 50% on a $2m income does.

Without checking the underlying data, I'd guess that the main reason for the relative unprogressiveness of European "federal" tax systems is the 17.5% VAT, which like all sales taxes has a disproportionate impact on lower incomes, as a higher proportion of those incomes is spent.

[mikkel]

Warren Buffett offered quite a bit of money to any richly compensated CEO that could show they paid a greater percentage than their secretary. As far as I know, no one won.

What I don't get is why investment income isn't taxed progressively...that'd go a long way towards actually having a progressive system.

Still, I don't think that any tax system will appropriately address income inequality, and inequality rises as total wealth rises. Inequality tends to fall due to asset price collapse, not proportionally larger gains to the working classes. I do think that tax policy can slow down that process though...

As for the data, the wealth inequality is so vast that quintiles just don't cut it. You can chop it up into four, then look at 80-95, top 5, top 1, top 0.1 to get a more realistic portrayal. If I remember correctly, the highest effective burden is on the 80-95, then it decreases rapidly.

[mkd]

Ezra also spent some time (unmentioned here) discussing the nature of a "burden", noting that the 25.8% the top quintile is paying does not place the same burden in real dollar terms on them as the 4.3% that is paid by the lowest quintile. Because arguments raised by the right are usually framed in this "bearing the burden" rhetoric, this is not an insignificant point.

As to the point about the US targeting the rich more than other developed countries, he also posted a comparison chart that did seem to show that. Of course, it also showed that the percentage of wealth held by the top 10% in the US was far greater than any other country. So, as everyone else in this thread has noted: WHERE ELSE IS THE MONEY GOING TO COME FROM?

[mikkel]

Oh wait I got Buffett's bet a bit wrong:

"And Buffett went a step further, putting his money where his mouth is. Last November he issued a challenge to his fellow billionaires:

I’ll bet a million dollars against any member of the Forbes 400 who challenges me that the average (federal tax rate including income and payroll taxes) for the Forbes 400 will be less than the average of their receptionists.

So far, no-one has taken him up on this bet."

[Blue Neponset]

I see no fundamental problem with the fact that the top quintile is paying a 25.8% effective tax rate.

One thing no one seems to notice in these discussions is that taxable income does not equal total income. Rich people spend a lot of money, time & effort maximizing their total income and reducing their taxable income. How is "household income" calculated by the CBO? If it is anything other than total income (regardless of taxability) then we aren't getting a clear picture about what the top 20% is actually paying tax rate wise.

[d'd'd'dave]

According to OECD statistics, the mean poverty gap before taxes and transfers has consistently been smaller (ie better) in the United States than in other countries noted for good equality performance (ie France and Denmark).

IMHO this indicates that the US system is better at enabling all classes of people to sustain themselves than the other countries noted. Those other countries paper over the problem with high levels of transfers. Sure, the transfers help. But wouldn't it be better to discover what's at the core of the better 'mean poverty gap before taxes and transfers' and strengthen and reinforce that natural process?

[Davis X. Machina]

But no one actually experiences the 'mean poverty gap before taxes and transfers'. It's an artificial construct.

Popcorn is low in calories, if you eat it air-popped without butter. Which no one does.

[(The Original) Francis]

I do think it's interesting that no one is defending Klein

Silence doesn't equal consent. You post what you feel; I'll comment how I like.

[Blue Neponset]

Found the answer on the CBO page Klein links to:

Measuring Income

This analysis focuses on households’ adjusted pretax comprehensive income. That measure includes all cash income (both taxable and tax-exempt), taxes paid by businesses (which are imputed to individuals, as noted above), employees’ contributions to 401(k)retirement plans, and the value of income received in-kind from various sources (such as employer-paid health insurance premiums, Medicare and Medicaid benefits, and food stamps). The calculations use the Census Bureau’s fungible value measure to determine the cash equivalent of in-kind government transfer payments.

I still maintain that 'all income required to be reported to the IRS' does not equal total income. As a result, the true effective tax rate of the top 20% can not be calculated, and common sense would tell you it is lower than 25%.

A few example of 'income' not reported on the 1040:

1) trust income taxed at the trust level

2) non-taxable fringe benefits such as automobiles & travel

3) taxable fringe benefits not reported to the IRS

4) tax free gifts

You get the idea. Rich people go to great lengths to avoid taxes. They got so good at it that the gov't had to create the Alternative Minimum Tax.

[d'd'd'dave]

wagster

" your throwing your hands up as you exclaim "See? Progressive taxation doesn't fix income disparity" is deeply disingenuous."

I don't think so. If you look into the OECD stats you'll see that the nations with the most transfer payments also have worse pre-transfer mean poverty gaps than the USA. It appears that the taxation and transfers do not fix the underlying basis of the economy. They paper over the problem at best, and perhaps make it worse.

