Could More Progressive Taxes Increase Income Inequality?(stlouisfed.org)
stlouisfed.org
Could More Progressive Taxes Increase Income Inequality?
https://www.stlouisfed.org/on-the-economy/2020/may/could-more-progressive-taxes-increase-income-inequality
35 comments
I think they restricted it to 50% because it's looking at federal taxation (payroll, local and state level gets much more complicated), and ~43% of Americans don't pay any federal tax or receive a rebate. Many of these people are elderly, low income with children, unemployed, etc. But including them when looking at the impact federal taxes have would be incorrect.
[0] https://www.statista.com/statistics/242138/percentages-of-us...
[0] https://www.statista.com/statistics/242138/percentages-of-us...
> think they restricted it to 50% because it's looking at federal taxation (payroll, local and state level gets much more complicated),
Federal payroll tax is part of federal tax (as are federal excise and consumption taxes).
> and ~43% of Americans don't pay any federal tax
As well as being kind of dated and thus quite likely not accurate, this number os for federal income tax, not the more general category of federal tax (or even “federal taxes on income”, which includes payroll tax.)
Federal payroll tax is part of federal tax (as are federal excise and consumption taxes).
> and ~43% of Americans don't pay any federal tax
As well as being kind of dated and thus quite likely not accurate, this number os for federal income tax, not the more general category of federal tax (or even “federal taxes on income”, which includes payroll tax.)
> We found that an increase in tax progressivity actually increases income inequality.
It seems odd that they are making a general and unbounded statement, when it is provably nonsensical.
Consider what would happen if the government tomorrow reduced taxes on the middle class and increased taxes on the wealthy to compensate. The middle class would see a rise in their disposable income. According to this paper, because taxes are now slightly more progressive, income inequality would rise. Which means that the wealthy must see an even larger rise in their disposable income. Meanwhile, government revenues remain neutral. Literally everyone wins.
We have now found a perpetual motion engine for creating wealth. We can now repeat the above process over and over again, until middle class taxes hit 0%. And literally everyone would keep getting richer in the process, without any impact on government revenues.
Clearly the above is nonsensical. There must be significant constraints on the statement that "an increase in tax progressivity actually increases income inequality"
It seems odd that they are making a general and unbounded statement, when it is provably nonsensical.
Consider what would happen if the government tomorrow reduced taxes on the middle class and increased taxes on the wealthy to compensate. The middle class would see a rise in their disposable income. According to this paper, because taxes are now slightly more progressive, income inequality would rise. Which means that the wealthy must see an even larger rise in their disposable income. Meanwhile, government revenues remain neutral. Literally everyone wins.
We have now found a perpetual motion engine for creating wealth. We can now repeat the above process over and over again, until middle class taxes hit 0%. And literally everyone would keep getting richer in the process, without any impact on government revenues.
Clearly the above is nonsensical. There must be significant constraints on the statement that "an increase in tax progressivity actually increases income inequality"
I don't think you read the summary. The mechanism is pretty clear:
1. Compared with a flat tax, a progressive tax regime expands the economy because poor people spend more of their money than rich people.
2. This expansionary effect gets multiplied because this spending recirculates around and around (the "standard fiscal multiplier" in the summary).
3. Rich people accrue most of the benefits of the expansionary effect.
4. These benefits are actually larger than the initial increase in tax burden in step 1), so while everyone ends up better off, rich people end up _more_ better off than poor people. Therefore the progressive tax scheme has the net effect of boosting income inequality.
It's not a perpetual motion machine, the gain starts because rich and poor people having different consumption rates. You could only do this until you run out of tax dollars being paid by poor people.
Really, though, what the paper is proposing is saying is that rich people benefit quite a lot from expansionary policies, so much so that they can even afford to pay to get them started. I don't think this is very controversial or even counterintuitive. The thing to realize is that the paper starts with the claim that _progressive taxation makes the economy bigger_. If you accept that, it makes sense that the rich would benefit the most from it.
1. Compared with a flat tax, a progressive tax regime expands the economy because poor people spend more of their money than rich people.
2. This expansionary effect gets multiplied because this spending recirculates around and around (the "standard fiscal multiplier" in the summary).
