Sunday, November 13, 2011

Taxes are progressive enough

There is a lie being repeated that America has a regressive tax system, that the rich pay a lower percentage of their wealth than the middle class. Instead, we have a progressive tax system that has done a great job of keeping inequality in check.

As I've said before, there's nothing wrong with inequality. What we should focus on is the well-being of the poor, and the poor in America enjoy a high standard of living.

The recent Bruce Meyer episode of Econtalk made a compelling point that inequality is much lower than the pundits claim because they are merely looking at pre-tax income. Once you factor in taxes, consumer spending and government assistance programs like the earned income tax credit you see a much different picture observe.

Both the left and the right make the mistake of focusing on the top tax bracket in the past, which was higher than it is today, but affected few people. A much larger percentage of our federal taxes paid by the wealthy, and it's not just because they have more of the wealth. We are seeing lower taxes for the poor and middle class.

Enter Warren Buffet and the claim that he pays a lower tax rate than his secretary, whose income was never identified. He claimed he paid 17.4 percent while everyone else in his office pays 31 to 44 percent. Greg Mankiw said that isn't even true, but let's play along and say it is.

Is it fair for members of the left to use him as an example to "prove" that the rich pay a lower tax rate, like "Bob" did in an exchange we had in a comment section at For The Sake of Science last month? People rightly claim that taxpayers are able to use loopholes and write-offs to reduce their tax bill, and the rich have access to smart accountants who can exploit them, so could this stymie the progressiveness of the official tax rates?

The good news is that the hard data says otherwise. Using Warren Buffett as an anecdotal example is misleading, as we can see by looking at the effective federal tax rate that compares what people actually pay in taxes to their incomes. Here's what the Congressional Budget Office projected for this year:

It's plain to see that in reality, the five different quintiles fall neatly in line, with the top 1 percent that gets so much focus today paying the highest at 33.8 percent. It is a lie to say the rich pay less of a percentage of taxes than anyone else.

All is not lost for the left. They could simply abandon this bogus claim of a regressive tax system and instead focus on the gains that have come through lowering taxes for the poor and middle class and various "redistribution" programs like the earned income tax credit. That would allow them to sleep better at night instead of, in the words of Michael Munger, elevating the sin of envy to a virtue.


  1. But, but, but... My Poly Sci professor said...

  2. I read Mankiw's article, but I think this gives a much better story of the overall most things it just can't be reduced to the level talking-heads like to to talk about on the telly.

    I don't think you can strictly say the left is lying about it, rather some people are purposely leaving out the details. For some ultra-rich they may very well pay a lower rate, but it's because it's because they are making money from capital gains and dividends, not salary.

    By the same token, you have also left out important details. You focus on the left's incomplete and misleading claim, and don't mention tax rates on capital gains and dividends, which can lead effectively lead to a regressive system...under specific circumstances for a subset of people. I'm not endorsing the left's view here, I tend to think the tax rates for capital gains/dividends are fine, but it's important to identify the real issue.

    This is a great example of why both sides accuse the other of lying, because they paint an incomplete story to support their own ideaology rather then telling the complete story and then being honest about their ideology.

  3. You touch on a great point that I think is worth an article in and of itself: America's Poor vs. the Poor in the rest of the world. Americans don't know what poor really is! A lot of people in other countries would kill to be poor in America.

  4. I dispute whether the capital gains tax could be called regressive. Generally, the first dollar someone invests will already have been taxed via income tax, and anything earned from that investment taxed at 15%, and is also impacted by the corporate income tax before that. I highly doubt that dividends really come out as being taxed low at all.

    The capital gains tax is a flat tax specific and socially desirable behavior and is so taxed relatively lowly. We don't want to kill people selling their homes and we don't want to kill those investing vast amounts of money in business (and government debt).

    I wonder how the left would respond if, after ensuring that the rich pay 35% on everything, these evil rich people yanked their cash out of the market and sold their bonds to China.

  5. Matt, I just want to be clear. Those CBO numbers for effective tax rates include capital gains and dividends as income.

    I corrected an HTML error that obscured the link to the CBO paper I cited. It's just above where I showed the number and put a blue box around the 2011 figures.

    I'm not saying that people are purposely lying, I'm saying the statement that are repeating is a lie. I have no problem giving people the benefit of the doubt and believing they are just wrong.

  6. I see, so those numbers are in the aggregate. It doesn't completely answer the left's (admittedly poor) argument however. They made a faulty argument because it based on an anecdote, a single case, and not the average over the population. You countered with overall statistics, which are certainly more useful. But the left's counter-argument would be to point out that you were lying and point back to some example of a millionaire who pays 15%.

    I think you need to better clarify that the left's argument isn't bad because they are lying, or trying to mislead. It's because they are using useless anecdotes to prove their view. The right does the same thing with the Cadillac-driving-welfare-mom, and people buying lobsters with food stamps. You did a similar thing, using the puppet-master the other day. The end result is the same, both sides talk past each other, both calling each other liars.

    I think your post could be improved if instead of focusing on words like 'lying', you lay out why the left's use of a single (and unsubstantiated) case is incorrect and more importantly why the tax status of a single person isn't all that important.

  7. Matt, I agree with you a lot. I've been making the same comparison to welfare queens as cherry picking and emotional arguments.

    I do want to clarify that the puppet master post was about how I'm against picking out atypical examples and holding them up to tar the would group, but in this case I will make fun of this individual because it was The Nation magazine that held him up as an example. They chose him as an example, and I made fun of him because, c'mon, PUPPETS!