[ScentOfViolets]

Good points all. von has also neglected to mention Ezra's followup post, where this graphic was displayed:

http://blog.prospect.org/blog/ezraklein/share%20of%20total%20taxes.jpg

Looks to me like this is pretty flat across the board. And don't forget that what government does disproportionately benefits the upper quintile; though to be fair, that's mostly because of that top one percent.

[d'd'd'dave]

mikkel

" If I remember correctly, the highest effective burden is on the 80-95, then it decreases rapidly."

Yes, 80-95 is highest.
No, it doesn't decrease rapidly. In fact, it decreases so slightly that it might be a statistical abberation.

[d'd'd'dave]

davis x machina

"But no one actually experiences the 'mean poverty gap before taxes and transfers'. It's an artificial construct."

Huh? Please explain.

[d'd'd'dave]

blue neponset

I agree that total income is not measured. For example, Bill Gates is not taxed on the increase in value of his Microsoft stock. He is only taxed on the dividends he receives and the proceeds of any stock sales. Further, he received a deduction for the full value of the stock he contributed to his foundation. ... so, I accept your point.

The problem is how are you going to value these things? And how are you going to tax a guy whose orchard rises in value one year and falls in value the next? Will he get a refund when the value falls?

That's what the estate tax is for. It catches up for all the gains missed because there was no taxable event. Wouldn't want the collective to miss out on their 'share' of any gains one of its individuals made now would we?

[d'd'd'dave]

SOV
" And don't forget that what government does disproportionately benefits the upper quintile"

Can you refer me to some support for this assertion?

[Blue Neponset]

The problem is how are you going to value these things? And how are you going to tax a guy whose orchard rises in value one year and falls in value the next? Will he get a refund when the value falls?

I am not arguing you need to tax these things. My argument is simply that these increases in wealth are not included in the 25.8% calculation above. As a result the 25.8% is a misleading.

[Nate]

von:

I haven't looked at Ezra's numbers, because they're irrelevant to the overall point, which is the rich pay more since they make more money.

But now, I have a different question. When do "structural deficits" and taxes going up matter to you? Obviously they mattered less than some other suite of reasons when you were supporting the Iraq war, and when you felt that sending "more troops" was the answer. (Nevermind that most of the reasons to invade Iraq were obviously BS at the time, and all of them have been proven to be BS in hindsight.) We were already fighting one expensive war. A second expensive war would rather obviously have "structural deficits" that would require everyone's taxes to go up (or to borrow trillions from China).

What was it about invading and occupying a country that hadn't attacked us that made it worthwhile?

Why are "structural deficits" an issue now, in a stimulus package designed to help keep the country out of a Great Depression, an actual emergency?

Basically, where do your priorities lie? When does "fiscal responsibility" matter, and when does it not? Is it as simple as it doesn't matter when Republicans do it?

[hairshirthedonist]

I'm not so sure how relevant comparisons of the mean poverty gap are to the overall question of income equality. It's certainly not relevant to the health of the middle class, since it applies to the poor as, generally speaking, a measurement of how poor the poor are. There are plenty of other factors, particularly in countries much smaller than the US, that can skew this measure independantly of the effectiveness of tax structures.

And, yeah, comparing quintiles doesn't tell you much unless you look at what percentage of total national income those quintiles are earning.

[von]

Um von, isn't this analysis a little bit ridiculous since it excludes state and local taxes?

Klein's focused on federal taxes, so that's my focus here as well. (This may be an additional basis to criticize Klein.) If you'll follow my links, you'll see that my initial posts concern "all-in" values.

Progressive tax structures are not (or at least should not be used as) tools to create income equality. The point of a progressive tax structure is that the government has to be funded somehow, and it's fair and sensible for people with more "spare" money to pay more. 30% tax on a $15,000 income doesn't leave much to live on. 50% on a $2m income does.

I agree with that, Ginger Yellow.

" And don't forget that what government does disproportionately benefits the upper quintile"

SOV, I'd like to see some support for that argument as well -- in relative as well as absolute terms. Also, Klein's follow up posts don't address the obvious error in this post (although they include new errors .... Klein doesn't seem familier with OECD data).

[russell]

These gaps are not sustainable over the long term.

You got that right.

The interesting number here regarding financial inequality is not income, but wealth.

The US Gini coefficient for income is somewhere in the 40's, maybe 50.

For wealth, the most recent number I'm aware of is for 1998, when it was 82. I doubt it's gone down since then.

And for reference, a Gini number of 100 for wealth means that one person owns every damned thing in the entire nation. One person, everything.

And I believe the Gini calculation doesn't allow for negative values. If so, the reality is even more skewed; there are lots of folks in the lower percentiles with negative wealth.

