Thursday, May 11, 2006
Joint Economic Committee Releases Tax Cuts Make Tax System More Progressive
The Joint Economic Committee yesterday released Federal Income Tax System Is Highly Progressive After Recent Tax Cuts (#109-36):
https://taxprof.typepad.com/taxprof_blog/2006/05/joint_economic__1.html
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Comments
KCinDC, look at the stats on http://www.irs.gov/taxstats/indtaxstats/article/0,,id=133521,00.html . Or else just look at the Bush tax rate cuts themselves. Bush cut taxes drastically on the bottom quintiles, and lowered them slightly on the upper ones. There are two ways of describing the overall effect: (1) the Bush tax cuts shifted the income tax burden from the lower classes toward the upper classes. (2) The upper classes realized far greater savings, in dollars (not in effective tax rates), than did the lower classes. Both statements are true, but each is misleading unless you understand them both. Effectively, Bush lowered income tax rates all over, and shifted the burden toward the upper classes. Since the lower classes were (and are) paying a negligible share of income taxes to start with, their tax cuts, though much larger to those individuals in percentage terms, were smaller in dollar terms.
Posted by: littlebeartoe | May 13, 2006 7:12:35 PM
In addition to my Angrybear post on this, Matt Yglesias, Brad DeLong, and Max Sawicky commented. Max said you flunked but he is indeed a kind fellow. Oh did I mention that Glenn Reynolds and Jonah Goldberg liked your post - but now I'm just being mean.
Posted by: pgl | May 12, 2006 2:37:33 PM
ak3 talking of FICA and Medicare taxes (aka "self-employment tax" if one is self-employed): "...benefits that are directly funded by these two taxes..."
I'm sorry, you are simply delusional. All tax receipts, whatever they are called, go into one account. The FICA/Medicare/self-employment tax, along with every other tax, goes to pay for soldiers' salaries, and bridges to nowhere, and the power bill at the capitol, and paper towels in the bathrooms at TSA, and high-energy physics research, and school lunches, nursing-home bills for the indigent elderly, etc., etc., etc. There is no such thing as "direct funding" -- the government has one account. They don't even have separate capital and operating accounts. Some government services go disproportionately to the poor (food stamps) while others go disproportionately to the rich (airport screeners, coast guard rescues, business loans). Associating one particular program as going disproportionately to the poor and then concluding that all taxes should be regressive is risible.
Posted by: cathyf | May 12, 2006 12:03:57 PM
"and it's a simple fact that Bush's tax changes have shifted the tax burden dramatically from the poor to the upper-middle and rich classes."
Huh? Evidence for this statement?
Posted by: smuggler | May 12, 2006 11:00:59 AM
Tushar D, do those same concerns apply to the idea of eliminating all taxes on people whose income comes purely from capital gains, dividends, and inheritance?
Posted by: KCinDC | May 12, 2006 10:59:08 AM
ak3 talking of FICA and Medicare taxes (aka "self-employment tax" if one is self-employed): "...benefits that are directly funded by these two taxes..."
I'm sorry, you are simply delusional. All tax receipts, whatever they are called, go into one account. The FICA/Medicare/self-employment tax, along with every other tax, goes to pay for soldiers' salaries, and bridges to nowhere, and the power bill at the capitol, and paper towels in the bathrooms at TSA, and high-energy physics research, and school lunches, nursing-home bills for the indigent elderly, etc., etc., etc. There is no such thing as "direct funding" -- the government has one account. They don't even have separate capital and operating accounts. Some government services go disproportionately to the poor (food stamps) while others go disproportionately to the rich (airport screeners, coast guard rescues, business loans). Associating one particular program as going disproportionately to the poor and then concluding that all taxes should be regressive is risible.
Posted by: cathyf | May 12, 2006 7:53:10 AM
a3k - In 2005, FICA was only assessed on the first 90k in income. Therefore, it is slightly regressive (someone earning 250k would pay a smaller percentange than someone earning 25k). Additionally, dividend, rental, gambling, and investment incomes are not included in FICA unless the IRS determines that the primary business of the taxpayer is the same as the source of that income. Many small business owners pay a majority of their incomes in dividends to avoid FICA. I believe this was glaring hypocrisy in John Edwards' "Two America's" speeches in 2004.
More detail on my exception above. For instance, if I was not employed by a large company (which I currently am), and derived most of my income from rental properties (where I am trying to get), then the IRS could claim that my primary business is rental property management and assess me on those "wages" (both employee and employer contributions), even if I was paid from my rental business in the form of dividends or pass through accounting (S-type corporation). Someone feel free to correct me on this if I am wrong (I'm an engineer, with one hell of an accountant, but am interested in the tax system for a myriad of reasons).
