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Monday, October 16, 2017

Yes, U.S. Tax Cuts Will Mainly Benefit Those Who ... Pay the Most Taxes

New York Post op-ed:  Yes, U.S. Tax Cuts Will Mainly Benefit Those Who ... Pay the Most Taxes, by Brian M. Riedl (Manhattan Institute):

A popular Facebook and Twitter game asks friends to post an unpopular opinion. Here is an unpopular fact: Tax reformers cannot deeply cut income taxes for lower-income families, because they already pay no collective income tax.

Tax reform is intended to bring simplification and economic growth. Yet many commentators seem interested in only redistribution.

This explains the teeth-gnashing over the Tax Policy Center estimate that the Republican tax blueprint would save the median family $420, but a family in the top income quintile $10,610.
While that sounds unfair, consider this: The top-earning 20 percent of households currently pay 88 percent of all federal income taxes. So even a proportional income-tax cut will save them the most money.

MI1

... In fact, the Organization for Economic Cooperation and Development in 2008 showed that the United States had the most progressive tax code of all 24 countries measured. And that doesn’t even count America’s 2013 upper-income tax hikes, or Europe’s steep value-added taxes, which each widen America’s progressivity lead over Europe.

MI2

... Adding all federal taxes together, the top-earning 20 percent fund 69 percent of all federal revenues.

MI3

... The point is not that progressivity is harmful or should be reversed. Rather, it mathematically limits the low-income taxes left to cut. It’s easy for politicians, populists and panderers to pretend that the middle class pays all the taxes, and thus deserves the largest tax savings. But the first assertion is demonstrably false, which makes the second mathematically impossible. Champions of progressive income taxation have won. The bottom 60 percent have seen their collective income tax reduced to zero. In tax reform, there are no more winnings left for them to claim.

National Review, Kevin Hassett’s Defense of Tax Reform is Right on Point

http://taxprof.typepad.com/taxprof_blog/2017/10/yes-us-tax-cuts-will-mainly-benefit-those-who-pay-the-most-taxes.html

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Comments

This is an extremely misleading critique. First, federal taxes are a mix of different components, with income tax being just one. Most people still pay payroll tax, medicare tax, and social security tax, and there is room for cutting for the poor and middle-class there, as well as increasing the share paid by the rich (including removing the income cap for social security taxes). Second, progressive taxation is not just lowering the rates on the poor and middle-class, it’s about raising the rates on the rich. The fact that the percentage of tax collected from the wealthy has increased while their tax rate has gone down is clear indication that their tax rate can certainly do with a significant increase. Third, and I apologize for shocking any Manhattan Institute members who may be reading this to the extent the widening of their eyes makes their monocle fall into their brandy: Negative taxation is a thing. We can make it so people below a certain income level get more back from the government than they pay in taxes.

Posted by: twbb | Oct 16, 2017 7:07:33 AM

twbb: "We can make it so people below a certain income level get more back from the government than they pay in taxes."

They already do:

http://www.aei.org/wp-content/uploads/2016/06/CBO2.jpg

And:

http://www.aei.org/wp-content/uploads/2016/06/CBO4.jpg

It is a fact that top 20% of households already pay ALL net federal taxes. That includes income, payroll, capital gains, etc.

It is also a fact that the U.S. has the MOST progressive federal tax system in the entire OECD:

https://www.washingtonpost.com/news/wonk/wp/2013/04/05/americas-taxes-are-the-most-progressive-in-the-world-its-government-is-among-the-least/?utm_term=.b2516fe1c214

Raising taxes on the top 20% will only make the federal government more reliant on households that derive more of their income from volatile sources like capital gains. This has the effect of quickly causing large deficits during economic downturns.

The federal budget will never be balanced until the bottom 60% of households pay more in taxes and entitlement spending is reduced in absolute dollars. I'd even be fine with the top 1% paying more. But the rest of the income distribution, the top 20-40% of households, already pay their fair share, cover their own government transfers, and pay everybody else's share of government transfers, as well. And they never get a thank you, just resentment that they aren't made to pay more. It's not their fault that the U.S. federal tax system, more progressive than any other industrialized country, does a terrible job of redistributing income.