The social issues here go well beyond allocation of tax burden. They include things like quality of health, access to education and job opportunities, access to credit, influence on political policy, etc etc etc.

Really, if wealthy people were wise they would not call attention to themselves by complaining about their tax burden. It's only going to piss everyone else off.

And yes, FWIW, I am happy to stipulate that being poor in the US means your quality of life is probably better than that of most of the rest of the world.

[Turbulence]

Klein's focused on federal taxes, so that's my focus here as well. (This may be an additional basis to criticize Klein.) If you'll follow my links, you'll see that my initial posts concern "all-in" values.

von, your last post that dealt with all-in values did not include sales taxes and other regressive taxes. AFAICS. And I don't really care about Klein here. If you think he's doing something stupid, the correct response is not to replicate his stupidity. If you think making arguments about taxation that deliberately exclude a large chunk of taxes people pay is a good idea, than stand by it rather than blaming everything on Klein. I know you're a conservative but surely you can take responsibility for your own actions once in a while.

[Wagster]

Von:

Ezra writes: "Income taxes do tilt upward." Look, maybe he did read the graph wrong, but it's such an obvious point, and I don't think anyone would accuse the boy of being dumb. More likely there's a missing word like... "They are not bearing a [much] heavier burden as a percentage of their incomes."

In terms of your argument, I think you need to make a defense of the figures you choose that is stronger than "those are the figures I prefer". If your boss docked you 10% of your pay and justified it by saying, "that's okay, it's still fair because I hired some people and now my employees are getting paid more overall!" I think you'd be pretty ticked off.

d'd'd'dave:

I'd be interested in seeing a link.

[Fraud Guy]

SOV
"And don't forget that what government does disproportionately benefits the upper quintile"

Can you refer me to some support for this assertion?

My anecdotal non-data. Local police advised, conversationally, that their "random" traffic stops are predicated on the value of the vehicle. An older, well-used car is likely to be pulled over "randomly" for two main reasons. First, there is more likely to be a problem with an older car. Second, the drivers are less likely to be able to afford contesting any citation in court.

So people in which quintiles are more likely to be able to afford the new, shiny car that the police will let pass, and which will be driving the used but serviceable late model car that does get over?

Additionally, which quintiles (hell, percentiles) are favored in the legal system, having better access to attorneys and advice, and often knowing members of the local legal system? Which percentiles are able to afford access to better universities, some with near automatic legacy placement? Which percentiles are more likely to run and hold elective office, especially at the state and national level? Which percentiles will have access and favor from those who hold elective office?

Government of, by, and for the people, but which people?

[Damien Neil]

Moreover, thus far, we have not been able to progressively tax our way out of the income disparities between rich and poor.

I call foul on this. The goal of a progressive tax system is not to eliminate income disparity.

Think about this for a second. Are you honestly saying that our tax system is a failure because it hasn't left Bill Gates with the same amount of money as me?

[Pooh]

You cannot have a smaller and smaller percentage of the population bearing more and more of the ultimate tax burden.

I see many, many others have beaten me to the punchline that Von has (per usual in recent weeks) skipped over the diseases (massive income inequality) to complain about the unfairness of the symptom.

My question is, why the hell are you so wedded to paradigm were a fairly randomly selected few make so much more than everyone else? Hand-waving about markets and such aside, how is this a good outcome?

[Pooh]

Basically, where do your priorities lie? When does "fiscal responsibility" matter, and when does it not? Is it as simple as it doesn't matter when Republicans do it?

Is there a shorter word than "yes"?

[Undeanonymizable]

Ezra seems to understand the numbers pretty well. In this followup he wonders about the meaning of the phrase "tax burden" and asks "The rich person certainly pays more, both in absolute terms and as a share of income. But is their burden greater than the middle-income taxpayer left with $52,100?." And in this one, he notes that the US federal tax system is the second most progressive in the OECD. The part that von quoted was poorly worded, but if you read Ezra's series of posts you should get an accurate impression of the tax system.

That first post which von cites was mostly trying to argue against Fleischer claim that the tax system was wildly imbalanced, and show that the statistic that Fleischer gives - that the richest 10% pay 72.4% of the nation's income taxes - is misleading. The federal tax system is progressive, but not ridiculously so. Then he goes on to show that the total tax system, including state and local taxes, is barely progressive at all.

[russell]

The goal of a progressive tax system is not to eliminate income disparity.

At least, the goal of *our* progressive tax system is not the eliminate income disparity.

The classic argument for a progressive tax regime is that a dollar taken from a wealthy person causes that person less pain than one taken from a poor person, so levying relatively more of the tax burden on the wealthy allocates the total tax burden such that the total level of pain is minimized.

