I’m a pretty liberal guy. But a friend linked to this article from Wonkblog which really challenged my thinking. Therein, the author argues that we have the most progressive tax system in the world but the worst welfare state. He discusses this situation elsewhere and writes:
Obviously, our tax burden is extremely low. But while we have to increase taxes on the rich, it sounds like we should be increasing taxes on everyone, particularly instituting consumption taxes to the point that the tax code is downright regressive and growing out the welfare state. Once the economy’s out of the rut it’s been in, then we shoot up taxes on the rich even more to pay down the debt, sacrificing some growth for stability/ensuring the economy doesn’t self-destruct.
But I’m not an economics guru, just a guy who likes to read about political issues. Wanted to get the thoughts of the teeming millions.
Given that the rich have most of the money, that would collapse the country even faster. The ordinary people can’t afford such a tax, it would further depress our consumer-driven economy, and it wouldn’t solve our revenue problems because you can’t get blood from a turnip. You can’t take money from the non-rich that the non-rich don’t have. It would also probably create major social instability by forcing millions of people into homelessness and hunger.
How about we implement a decent safety net and then increase taxes on the poor? I don’t see why people have to starve so that our economic growth can just be sucked up by the wealthy.
As a wealthy nation, I think we owe it to our citizens to ensure they don’t die of poverty. Then we can worry about optimizing returns on the investments of the rich. I feel like a robust safety net would more efficiently allocate jobs and decrease crime, ignorance, and strain on our health care system. Overall, it would help our economy grow and stabilize. So it’s a win-win really. How about those rich folks invest in that?
The top 1% alone take home about 24% of all income. According to that graph, that leaves 9.5% of national income to split among the top 2-10% of earners. That seems highly, highly unlikely.
The cutoff to be in the top 10% of households is roughly 130k in household income. That is a guess, based on the 92k cutoff for the top 20% and the 167k cutoff for the top 5%. That is about midway. The cutoff for the top 1% is 350k
The top 20% earn 49.4% of all income. So somehow the top 1% earn 24% of income, the top 10% earn 33.5%, but the top 20% earn 49.4%. That makes no sense if the top 11-20% are outearning the top 2-10%, the top 10% probably earn 35-40% or so of income, not 33.5%.
Plus the wealthy are not a monolith. If a family with 2 doctors makes 400k and is in the top 1%, they will not be taxed the same way someone who earns money on dividends and capital gains is taxed. The doctors may pay 30-40% of gross in taxes, the person earning dividends/capital gains may pay 10-20% of income in taxes. When people talk about changing the tax code, they mean changing it for the investor class, not the business/professional class.
First two responses mention hunger or starvation issues. A married couple with with two children and adjusted gross income of $40,000 owes nothing in federal income taxes. A couple of percent increase in income tax on nothing is nothing, so how does that drive them to starvation?
The government should have just let the Bush tax cuts expire instead of trying to come to agreement on how much the rich or the poor should pay. It would have been much easier, wouldn’t have caused undue hardship on the poor, and would have had a much greater deficit reduction than what has been accomplished so far.
Can I cuss in GD? How the hell is a regressive consumption tax not harmful to growth? What am I missing?
I agree that broad-based taxes are useful to ongoing social insurance, but if you want actual economic growth, it seems logical to me that you want more “stimulus” income going to the poor.
So you can have a “regressive” tax code and growth only insomuch as you then have an effectively progressive after-tax income spread, with benefits and negative taxes going to the lower income brackets.
I agree that the whole of the Bush tax cuts should have expired, and indeed we could have usefully raised taxes (while also raising spending even more) after the 2008 crash.
The U.S. enjoyed excellent prosperity during most of the 1950-2000 period (excepting the 1970’s). I don’t think a radical overhaul is needed, just the repeal of some recent bad decisions like the GWB tax cuts. Still, it’s good to be open-minded about alternatives.
I didn’t click the link, but the “most progressive” claim may be misleading. You can see here that the U.S. has almost the lowest top income tax rate in the developed world. (Poland, New Zealand, and Baltic states are lower.)