3. Rich people accrue most of the benefits of the expansionary effect.
4. These benefits are actually larger than the initial increase in tax burden in step 1), so while everyone ends up better off, rich people end up _more_ better off than poor people. Therefore the progressive tax scheme has the net effect of boosting income inequality.
It's not a perpetual motion machine, the gain starts because rich and poor people having different consumption rates. You could only do this until you run out of tax dollars being paid by poor people.
Really, though, what the paper is proposing is saying is that rich people benefit quite a lot from expansionary policies, so much so that they can even afford to pay to get them started. I don't think this is very controversial or even counterintuitive. The thing to realize is that the paper starts with the claim that _progressive taxation makes the economy bigger_. If you accept that, it makes sense that the rich would benefit the most from it.
I've read the summary and it does not change anything.
> These benefits are actually larger than the initial increase in tax burden in step 1
This isn't clear at all. I suspect this is only true in a specific set of circumstances, not as a universal rule.
> You could only do this until you run out of tax dollars being paid by poor people
The article is talking about the 50th and 99th percentiles. If what you're saying is true, the government should reduce taxes on the 50th percentile household all the way to 0%, and fund this tax cut entirely by increasing taxes on those who are more wealthy. And if what you're saying is true, such a change in tax policy would increase disposable income for the 99th percentile.
There isn't a single serious economist who believes the above. Even people like Sanders who would advocate for such a tax policy, are arguing for it from a fairness perspective. Not a "this will make the rich even richer" argument, which is what you're implying.
> These benefits are actually larger than the initial increase in tax burden in step 1
This isn't clear at all. I suspect this is only true in a specific set of circumstances, not as a universal rule.
> You could only do this until you run out of tax dollars being paid by poor people
The article is talking about the 50th and 99th percentiles. If what you're saying is true, the government should reduce taxes on the 50th percentile household all the way to 0%, and fund this tax cut entirely by increasing taxes on those who are more wealthy. And if what you're saying is true, such a change in tax policy would increase disposable income for the 99th percentile.
There isn't a single serious economist who believes the above. Even people like Sanders who would advocate for such a tax policy, are arguing for it from a fairness perspective. Not a "this will make the rich even richer" argument, which is what you're implying.
>You could only do this until you run out of tax dollars being paid by poor people.
Or you could start paying them more and more money to trickle up, i.e. progressive negative taxes.
Or you could start paying them more and more money to trickle up, i.e. progressive negative taxes.
I think the trick of this trickle up is that giving money from the 90th percentile (read: affords saving for retirement) to the <50th percentile (read: doesn't afford saving for retirement) effectively gives money to the >99th percentile (read: affords saving into the blackhole of offshore accounts)
Despite having a wide range of top marginal tax rates in the US (from 90%+ in the 50s to mid 30s today), tax revenue as a percentage of GDP has stayed remarkably constant since post-WW2 (~19%) [0].
It's not as simple as looking at the top rate, but you have to look at deductions, the caps, lower rates, etc. But I don't think there is a clear line between tax rates and taxes paid. There's likely an equilibrium rate that people will pay at which point tax aversion strategies make more sense. For instance, as I hit a higher tax bracket, I've invested more in pre-tax retirement, education and health savings accounts. Wealthier individuals have even more options.
So looking at marginal tax rates is a kind of red-herring.
[0] https://en.wikipedia.org/wiki/Hauser%27s_law
It's not as simple as looking at the top rate, but you have to look at deductions, the caps, lower rates, etc. But I don't think there is a clear line between tax rates and taxes paid. There's likely an equilibrium rate that people will pay at which point tax aversion strategies make more sense. For instance, as I hit a higher tax bracket, I've invested more in pre-tax retirement, education and health savings accounts. Wealthier individuals have even more options.
So looking at marginal tax rates is a kind of red-herring.
[0] https://en.wikipedia.org/wiki/Hauser%27s_law
Progressive taxes harm the middle class whilst the rich figure out ways to avoid them. If you want the average person to do well, you should support a flat tax.
The top 1% earned 21% of aggregate income, and paid 40% of income taxes. Clearly the rich are indeed being impacted by progressive taxes.