That's the argument presented by Adam Smith in "The Wealth Of Nations", and it's a damned good argument. It's not absolutely bulletproof, and it makes certain assumptions about the nature of fairness, but on the whole it's pretty damned good.

European countries raise relatively less of their revenue from the wealthy because they raise relatively less of their revenue from income taxes. In turn, they return relatively more of the revenue they take in back to lower income earners through transfers.

Personally, my preference would be to not rely on transfers to that degree, so what we have suits me just fine.

[Slartibartfast]

Ok, now I'm confused. Is SS a tax, or a retirement program?

Or both, somehow?

[Sebastian]

"You cannot have a smaller and smaller percentage of the population bearing more and more of the ultimate tax burden. "

Why not? Ask many people.

The answer is the same reason you shouldn't radically divorce the risk taking of loans from the risk assessment. The answer is the same reason why companies don't worry about pollution until they have to. You don't worry so much about spending things efficiently when you are convinced that you can foist most of the costs off on to someone else. If you think you have pushed government cost into an externality paid for largely by other people, you won't make wise decisions about it.

(See also one of the reasons why the Iraq War caused much less fuss than you would have thought: the price didn't fall very heavily on people that a majority of Americans knew)

I'll use this to flog my general preferred tax scheme. It would be something like: The bottom 15-20% pay nothing with an EITC-like process easing them toward what I will call 'the basic tax rate'.

There is a smooth progression of the tax rate from the basic rate to approximately the rate +15 percentage points of the rate. (I'm flexible on the exact number, it could be 10 or maybe as high as 20 or so points above the basic rate, but whatever it is, it is a SET amount and shouldn't be dramatically more than the basic rate).

The basic rate is adjusted each year to reflect actual government spending needs. Spend more, pay more, spend less pay less. For tracking purposes and/or fiscal responsibility and/or recession fighting possibilities we might need to have a running average of some reasonable number of years. I'd guess 2-5. This would also let people plan for paying it.

The advantages are: it keeps peoples governmental wants tied to the idea of governmental costs, it doesn't encourage long term deficits, it is easy to understand.

[Donald Johnson]

"And yes, FWIW, I am happy to stipulate that being poor in the US means your quality of life is probably better than that of most of the rest of the world."

I wouldn't stipulate this, not without seeing a good argument for it. Maybe it's true and maybe it isn't. Poor Americans are supposedly richer than most of the rest of the world, but that doesn't necessarily translate into a better quality of life, or even a higher life expectancy. I remember a study from the early 90's, I think, that found that black men in Harlem had a lower life expectancy than people in Bangladesh, for instance. Also, there is evidence that inequality in itself hurts people on the low end of the status pole, but I haven't looked for links to support this.

The link below doesn't directly support or refute my claims, but it does contain some relevant factoids.

Link

[Troy]

IMO SS should rightly not be considered a "tax" since people get their money back, even if the ~3% return is sub-optimal, or was until everyone's equity investments got slaughtered last year.

Speaking as a Georgist, the tax arguments here are missing an important element, land prices and rents. All things being equal, high progressivity in income taxes -- giving the toiling masses free rides -- serves to put upward pressure on rents and land prices.

This observation is called "The All-Consuming Rent". In most areas LLs generally have pricing power to set rents to whatever the renting base can & will bear.

As a tax policy mandated income taxes for health care, retirement savings are superior to laissez faire half-assed tax policy since high income taxes are actually a disguised form of land value tax (in that they prevent the toiling masses from bidding up rents and land values).

[(The Original) Francis]

The following excerpt from von's post is, i think, really striking:

The US is almost unique among developed countries in that taxes are disproprotionately paid by the wealthy. Moreover, even as the wealthy have (and are) bearing a greater absolute tax burden, the gap between US rich and poor has widened.

Dude, sometimes correlation does imply causation. When the gap between rich and poor grows, the wealthy inevitably bear a greater burden, measured as a percentage of share of dollars sent to the government. After all, that's where the money is.

Issue 1: How much money does government need? (Answer: given our defense commitments, a lot. Or, put another way, if we shrank our DOD and related spending somewhat, we could either lower taxes or increase our social safety net noticeably. Anyone ready to argue for another peace dividend?)

Issue 2: Who pays? (Answer: Everyone except the bottom quintile, and they don't have a lot of extra income lying around. The highest quintile pays a little more on a percentage of what they earn basis, but not a lot. See KD's allocation post here.)

Issue 3: Why is so much of the revenue coming from the top. (Answer: Because that's where the money is. If the very rich want to lower the percentage that they contribute to the total receipts (which is a very different number than the percentage of what they earn that they pay), then they're going to need to make society less unequal.)

