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Tuesday, November 20, 2012

Greg Mankiw: America Already Has a Flat Tax

N. Gregory Mankiw (Harvard University, Department of Economics), The U.S. Has a Flat Tax (in Effect):

The Congressional Budget Office has a new study of effective federal marginal tax rates for low and moderate income workers (those below 450% of the poverty line).  The study looks at the effects of income taxes, payroll taxes, and SNAP (the program formerly known as Food Stamps).  The bottom line is that the average household now faces an effective marginal tax rate of 30%.  In 2014, after various temporary tax provisions have expired and the newly passed health insurance subsidies go into effect, the average effective marginal tax rate will rise to 35%.

What struck me is how close these marginal tax rates are to the marginal tax rates at the top of the income distribution.  This means that we could repeal all these taxes and transfer programs, replace them with a flat tax along with a universal lump-sum grant, and achieve approximately the same overall degree of progressivity.

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Comments

This supposed economics expert has drawn a completely erroneous conclusion. This "study" shows what the RANGE of marginal rates is by income group. To draw such a conclusion as the author does, one would have to at minimum know the median marginal rate.
Also this study produces large marginal rates for those who increase their earnings a little and lose some of the government largess as a result.

Posted by: axelhose | Nov 21, 2012 5:39:38 AM

The vertical equality may not vary between the two scenarios, but horizontal equality is another matter. Low and moderate income households vary greatly, most notably between the indolent breeding female, a huge "taker," and the childfree non-breeding male, a huge "giver."

A young, single, non-breeding male has to be an idiot to participate in the current system, and a flat tax plus handouts to the indolent breeders won't help much.

Posted by: Jimbino | Nov 21, 2012 10:15:48 AM

The author of the article/blog miscontrues the premise of the argument for a flat tax. Advocates of a flat tax base the argument on its simplicity; this, of course, ignores its regressive nature for low-income groups. When lawyers, economists, and politicians think about the income tax system, they think about it from a macro-economic perspective. When taxpayers think about it, they think about fairness and whether they have enough money in the bank to write the check. They don't think, "I'm paying a lot of income tax here, but I get it back by indirect transfer payments to my community." Tax reform will make more progress if the politicians think separately about the various parts of the tax pie (state & local, federal income, gift & estate, excise) instead of trying to fit everything into one macro-economic model driven by trying to cover the federal government's profligacy. The tax expenditure concept (and its progency), as much as economists and statists love it, is the biggest impediment to real tax reform.

Posted by: TexEcon | Nov 21, 2012 12:03:10 PM