A flat tax would give them a huge tax break, which would either lead to higher taxes on everyone else, cutting of social services, or an increasingly large deficit
A flat tax would give them a huge tax break, which would either lead to higher taxes on everyone else, cutting of social services, or an increasingly large deficit
If you assume that the rich always figure out ways to avoid progressive taxes, why would you not also assume they would figure out ways to avoid paying a flat tax as well?
The thing that makes taxes complicated isn't the progressive tax table of 'pay X% on the first Y dollars you make, then pay Z% on the next W dollars, etc.', its the determination of what is and isn't taxable. That is where the rich game the tax system, and that's something that changing the rate schedule from progressive to flat will not fix.
If you want to close loopholes, eliminate deductions primarily used by the rich, put limitations on tax-exempt trusts, properly fund the IRS so they can actually audit rich people's tax returns again, etc., to actually capture more taxes from the rich... great! We should do that! But that all of that is completely orthogonal to changing the question of flat vs. progressive taxation.
Simply changing to a flat tax will lower the tax burden on the rich and increase the tax burden on the poor and middle class. All other things being equal, a change to a flat tax will hurt the average person, not help them.
The thing that makes taxes complicated isn't the progressive tax table of 'pay X% on the first Y dollars you make, then pay Z% on the next W dollars, etc.', its the determination of what is and isn't taxable. That is where the rich game the tax system, and that's something that changing the rate schedule from progressive to flat will not fix.
If you want to close loopholes, eliminate deductions primarily used by the rich, put limitations on tax-exempt trusts, properly fund the IRS so they can actually audit rich people's tax returns again, etc., to actually capture more taxes from the rich... great! We should do that! But that all of that is completely orthogonal to changing the question of flat vs. progressive taxation.
Simply changing to a flat tax will lower the tax burden on the rich and increase the tax burden on the poor and middle class. All other things being equal, a change to a flat tax will hurt the average person, not help them.
> If you assume that the rich always figure out ways to avoid progressive taxes, why would you not also assume they would figure out ways to avoid paying a flat tax as well?
Every modern economy in the world has already solved this issue. VAT. A VAT is a consumption tax, there is no way to avoid a VAT, even with the resources of a super wealthy individual. A VAT is progressive because the more you spend the more you end up paying. A VAT can also be scaled on types of goods (so a higher VAT on Yacht's for example).
Income taxes, in general, flat or not, are abhorrent, hostile to freedom, and generally should be abolished.
Every modern economy in the world has already solved this issue. VAT. A VAT is a consumption tax, there is no way to avoid a VAT, even with the resources of a super wealthy individual. A VAT is progressive because the more you spend the more you end up paying. A VAT can also be scaled on types of goods (so a higher VAT on Yacht's for example).
Income taxes, in general, flat or not, are abhorrent, hostile to freedom, and generally should be abolished.
> If you want the average person to do well, you should support a flat tax.
Regressive taxation has never not increased wealth gaps. Say you bothered with a flat tax of 9%, which would raise taxes significantly on most Americans. We already have this problem with payroll taxes that are essentially flat, which is why tax relief for the poor has always come in payroll tax decreases rather than income tax decreases.
Regressive taxation has never not increased wealth gaps. Say you bothered with a flat tax of 9%, which would raise taxes significantly on most Americans. We already have this problem with payroll taxes that are essentially flat, which is why tax relief for the poor has always come in payroll tax decreases rather than income tax decreases.
Payroll taxes are not flat, they are in fact regressive (unlike a flat tax, which is by definition neither progressive nor regressive). Since social security tax is capped, the more you beyond the social security tax limit, the lower your effective payroll tax rate becomes.
Not that it really matters in my argument, but while SSI is regressive, medicare is not.
No serious reputable anything has ever found a flat tax to be anything but a huge giveaway to the rich as well.
Just fund the IRS and stop letting the foxes run the hun house, ie. get money out of politics and stop letting a few people and their rich friends make all the rules to favor that small cadre.
Just fund the IRS and stop letting the foxes run the hun house, ie. get money out of politics and stop letting a few people and their rich friends make all the rules to favor that small cadre.
You might as well tell people to make other people stop being corrupt. Humans are corruptible full stop. For a funny recent example see Russel Brand's last YouTube video on the US Congress's insider trading clown shows, and then ask yourself if there's any way possible to get this legislative body to "stop letting a few rich people and their rich friends make all the rules to favor that small cadre."