Issue 4: Is our tax code the appropriate vehicle for eliminating the inequality in income in our society. (Answer: Not directly. As a policy matter I believe we need to collect enough taxes to build a sufficiently robust safety net that provides rough equality of opportunity -- schools, medical care, job retraining, retirement security, etc. If the only group that has the surplus funds available to build this net is the very rich [as opposed to the middle class], then so be it.]

[russell]

Or both, somehow?

It's a government program that provides a modest benefit to more or less everyone for retirement and a handful of other circumstances. It's purpose is to prevent folks from suffering truly abject poverty if they can no longer work due to age or infirmity. It's funded by a tax.

You don't worry so much about spending things efficiently when you are convinced that you can foist most of the costs off on to someone else.

That's a reasonable objection. IMO the ideal situation would be that everyone paid a relatively more equal amount of taxes based on a relatively more equal distribution of wealth and income.

In other words, address inequality at the point of the inequality, rather than at its resulting effect on the tax regime. If the distribution of income and wealth were relatively more equal, the allocation of the tax burden would follow quite naturally.

I'd also argue that the best way to work toward addressing the inequality of wealth and income would be by organizing our commercial lives such that more of the value that is created by enterprises flows to the folks who work in them.

There's a lot of value being created out there, more than enough that nobody who does any kind of productive work needs to be poor. Just a thought.

Poor Americans are supposedly richer than most of the rest of the world, but that doesn't necessarily translate into a better quality of life

I think you have a good point. On second thought, the only thing I think I can really stipulate is that poor Americans most likely have more money that most other folks in the world.

[Slartibartfast]

It's a government program that provides a modest benefit to more or less everyone for retirement and a handful of other circumstances. It's purpose is to prevent folks from suffering truly abject poverty if they can no longer work due to age or infirmity. It's funded by a tax.

It sounds like an entitlement to me, when worded this way. If entitlement is excessively loaded, feel free to substitute some other word.

The reason I asked the question is SS seems to get treated as a different beast, depending on expediency.

Maybe it just seems that way. Hence, the question.

[Bernard Yomtov]

I find this graph confusing, since it compares income share with effective tax rate. That seems odd to me. Still, pulling out the numbers of interest, I think it implies that the top quintile pay 69.4% of taxes while receiving 55.7% of the pretax income. I get this by multiplying the percentages for each quintile together, so, for example, the top quintile contributes about 14% of the nation's total income in taxes. The other four contribute about 6% of national income to the govt.

[lightning]

Philosophical question here -- what is "fair"? On one level, each American's "fair share" of Federal spending is about $8200 ($ spent / population)*.

The Government needs money to operate; we have to figure out how to get it. Is a progressive income tax "fair"? Maybe, maybe not, but it takes some money from everybody and most from those who have the most of it.

BTW, "Fair" is one of the words that triggers my bullshit detector. It usually translates as "it's only fair that you give me ..."

"Fairness" is to "justice" as "cuteness" is to "beauty".

[russell]

It sounds like an entitlement to me

Yes, I think it's definitely an entitlement, as that term is used to describe government programs.

The term has perjorative connotations in common use -- "a sense of entitlement" -- but in this context it just means a program to which general access is guaranteed by law.

We don't have lots and lots of them, which is probably a good thing, but we a few, and SS is one.

[Bernard Yomtov]

I see that I could have spared myself some arithmetic by following links, and that CBO confirms my numbers.

It is interesting, though, that corporate taxes are allocated to individuals on the basis of their capital income - interest, dividends, etc. I think, and CBO agrees to a point, that this overstates the burden on the upper quintile. The probem of unrealized capital gains comes in here, as well as more directly in calculating income by quintile.

[Sebastian]

I forgot one of the best things about my proposed tax regime (actually I stole the biggest idea from Friedman), and it addresses one of the biggest general problems in our politics: the ability of politicians to promise benefits without addressing cost, or conversely to promise to lower taxes without dealing with real cuts.

[russell]

the ability of politicians to promise benefits without addressing cost, or conversely to promise to lower taxes without dealing with real cuts.

FWIW, my gut sense on this is that politicians' ability to make big promises without carefully considering cost is due more to the ability of the federal government to run on borrowed money, and less on their ability to stick rich folks with the bill through a progressive tax scheme.

To be honest, I really don't think the "we'll make the rich guys pay for it" thought process is that common, either consciously and explicitly or not.

"We'll borrow it and pay it back later", IMO, certainly is.

Just my intuition, I have no cite or data to offer, so take FWIW.

[Bernard Yomtov]

Sebastian,

Would you retain favorable rates for capital gains and dividends?