We may or may not be more or less progressive than other countries but we are certainly taxing the rich at lower levels than we have seem for most of our taxing history. Comparing our tax system to the tax systems of other countries is just inviting a race to the bottom where countries line up to give more and more tax breaks to multi-mational corporations to entice them to bring their assets and jobs to their country. The corporate tax used to be a significant portion of our revenue, it is now a relatively small portion. Something is wrong here.
The social security tax is a flat tax on earned income under $100,000, if we lifted the cap and made it a flat tax on all earned income, social security would start running surpluses and be fully funded within my lifetime.
Medicare is also a flat tax imposed on all income but we probably will not be able to tax our way into medicare solvency.
If your point is that we should increase taxes at all levels, then I agree. The Faustian bargain that conservatives have made is to reduce taxes on the poor to nothing or next to nothing and reduced taxes on the rich to some of the lowest levels in our tax history.
The difference between the US and Europe is not the level of funding it is in the effectiveness of government programs. For example Canada and the United States government spend approximately the same perc4entage of GDP providing healthcare to its citizens. The difference is Canada provides it for all of its citizens and the US government provides only Medicare, Medicaid, and the VA. Everyone else buy health care from the private market.
The US subidizes things through the tax code whereas European countries pay for them directly. The US has a subsidy for child care. Sweden has government child care facilities. The US has a subsidy for health insurance costs, most European countries pay the health insurance costs or provide a public health care system. The US system of subsidizing social spending using tax incentives costs the government 600 billion dollars a year. If you factor this into the amount the government spends directly then the US is not an outlier in terms of money spent. See this report by the Organization for Economic Cooperation and Development (PDF) It shows that the US is right in the middle of European norms for amount of social spending.
So it is a myth that the US spends less than other countries of social spending. The difference is that much of the rest of the world does it through regressive consumption spending and the US does it through a highly progressive income tax and many hidden tax subsidies.
The reason consumption taxes are not as harmful as income taxes to economic growth is that they have less deadweight loss. You can hire tax experts to set up investment vehicles to hide money from the income tax legally and all that money is lost to the economy. Consumption taxes also do not penalize savings and investment so there is less distortion in the economy from less than optimal savings. Here is an article from the concise encyclopedia of economics about consumption taxes.
Here is an IMF paper showing that consumption taxes are correlated with higher growth and income taxes are correlated with lower growth(pdf)
We may have the most progressive tax system in the world, however there is also a pattern in this country that has lasted two decades of the escalation transfer of wealth and income upwards, and a constant decline of wages relative to production value in many manufacturing industries or what are called ‘blue-collar’ work.
And given that in this country, the poor have been getting poorer and rich richer, even during the recession, at least the top 1%, it’s absolutely absurd to say that we need a more regressive tax system.
I really don’t know how people who aren’t mega-rich themselves can come to the informed conclusion that we need more regression in the tax system, or that the poorer need less money, and the rich more.
That’s just not plausible on its face. I’m sorry, but a priori, a consumption tax pretty much drives up prices and creates opportunity for deadweight loss. An income tax can be made targeted and progressive, and ideally be engineered to diminish deadweight loss.
Further, until we get rid of the capital gains tax breaks, we can’t really say our tax system suffers from an excess of progressivity.
All taxes have deadweight losses, consumption taxes can be more easily targeted to inelastic goods. Moreover, consumption taxes encourage the formation of capital relative to income taxes and the formation of capital is what leads to economic growth.
Capital gains are taxed differently than income because they have a much different elasticity than income. In order for a tax to be efficient it must take into account elasticity. Capital gains are not given a break they are actually taxed twice. First the money to acquire the capital is taxed when it is earned, secondly it is taxed when the capital gain is realized. Thus it is not a break.
However, even with the relatively low taxes on capital gains America still has the most progressive household taxes in the world.The average share of taxes paid by the top ten percent of earners in the OECD-24 is 31.6%. In the US the share of income taxes paid by the top ten percent is 45.1%. For comparison the figure in Japan is 28.5%, the figure in Sweden is 26.7%, and the figure in France is 28%.
Not sure you can do a country-by-country comparison of only Federal Income taxes. You also have to factor in FICA and state income taxes, too. And not just in the US-- if other countries have a similar tax, that needs to be accounted for as well.