The only decent solution would be a vastly simpler system with enough transparency and accountability the average person could make sense of it.
The only decent solution would be a vastly simpler system with enough transparency and accountability the average person could make sense of it.
We don't punish white collar crime for the same reasons. If you made it illegal to get outside money for politicians, and made the punishment significant, the rats would scurry and "normal" people could get involved in the process. The way it works now we just get rich people looking after rich people problems because theres no way to overcome all the money flowing around with any regular success.
We can try to change government, but do a quick thought experiment: how many resources does it take to manage shared infrastructure and services for 20 people? 200? 2000? 20,000? 200,000? 2,000,000?
Go on up to 350mil.
It's not easy, and you can't just "tear it down". You can envision some ways to streamline some things, but the problem is just mind boggling gigantic.
We can try to change government, but do a quick thought experiment: how many resources does it take to manage shared infrastructure and services for 20 people? 200? 2000? 20,000? 200,000? 2,000,000?
Go on up to 350mil.
It's not easy, and you can't just "tear it down". You can envision some ways to streamline some things, but the problem is just mind boggling gigantic.
Land/Value tax is the best.
Poor people, hell half of middle class don't own land or property.
Land and the resources on them should be taxed for the value they give whoever owns them. This could essentially pay for Basic Income, and it's not something you can 'offshore', and it even makes foreign investors pay nice taxes, (we could even tax them more).
Poor people, hell half of middle class don't own land or property.
Land and the resources on them should be taxed for the value they give whoever owns them. This could essentially pay for Basic Income, and it's not something you can 'offshore', and it even makes foreign investors pay nice taxes, (we could even tax them more).
Flat income tax schemes, like sales and use taxes, and user fees, are all regressive: striking the poor harder than the classes above them. The appeal of flat taxes (and the others mentioned) is their perceived simplicity in both assessment and collection. But that's an assumption that flies in the face of historical practice.
As you say, the rich always find a way to avoid taxes of all kinds. They pay accountants and politicians to ensure that. The middle class may not have many politicians on their payroll, but they do have accountants -- and have learned how to use them. Besides, the progressivity (a word that the tech giants still don't know how to spell) of our current tax structure is inconsistent and intentionally incoherent.
Just a note: the US tax system seems to have been at its fairest (a very relative term) during the late 1940s through to the Kennedy tax cuts in the early 60s when the highest rates were in the 90% range and when estate taxes still took a credible bite out of ultra wealthy generational wealth. Of course all that money collected didn't go to help eradicate poverty. It mostly went to build warships, bombers, missiles and the nukes they carried.
As you say, the rich always find a way to avoid taxes of all kinds. They pay accountants and politicians to ensure that. The middle class may not have many politicians on their payroll, but they do have accountants -- and have learned how to use them. Besides, the progressivity (a word that the tech giants still don't know how to spell) of our current tax structure is inconsistent and intentionally incoherent.
Just a note: the US tax system seems to have been at its fairest (a very relative term) during the late 1940s through to the Kennedy tax cuts in the early 60s when the highest rates were in the 90% range and when estate taxes still took a credible bite out of ultra wealthy generational wealth. Of course all that money collected didn't go to help eradicate poverty. It mostly went to build warships, bombers, missiles and the nukes they carried.
>like sales and use taxes, and user fees, are all regressive
Under no circumstances are consumption taxes "regressive". Consumption taxes are the only tax any free people should tolerate. The poor will never pay more in outright dollars, or in percentage. It's only "regressive" if you you stupidly count money that isn't spent, which is entirely pointless because of course money not spent won't get hit with a consumption tax (it will once it DOES get spent, the more you spend the more you pay, which means consumption taxes are PROGRESSIVE). Furthermore, any good implementation of a consumption (VAT, etc.) tax is going to tax luxury goods at much higher rate than consumer staples.
Under no circumstances are consumption taxes "regressive". Consumption taxes are the only tax any free people should tolerate. The poor will never pay more in outright dollars, or in percentage. It's only "regressive" if you you stupidly count money that isn't spent, which is entirely pointless because of course money not spent won't get hit with a consumption tax (it will once it DOES get spent, the more you spend the more you pay, which means consumption taxes are PROGRESSIVE). Furthermore, any good implementation of a consumption (VAT, etc.) tax is going to tax luxury goods at much higher rate than consumer staples.