[d'd'd'dave]

wagster

Here is an OECD address that purports to show 'mean poverty gap before taxes and transfers' and 'MPG after taxes and transfers' but it takes a little bit of manipulating.

http://stats.oecd.org/WBOS/Index.aspx?QueryId=9909&QueryType=View

There are four choices to toggle for the 'Poverty Measure' in the first wide blue header. Two of those relate to the 'mean poverty gap'.

[Sebastian]

"To be honest, I really don't think the "we'll make the rich guys pay for it" thought process is that common, either consciously and explicitly or not.

"We'll borrow it and pay it back later", IMO, certainly is."

I think you're kind of close. I suspect the thought process is more like "*We'll* borrow it and *I'll* never really have to pay it back."

"Would you retain favorable rates for capital gains and dividends?"

I would tend to treat dividends as ordinary income (I realize that there is a 2003 change that treats some as capital gains, but I don't really understand the rationale for that.) They operate more like rental income from real property than a capital gains type thing.

The main function of the capital gains rate being lower is that it encourages investment over consumption. I think I'm pretty much for that.

But I understand the argument that low capital gains rate make for too much accumulation of wealth (though eventually you have to sell it or you can't use it). That said I'm not against a highish estate tax, though I think it should be taxable on a recipient level, not an estate level.

[rapido]

What if we looked at it this way in a poorly thought out theory of why the rich should be pay more taxes proportional to their income than lower income groups. This may be approaching comedy, and I doubt its merits but lets just say.

Certainly, the top bracket is making more money than anyone else in the same society. What about looking at their tax rate as being essentially linked to their return on working in this society versus the other brackets? That they make more money might mean that they utilize more resources and are dependent on more government subsidized institutions than the less fortunate citizens in the lower brackets. Does a public, or better yet, private school teacher utilize an equal amount of government resources compared with the CEO of a corporation or head of a hedge fund?

So the top bracket beats the next bracket by 35 points in income but only gets an increase in taxes over that bracket by 7 points. In terms of proportionality, the only thing that looks out of whack is that the tax rate remains relatively constant in increase over the brackets until we get to the income level of the top bracket, which cannot be described as a linear increase over the other brackets.

[Tony P.]

Von is getting screwed by the top 0.1%, but thinks he's getting screwed by the bottom 80%.

I mean, quintiles?!? Really? Quintiles?????

The chart von puts up is a perfect example of how you lie with statistics. Dividing incomes into quintiles is a pathetic attempt to pretend that the top quintile is not hundreds of times wider than the middle quintile.

In the middle quintile, there might be a factor of 2 between the lowest and the highest income. In the top quintile, there's at least a factor of 200 between the lowest and the highest income. This matters because we tax incomes in this country, not people.

For all I know, von's income is in the top quintile, but I bet it's near the bottom of that top quintile. There are people -- a very few people to be sure -- making at least 100 times what von pulls in. Raising the marginal tax rate on those people would allow us to cut taxes even for von.

Frankly, I'd gladly assent to von's inexplicable desire to collect less tax money from people richer than himself -- provided we could make massive cuts in spending. I don't believe in taxing people just for the hell of it. So I challenge von to join me in identifying spending cuts. I'll go first: an 80% reduction in the Air Force budget.

--TP

[Doctor Science]

Me, I am a follower of the late, greatly lamented Alice Trillin: I believe there should be a principle of Enoughness, where above some agreed-upon level the government (that is, society) takes it all. "When Alice says confiscatory, she means confiscatory" -- there's a level of income above which no human being can be rationally said to have "earned" it, and most of the financial sector has been in that zone for the past decade.

[Slartibartfast]

The chart von puts up is a perfect example of how you lie with statistics. Dividing incomes into quintiles is a pathetic attempt to pretend that the top quintile is not hundreds of times wider than the middle quintile.

Let's assume for the sake of argument that income follows a one-sided (Rayleigh, for example) distribution. I'm not saying it does, but this is, after all, about statistics. I chose a one-sided distribution because there just aren't that many people (or so I hope) that have a negative income.

In the case of a Rayleigh distribution, the uppermost quintile is infinitely wide. If you sampled a population whose income represented a Rayleigh-distributed random variable, the upper quintile would certainly be much, much wider than the middle quintile.

So, in this hypothetical, are quintile statistics a lie?

No, they are not. They might mean something different than what you imagine they should mean, but they are not a lie.

I'm sure it wasn't von's idea, after all, to represent US income groups in quintiles, nor was he anywhere near the first to do so. I think the chart is Jesse's, after all, and quintiles weren't even his idea.

[Troy]

^ actually, the income distribution is a something of an l-curve l-curve, so von's assertion that the present high taxes on the uppermost quintile is a) class warfare and b) not working is not supported by reality. Assertions that don't describe reality are either mistaken or lies, and both you and von are smart enough not to be mistaken so I assume you are just lying.