But all the information shown above is 100% correct. It leaves out after-tax government transfers, which is critical to understanding who pays what and who gets what.

Posted by: MM | Oct 16, 2017 9:27:56 PM

twbb is correct, in that redistribution can be increased by one means or another. At some point, however, we reach a point where the curves for earned success and learned helplessness cross. Those paying no or negative taxes have little incentive to pull themselves up (i.e., to begin paying taxes), and those whom the government taxes ever more heavily have little incentive to earn more (i.e., to pay even higher taxes).

Posted by: bcl | Oct 17, 2017 5:56:22 AM

If the government wanted to, it could do revenue neutral tax reforms that would leave 80+ percent of the population paying zero in income, payroll or social security taxes and have the remaining 20 percent foot the bill for everything. Or it could shift the tax burden more toward those with extremely high incomes and cut taxes almost for everyone else.

The reason the top 1% of the population are going to get the bulk of the tax cuts is because they are the Republicans' true constituents.

Even people with relatively high incomes in the six figure (i.e., $100K to $400K) range aren't rich enough to be real republicans.

Nothing tells you who politicians represent so much as their tax plans.

Posted by: Progressive Taxation | Oct 17, 2017 10:04:40 AM

“people still pay payroll tax, medicare tax, and social security tax”

The Department of Redundancy Department would like a moment to speak with you, at your convenience.


“increasing the share paid by the rich (including removing the income cap for social security taxes).”

Why remove the cap? Social security taxes are not general revenue taxes and social security is supposed to be an insurance program, not a general welfare program. And it is already fairly progressive in the benefits payout scheme, despite (again) supposedly being an insurance program. Take the person who pays in at the cap, paying close to 3X what the “average Joe” is paying. That person does get a larger benefit, but nowhere near 3X Joe’s.

So someone making 250K should pay in 6X what Joe pays? Or more, given above you indicate you’d like to actually reduce what Joe pays in SS. So let’s cut Joe’s in half, and remove the cap, and the person making 250K should pay 12X what Joe pays? Why should this person carry 9 or 10 Joes on his back in an insurance program?

Now, if you want to make it a general welfare scheme, then set up a tax plan to do it – which would include not charging people federal income tax on that payroll tax they paid, as if it is really “income” that they’ve somehow received.

Same goes for calls to means-test SS benefits, although you did not mention this. If means-testing becomes a thing, will we have to refund the income tax that people means-tested out have already paid on that “income” they were assessed on but which went directly to payroll tax?


“Third, and I apologize for shocking any Manhattan Institute members…. Negative taxation is a thing. We can make it so people below a certain income level get more back from the government than they pay in taxes”

Well, I hate to shock you, too, but this is already a thing. We already have it set up so that a certain percentage of low-income people get more back than they pay, at least in terms of income taxing. The bottom 35% or so are at -8%, I think I read recently (could be off on both percentages one way or t’other).

Posted by: emanresu | Oct 17, 2017 10:41:43 AM

"The fact that the percentage of tax collected from the wealthy has increased while their tax rate has gone down is clear indication that their tax rate can certainly do with a significant increase."

Or it's a sign that the rates don't mean much, because they are able to shift or shield their income so as to avoid taxation. Much like the estate tax, those who pay it do so only out of poor tax planning. Like corporate tax rates, few actually pay the rate. Raising rates at the higher brackets is a fools exercise, likely to only impact those with diminished flexibility in how to arrange their income or those who can't pay for better tax advice.

Posted by: ruralcounsel | Oct 18, 2017 4:12:07 AM

"Most people still pay payroll tax, medicare tax, and social security tax,..."

Which the working poor get back in the EITC, so actually many don't pay those taxes. Not to mention, Social Security and Medicaid are hardly the programs to underfund at this point in time.

Posted by: ruralcounsel | Oct 18, 2017 4:14:14 AM