> Under no circumstances are consumption taxes "regressive".
They absolutely are “regressive” in the objective sense “progressive/ ” and “regressive” are applied to taxation (which is distinct from normative uses of the pair, which are common in other areas of political discussion), in that they tend to tax a lesser (absolute and marginal) share of income with increasing income, due to declining marginal propensity to consume.
> Consumption taxes are the only tax any free people should tolerate.
There are obviously an infinite number of potential systems of moral axioms for which this is true (the most trivial being any in which it is taken as a moral axiom), and also an infinite number in which it is not. However, as you’ve provided neither the basic principles in which your belief in this is grounded or your reasoning connecting the conclusion to those principles, you’ve provided no reason for anyone who doesn't already hold this belief to adopt it.
> Furthermore, any good implementation of a consumption (VAT, etc.) tax is going to tax luxury goods at much higher rate than consumer staples.
That's an interesting “No True Scotsman”, but concrete consumption tax proposals (e.g., “FairTax”) often do not do this.
They absolutely are “regressive” in the objective sense “progressive/ ” and “regressive” are applied to taxation (which is distinct from normative uses of the pair, which are common in other areas of political discussion), in that they tend to tax a lesser (absolute and marginal) share of income with increasing income, due to declining marginal propensity to consume.
> Consumption taxes are the only tax any free people should tolerate.
There are obviously an infinite number of potential systems of moral axioms for which this is true (the most trivial being any in which it is taken as a moral axiom), and also an infinite number in which it is not. However, as you’ve provided neither the basic principles in which your belief in this is grounded or your reasoning connecting the conclusion to those principles, you’ve provided no reason for anyone who doesn't already hold this belief to adopt it.
> Furthermore, any good implementation of a consumption (VAT, etc.) tax is going to tax luxury goods at much higher rate than consumer staples.
That's an interesting “No True Scotsman”, but concrete consumption tax proposals (e.g., “FairTax”) often do not do this.
>in that they tend to tax a lesser (absolute and marginal) share of income with increasing income
It is pointless to look at income in this regards. You come to a false conclusion that a tax is regressive because the percentage of income is taxed less for the "wealthy". This only due to the fact that the wealthy are spending a smaller percentage of their income.
You can only look at money SPENT, not at income. If someone makes 500 mil a year but only spends 80k, then you you compare to someone who made 80k and spent 80k then yeah it appears "regressive" because they paid the same in taxes (assuming they bought the same things). However when the person that made 500 mil goes to spend they remaining 420 min, they will be taxed. You can keep all the money you want, stick in your ears, put it a pool and dive in it like you Scrooge McDuck, who cares, once you actually try to do something useful with the money, that is when it would be taxed. More money you spend, more you are taxed, that is progressive.
It is pointless to look at income in this regards. You come to a false conclusion that a tax is regressive because the percentage of income is taxed less for the "wealthy". This only due to the fact that the wealthy are spending a smaller percentage of their income.
You can only look at money SPENT, not at income. If someone makes 500 mil a year but only spends 80k, then you you compare to someone who made 80k and spent 80k then yeah it appears "regressive" because they paid the same in taxes (assuming they bought the same things). However when the person that made 500 mil goes to spend they remaining 420 min, they will be taxed. You can keep all the money you want, stick in your ears, put it a pool and dive in it like you Scrooge McDuck, who cares, once you actually try to do something useful with the money, that is when it would be taxed. More money you spend, more you are taxed, that is progressive.
> It is pointless to look at income in this regards.
Whether or not you subjectively think it is pointless or not, the well-established meaning of “progressive” and “regressive” taxation does loom at income.
If you want to invent your own terminology to reflect the considerations you believe are important, great, but overloading established terminology used consistently by people with varying normative beliefs about the subject matter to mean something completely different because you don't like the way it maps terms on to facts isn't helpful in communication.
Whether or not you subjectively think it is pointless or not, the well-established meaning of “progressive” and “regressive” taxation does loom at income.