Part of the New Deal was about instituting a confiscatory tax regime on not just quintiles but damn near individual taxpayers.

*That* was class warfare, that we wisely (?) scaled back over the ensuing decades.

[lightning]

The main function of the capital gains rate being lower is that it encourages investment over consumption. I think I'm pretty much for that.

But that's exactly what we don't want! People aren't spending money -- they're worried about their jobs, their savings, and the whole economy. The whole economy is stagnating as a result. Before the current turndown, we had 'way too much money chasing too few good investments, so a lot of money went to CDSs, Enron, and Bernie Madoff.

This is a prime example of something that is good for individuals (saving) being bad for the system as a whole. How to resolve the conflict? I dunno.

I think the current kerfluffle gives us an opportunity to move from our current economy of scarcity to an economy of abundance, but that's a topic for a book, not a blog comment.

[Ben Alpers]

The US is almost unique among developed countries in that taxes are disproprotionately paid by the wealthy.

The U.S. is, in fact, much more committed to progressivity in its income tax rates than are, e.g., the countries of Western Europe, which tend to have flatter taxes (relying heavily on VAT) but feature much larger need-based social-welfare payments. There are interesting historical reasons for this difference.

However, the very people who argue that the uniqueness of America's commitment to progressive taxation is a problem often scream bloody murder if we adopt any policies that they feel make us more like Europe.

America has, almost uniquely among industrial nations, relied heavily on a progressive income tax for nearly a century. Usually that tax has been more steeply progressive than it is today. I thought conservatives were supposed to celebrate American exceptionalism!

[hairshirthedonist]

...which tend to have flatter taxes (relying heavily on VAT) but feature much larger need-based social-welfare payments.

Here we tax the wealthy at higher rates, but feature larger politically connectedness-based corporate-welfare payments. (I lump excessive military spending in with that.)

Two of the arguments that I see most often against progressive taxation are:

1. The majority, which isn't very wealthy, is forcing its will on a very wealthy minority. This is the tyranny of the majority.

2. Taxes at some (marginal) level become a disincentive for creativity and hard work, because people will choose not to work for (marginal) dollars too heavily taxed.

Now, which is it? If I can opt out of being subject to this tyranny, how is it tyranny? Or, if it is tyranny, why can I opt out of it?

Personally, I think it's neither at 39%, but that's just me.

[Jeff Darcy]

Good points, lightning, but I'll go a step further. Consumption *is* investment. Sales are the best and should be the preferred way for a company to fund its operations and growth, with old-fashioned loans second. Capital infusions via stock issue or direct investment should be reserved for the special cases (notably startups) where those don't work. Besides creating speculative bubbles, extending this kind of finance to every business dilutes its value for those very important special cases. In a better world, startups which have already accepted a high failure risk would also accept such funding so they can grow and compete with established companies, but that doesn't work if those established companies can also pump themselves full of speculator money. The net effect is to stifle innovation and new-business creation.

On a more general note, the real purpose of the special treatment for capital gains is not really to promote investment, because practically all of the investment would occur anyway. The real purpose is to protect the providers of capital (usually just money) more than the providers of labor (including high-end inventive labor), and it's a total travesty. Labor and enterprise are the *last* things we should want to tax. Assets accrued without work should be the first, and workers take risks along with investors so don't give me "they should be rewarded for their risk" claptrap. I've been at many startups. The workers are the ones with livelihoods at stake; the investors continue without so much as a blink no matter what happens.

If everybody actually tried to imagine a world where workers - from burger flippers up to CEOs - were allowed to keep their wages while the idle rich saw their portfolio "earnings" clipped a bit (with the result being a wash for those workers' retirement portfolios), I think almost all would see that it's far preferable to what we have now. Then maybe we'd see a profound change in our profoundly stupid tax policies.

[russell]

"In the top quintile, there's at least a factor of 200 between the lowest and the highest income. This matters because we tax incomes in this country, not people."

Somebody mentioned the L-curve.

[jeffrey]

von, why do you say that "you cannot have a smaller and smaller percentage of the population bearing more and more of the ultimate tax burden"? what is this conclusion based on? take this (admittedly contrived) example: the total population is 100 people, 99 people have income of $0, and 1 person has income of $1,000, the 99 penniless people don't get taxed anything and the other person pays $1 in taxes. this involves a small percentage (1%) of people bearing all of the tax burden.

you have said nothing to establish that it is inherently unsustainable for a small percentage of *people* to bear a large portion of the tax burden. it is far more coherent to say that it is unsustainable for people comprising a small percentage of *income* or *wealth* to bear a large portion of the tax burden, but that is entirely different. and indeed, it appears that klein was getting at this very distinction, by pointing out that that "small percentage of people" have a large percentage of income and/or wealth, and that it therefore isn't especially surprising or problematic that they should bear a large portion of the tax burden. basically, it's the income that's being taxed, not the people.