Regardless, either of my first two examples could demonstrate how the contribution portion of the system is regressive (and steeply regressive, when compared to extremently high income earners). Without actuarial data, as well as a greater understanding of how Social Security benefits are calculated (I'm 27, I'm not seeing any of it anyway), I cannot respond, accepting or refuting, your argument about the overall progressivity of Social Security.
This entire debate just lends credence to the need to eliminate FICA (at least the old age insurance portion of it). But at this place, I know I am preaching to the choir.
Posted by: Steve | May 12, 2006 6:56:44 AM
Phil-z,
If 50% of people are entirely excluded from income-tax, what is to stop them from voting in a congress that will provide them with unlimited foot-massages, spa treatment, a $1000 per month shopping allowance, and 4 weeks of luxury vacations on "Taxpayer dime"?
A token taxation is a small effort to stop turning the country into Bolivia.
Posted by: Tushar D | May 12, 2006 5:46:43 AM
I should clarify: payroll taxes are effectively regressive because (1) FICA taxes only apply to the first $87.5k of income and (2) low- and middle-income folks tend to get all or most of their income in salary or wages, all of which is subject to FICA and Medicare taxes, whereas high-income folks tend to derive some or most of their income in capital appreciation (e.g. profitable stock sales), interest on deposits, and dividends, none of which is subject to payroll taxes. For very high-income individuals, the payroll tax burden tends to be minimal.
I don't argue that this is unfair, since Social Security and Medicare are also primarily aimed at lower- and middle-income people-- they're the ones who need that income, not the rich people. But that only makes sense if you believe the myth that the payroll tax and payment system really is in a lockbox. In fact, we've been using payroll tax surpluses for years to finance the rest of our government, and pretty soon those surpluses will turn to deficits.
Posted by: littlebeartoe | May 12, 2006 5:09:05 AM
C-cipher, you raise an interesting question that I've pondered for a long time: why doesn't the gov't declare the first $40k (or perhaps $35k) income-tax-free? I think the best explanation is that both parties (but especially Democrats) know that the "not paying their share" accusation loses validity when large swathes of the electorate realize they're not paying anything. That is, Dems cannot easily engage in class warfare over taxes if their primary constituency isn't paying any taxes.
Redman, you're right that payroll taxes are horribly regressive-- how many Americans know that they're capped at something like $87,500? So are sales taxes, because lower-income folks spend a greater share of their income than high-income folks on retail goods and other items subject to sales tax. But these are not new developments, and it's a simple fact that Bush's tax changes have shifted the tax burden dramatically from the poor to the upper-middle and rich classes.
These facts are among the least understood ones in America today.
Posted by: littlebeartoe | May 12, 2006 5:01:34 AM
Didn't the upper 50 percentile pay 95% of tax revenues prior to the Bush tax cuts? If so doesn't that make the tax rates slightly MORE progressive than previously (95% vs. 96.5%)?
John
Posted by: John Ford | May 12, 2006 4:26:33 AM
Wow. Just wow. For anyone to assert that the FICA tax is not regressive, well there is just no need to argue with such a person. The FICA tax almost defines regressivity because it is capped at about $89,000. Any earnings above that figure are free from the tax, meaning that someone earning $500,000 earns $411,000 on which he does not pay FICA. At the same time, my sixteen year old pays FICA on the first dollar he makes.
Posted by: smedley | May 12, 2006 4:22:44 AM
Okay, I'll bite: where in the Joint Economic Committee report does it say that "Tax Cuts Make Tax System More Progressive"? All I see is that the income tax system REMAINS progressive.
Posted by: smuggler | May 12, 2006 2:36:17 AM
Where the heck is the word "more" coming from in this post's title? That is not what the referenced article says at all. There is no comparision of progressivity pre- and -post tax cut.
An accurate title might be, "Despite Recent Tax Cuts, Federal Income Tax Still Highly Progressive", but to suggest that it is more progressive is absurd and shows a complete ignorance of the substance of the recent tax cuts.
Posted by: aplomb | May 12, 2006 12:22:39 AM
Am I missing something? This graph says that the tax system (after the tax cut) is 'highly' progressive. Wasn't it also highly progressive before the tax cut?
Perhaps there is some more information somewhere else that leads one to conclude that the system is 'more' progressive after the cuts.
Posted by: Ferengi | May 11, 2006 10:21:11 PM
phil-z - "I don't understand why the current government just doesn't declare the first $40K to be tax free, it would solve all of their political problems overnight with very little loss in income."