If you want to invent your own terminology to reflect the considerations you believe are important, great, but overloading established terminology used consistently by people with varying normative beliefs about the subject matter to mean something completely different because you don't like the way it maps terms on to facts isn't helpful in communication.
I happen to mostly agree with you, but to play devil's advocate, consider the practical reality that government (as currently expressed) is expensive. New Hampshire is a great example of your model working well: nearly half of its tax revenue is consumption-derived (compared to ~10% of New York's). Except New York collects more than double the tax per head versus NH.
Let's assume that we can't easily shrink the size of government. Middle class incomes are just too lucrative of a piggy bank, which is why tax policy is so reliant on it. How do you make up for the $3.3 trillion in income and payroll tax revenues without taking people's property? The US only imported $2.5 trillion in 2019, so you'd need an import tariff rate of 130%! If you used a federal sales tax instead, you'd likely need a rate of > 24% to replace the income tax (extrapolating from New Jersey as a reasonable lower bound).
Let's assume that we can't easily shrink the size of government. Middle class incomes are just too lucrative of a piggy bank, which is why tax policy is so reliant on it. How do you make up for the $3.3 trillion in income and payroll tax revenues without taking people's property? The US only imported $2.5 trillion in 2019, so you'd need an import tariff rate of 130%! If you used a federal sales tax instead, you'd likely need a rate of > 24% to replace the income tax (extrapolating from New Jersey as a reasonable lower bound).
> Progressive taxes harm the middle class whilst the rich figure out ways to avoid them. If you want the average person to do well, you should support a flat tax.
If the concern is "the rich figure out ways to avoid" taxes, there's no reason why you need a flat tax to address that. A progressive tax can abolish deductions, etc. just like some flat tax proposals do.
If the concern is "the rich figure out ways to avoid" taxes, there's no reason why you need a flat tax to address that. A progressive tax can abolish deductions, etc. just like some flat tax proposals do.
Wouldn't the rich figure out a way to try and avoid a flat tax as well?
The solution then, based on their final conclusion, would be to distribute ownership of the capital instead of having it be concentrated to a small number of people. Sounds a bit like both the stock market and communism.
Edit: Seems like some people think otherwise. Would love to hear your thoughts.
Edit: Seems like some people think otherwise. Would love to hear your thoughts.
Jackson and Owyang,
Please respond here if Biden Administration puts pressure on you to not publish findings like this in the future. No, I'm not into conspiracy theories, but this finding does impress me as something the Democratic party would like to suppress.
Please respond here if Biden Administration puts pressure on you to not publish findings like this in the future. No, I'm not into conspiracy theories, but this finding does impress me as something the Democratic party would like to suppress.
[deleted]
Taxes are unnecessary in any country with fiat currency. This is plainly evident by the complete lack of correlation between tax revenues and government spending. The government can simply create as much money as it needs. Taxes exist only to track and control the citizenry.
What you're talking about is inflation of the currency, and if you want people to continue using it as a currency you'll limit its inflation.
And taxes exist for a plethora of reasons, originally as a source of income for governments, and later as a social and economic tool of governments to control behavior and growth, amongst likely hundreds of other reasons.
And taxes exist for a plethora of reasons, originally as a source of income for governments, and later as a social and economic tool of governments to control behavior and growth, amongst likely hundreds of other reasons.
> Taxes are unnecessary in any country with fiat currency.
No, taxes don’t pay for services in the simple way suggested by the metaphor of the fisc (a finite public purse filled by revenue and emptied by spending) in such a country.
That doesn't mean they aren't needed; they function as a tool managing and distributing monetary impacts of spending and for Pigovian internalization of social costs.
No, taxes don’t pay for services in the simple way suggested by the metaphor of the fisc (a finite public purse filled by revenue and emptied by spending) in such a country.
That doesn't mean they aren't needed; they function as a tool managing and distributing monetary impacts of spending and for Pigovian internalization of social costs.
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Or is it because if they don't restrict the data to 50th percentile and above, the data doesn't fit the story they want to tell?
It's also weird that they treat spending as intrinsically dependent on taxes when for all intents and purposes, it's independent.
Many of those variables are easily tweaked (e.g. government spending) and many of them vary enough that performing the experiment over a different time period could very well mean getting the exact opposite result.