you may take issue with the fact that rich people's tax burden is greater, as a percentage of their income, than poor people's. there are all sorts of obvious reason for which this makes sense, which it would take at least a 300 page book to fully spell out, but which i suspect you already know these reasons pretty well (though you seem to doubt their validity). but that's entirely separate from the question of whether few people can bear much of the tax burden. (and, while you're worrying about the plight of the small percentage of people who are rich enough to belong to that fifth quintile, you may also wish to devote some of your energy to considering whether it is sustainable for a small percentage of people to enjoy a large portion of total income and wealth).

[Brett Bellmore]

Two things make it unsustainable:

1. The situation is highly unstable; With the votes essentially all going to people who don't pay the taxes, all the political pressure is in favor of increased services paid for by taxes on somebody else. Unstable situations tend not to last.

2. If 100 people are living off of one person's means, that one person has a pretty strong incentive to go someplace else.

[russell]

1. The situation is highly unstable; With the votes essentially all going to people who don't pay the taxes, all the political pressure is in favor of increased services paid for by taxes on somebody else.

Here is a graph of the 2009 federal budget.

The biggest expenditure is Social Security, which is funded by a regressive tax on virtually everyone who works.

Next up, DoD, which doesn't really fall in the category of "services" as we are discussing it here.

Next up, Medicare, which, like SS, is funded by a tax on basically everyone who works. Unlike SS, it is flat rather than regressive.

Finally, we start to get into Welfare and the other entitlements that represent transfers. All of those together are a little less than 12% of the total federal budget.

All of the above plus the interest on the federal debt is 2/3 of the budget. The entire rest of the federal government runs on the remaining 1/3.

There aren't a whole lot of folks living off of the rich. Most folks pay toward whatever "entitlements" they receive.

The only change I see Obama planning in any of that is a move toward expanding health coverage. I haven't seen a plan yet, so I don't know what the numbers will look like.

If other countries are any indication, any move toward anything like a single-payer scheme will only save us money. Assuming we don't screw it up, which is far from guaranteed. That kind of change is unlikely in any case, folks would be setting themselves on fire on the Capitol steps before they'd let that kind of creeping socialism happen.

There are damned few people who "don't pay the taxes", or who are "living off on one person's means". Of them, damned few get more than a pittance from the rest of us.

So, no worries on that count, as far as I can see.

If you are concerned about unsustainable situations, you should worry about declining standards of living for the 80% of working people who are not in the top quintile, and who as a group have received approximately nothing from the wealth created by increases in productivity and the general expansion of the economy over the last 30 years.

That is both unsustainable, and real, as opposed to unsustainable, and a fantasy.

As a final point, the votes aren't "going" anywhere. They will remain where they are, and that is where they belong.

[cleek]

If 100 people are living off of one person's means, that one person has a pretty strong incentive to go someplace else.

OK, see ya. don't let the door hit ya, etc..

[cleek]

are we having some HTML-stripping issues ?

[Tony P.]

The biggest expenditure is Social Security, which is funded by a regressive tax on virtually everyone who works.

Correction: overfunded. Social Security is still lending money to the Treasury, on top of paying "entitlement" benefits to retirees. That lending makes it easier to cut top marginal rates, cap gains rates, and so on. During our working careers, we have seen the regressive FICA tax get used, in part, to pay for reductions in more-progressive taxes.

Emphasis: the big "entitlements" are called that for a reason. They are not government spending like the Pentagon budget; they are not government charity like Wall Street bailouts. They are payments out of a fund that people paid into precisely in order to be entitled to draw payments from the fund -- like a Christmas club of old.

Russell puts it more crisply: Most folks pay toward whatever "entitlements" they receive.

--TP

[jeffrey]

brett, you sure have a funny view of who it is who's "living off of" whom. russell and tony p. are surely right, but the specific distribution of government funds falls far short of telling the whole story of who benefits from government activity. government is necessary for the existence of contracts, corporations, property rights, markets, the entire financial industry, criminal sanctions, infrastructure, etc., and those, in turn, are necessary to make rich people rich (other than drug dealers, human traffickers, etc.). sure, those things also benefit others, but given who winds up doing well, government may not be "in favor of" that politically powerful, selfish, and ruthless faction that is the poor, after all.

but hey, if the rich really are getting a raw deal from those fiendish social security and medicare recipients who masterfully outfox moneyed interests in applying "political pressure", maybe we'll see that exodus to "someplace else" of which you warn (i hear estonia has very law tax rates). apparently, that's what your unsustainability claim hinges on. i, for one, am not holding my breath.