Because people that don't pay taxes could demand increased government services without bearing any cost.
Posted by: jdavenport | May 11, 2006 9:57:50 PM
FICA taxes are not regressive. They are neutral. And Medicare taxes are slightly progressive.
The distribution of benefits that are directly funded by these two taxes is progressive.
So neutral collection paired with progressive distribution equals a progressive program.
By no form of logic can one argue that FICA or Medicare are regressive. None.
What is regressive is excise sales tax. Tax a vice and you're likely to regressively tax folks at the bottom of the income ladder. So what party has been pushing to raise taxes on vices like tobacco use?
Posted by: a3K | May 11, 2006 8:55:44 PM
OK, but the politics part is what I imagined would be the sure thing. Median income is what, $45K? You'd completely eliminate taxes for about half the voting population, and still be able to keep most of the services and programs offered today. What's not to lose? Sorry I still don't get it. Not trolling, just puzzled.
Posted by: phil-z | May 11, 2006 8:32:30 PM
While the FICA taxes are "regressive" and capped, benefits are paid out in a "progressive" manner, which those whose average life time earnings are lower getting more per dollar paid in FICA taxes than those who had higher earnings. Thus low wage earners get a significantly higher return from SS than high wage earners, who therefore end up subsidizing SS.
Posted by: ATM | May 11, 2006 7:37:48 PM
Jonathan,
You are assuming the left actually cares about accuracy or fairness. They don't.
Just look at THIS attempt at spinning the tax issue.
http://www.exposetheleft.com/2006/05/11/gma/
Posted by: GK | May 11, 2006 7:19:24 PM
If the government declared the first $40K to be tax free, all hope of spending restraints would be lost. The masses who would then be paying no income tax would have no incentive to oppose new federal spending and no incentive to oppose tax rate increases.
Posted by: Yama | May 11, 2006 7:08:50 PM
Who is to judge the marginal utility of any man's earnings? Even if you had a moral claim to anyone else's earnings (which of course you don't), who is to say that the millionaire putting eight kids through college doesn't experience more utility from his earnings than the crackhead unwilling to hold a part-time job?
What the graph illustrates is that the most productive members of society are the franchise. As this graph gets around, I look forward to quantum increases in humility from the Left.
Posted by: Jonathan | May 11, 2006 7:00:01 PM
I'm as pro-tax reform as anyone, but these figures are always rather misleading since they ignore FICA and Medicare payments, which specifically regressive rather than progressive since they apply to earned income and one (FICA) is capped. The overall system is still, of course, heavily progressive, but it is disingenuous to focus solely on personal income tax and buy in to the big lie that FICA and Medicare are "contributions."
Posted by: Mike Koenecke | May 11, 2006 6:49:50 PM
You can't tinker social policywise without incentives and disincentives delievered via the tax code.
Posted by: Tollhouse | May 11, 2006 6:32:02 PM
I don't understand why the current government just doesn't declare the first $40K to be tax free, it would solve all of their political problems overnight with very little loss in income. Since they are not, I'm guessing that this would be fiscally disastrous? If not, why not?
Posted by: phil-z | May 11, 2006 5:49:50 PM
The question about "progressivity" only makes sense when you see how much of the nation's income is being earned by each segment of the taxpayer population.
So, if the top 1% were paying 34% of the taxes but earning 50% of the income, that would be regressive.
In truth, though, the top 1% pay a greater share of taxes than their share of income.
Nevertheless, the diminishing marginal utility of wealth makes all of this into a meaningless parlor game; it applies a false precision to an irreducibly normative problem.
Posted by: c-cipher | May 11, 2006 5:48:14 PM
It is unclear to me what this chart is measuring. Are the percentiles given those for the income levels of individuals or households? In other words, does the top 50% represent the top 50% of individual incomes or the top 50% of household incomes?
Posted by: Jimmy Akin | May 11, 2006 5:45:48 PM
Could progressivity in this graph be attributed to current distribution of wealth? As distribution of wealth accumulates in top 5% of earners, progressivity will increase. That is, as distribution of wealth becomes increasingly unequal, and tax code remains the same, progressivity increases based on this graph format. Latest reports from Federal Reserve report that 57.7% of net wealth in the United States is held by top 5% of earners, and 32.7% of U.S. wealth held by top 1%. Bottom 50% holds 2.8% of net wealth. Therefore, the group which has 97.2% of wealth, provides for 96.54% of taxes, and the group which holds 2.8% of wealth, provides 3.46% of taxes.
Posted by: Random | May 24, 2006 9:21:10 AM