How to Think About Taxes

Very interesting, and on target.

The CBO numbers appear to have a variety of methodological issues that make the distribution of federal taxes look more progressive than it is. The CBO study counts the following as income: Medicare, Medicaid, employer-paid health insurance premiums, food stamps, school lunches and breakfasts, housing
assistance, and energy assistance. They also count your employer's FICA payments on your behalf as income for you, rather than as taxes paid by you.

In other words, the income of the lower quintiles is inflated to include money they never actually received. That makes their tax rates look lower.

In addition, the taxes paid predominately by the upper quintiles (on dividends and capital gains) is inflated to include taxes they never actually paid (corporate taxes). That makes their tax rates look higher.

To me your numbers are way off, at least if you define the terms as I do. When you say "Share of Total Taxes" I think percentage of Federal Tax Revenue paid. In that sense the top Quintile pays about 70% of the taxes not the 28% you list. But you must mean "Effective Tax Rate" which would make more sense. Using "Tax Share" is how Republicans like to talk about taxes. They conveniently don't mention "Income Share". Ezra Klein has a good post on this here: http://www.prospect.org/csnc/blogs/ezraklein_archive?month=04&year=2009&base_name=day_of_1000_tax_graphs

It would be nice to collect the data so that the statistics are more granular (say, increments of 5% instead of 20% as you have) and show the results in a graph.

Excellent post.

Ahhhhh. Thanks Reino. Kevin never makes errors like this so I should have known it was my misreading. Never mind.

Are the income figures gross income, or after various deductions made in calculating taxes (dependent children, mortgage interest, home office, health expenses above 2% or whatever it is, etc.)? The reason I ask is that it makes a difference for which quintile I fall in. I imagine this is true for others as well.

Great post, Kevin. Really great. Could you extend the math a bit further to say what marginal tax rates we would need to get the distribution you propose?

I think the term "flat tax" has been misused enough to require some clearer treatment. Most proposals include a few demarcations of tax brackets to achieve some progressive increases;14,17, and 20% are typical. The key idea is to remove all the insane tweaks for mortgages, health care, 401ks, AMTs, babies, etc that are intended to improve people's behavior. All they do is serve to drive people into the arms of tax attorneys and open loopholes for cheaters.

Very nice article all in all.

"Share of taxes" is not correct. You need to gather all taxes on "income", if that is where you are going. It is not just FIT. Add Fica and Med, and how about the consumption taxes? That is where the Rethuglicans have gone to get their goodies.

You obviously write well Kevin, but your basic premise--that those who make more should pay a higher rate--has never made any real sense to me. I realize that not everyone in a given society is born equal, and that there are some in every population that will always require assistance. I am as generous and compationate as anyone and am just as irritated as the rest of the working class when the rich get richer on the backs of those that aren't rich, but I just don't get the point. We live in a free country and exist in a capitalistic society where virtually everyone has a chance to improve their status...why should successful people be required to pay a higher tax RATE simply because they're successful? Why should people on the lower end of the scale be rewarded with a lower rate simply because they aren't successful? In my simple opinion, a comsumption (sales) tax is about as fair as one can get in the way of taxes. If you have a lot, you consume more and pay more taxes; if you have little, you spend little beyond the basics and pay few taxes. It's not a perfect system, but it's simple, self-leveling and much cheaper to administer than our present system or many of the other ideas I've heard tossed around. You can juggle numbers all you want to and you will never eliminate the natural animosity that exists between the "haves" and "have nots."

-that those who make more should pay a higher rate--has never made any real sense to me.

The leftist/progressive answer to your question is what right-wingers object to: income redistribution. Most Europeans, including the vast majority who aren't Socialists, support progressive taxation on this basis. It's a social justice argument.

However, there's a more centrist, liberal rationale for progressive taxation: the marginal value of the dollar. Essentially, the argument is that a dollar in the pocket of a man who makes $10,000 a year is worth a lot more to him than a dollar in the pocket of a man who makes $100,000 a year. As wealth increases, the marginal value of a dollar decreases. Therefore, taxing 10% of income for a low-income person is effectively a higher level of taxation than taxing 10% of income for a high-income person. Thus, progressive taxation can account for the differing marginal values of a dollar and "evens out" the effective tax rates for all income levels.

Right-wingers will object to the latter argument. But I think they're just being ideological. My own personal experience is that the few years that I made mid-six-figures income during the dotcom era, a hundred dollars was worth much less to me than it is now, when I'm quite poor. It's obvious that the marginal value of a dollar changes depending upon total income.

The combination of the two arguments produces a significantly progressive tax system.

Incidentally, I suspect that lots of people don't comprehend how our tax system is progressive with regard to marginal income brackets, not total income.

I am intrigued with your analysis, and think it is a useful addition to the discussion of the income tax. I agree with those who point out that it needs to include the FICA and other withholding, including the employer's portion.

But those who believe that tax reform is necessary might want to get outside of the income tax box. And I don't mean that they should climb into the consumption tax box. It is just as bad, and arguably worse, particularly for the bottom 95% of us.

But there is a better alternative, which most of us overlook because our economics professors overlooked it, and they because they weren't taught it either. This despite the fact that 100 to 125 years ago, everyone knew about it. I refer to the collection of taxes called land value taxation. The classical economists -- taught far too infrequently and briefly today -- would recognize as land things that they'd never heard of: not just urban land value, but electromagnetic spectrum (those airwaves we say belong to the American people); geosynchronous orbits (so satellites don't bump into each other); landing rights at LaGuardia and other busy airports (which Mary Peters said belonged to the American people, not the airlines); natural resources; rights to pollute; water rights, and a long list of other things that are created by nature or by public spending on infrastructure and services.

The economic value of these things goes largely untaxed. This means that the economic value gets privatized by whoever has title. Finders keepers; losers out of luck. (Finders get to strut as "self made men.") As Michael Kinsley wrote recently in the WaPo,

"Perusing the Forbes 400 list of America's richest people, it's striking how few of them made the list by building the proverbial better mousetrap. The most common route to gargantuan wealth, like the route to smaller piles, remains inheritance. The ability to pass money along to your kids may motivate many a successful executive or investor to work harder, but it can't possibly motivate those kids to inherit harder in order to pass it along once again.

"Dozens of Forbes 400 fortunes derive from the rising value of land or other natural resources. These businesses are fundamentally different from mousetrap building. Land does not need to become "better" to increase in value, and that value increase doesn't produce more land."

We fail to tax land value. We permit it to accumulate in private pockets. That raises the cost of living for all of us, and we end up providing public revenue through taxes on that which we create, instead of getting those who have claimed that which no one CAN create to pay us for the privilege of privatizing the commons.

Let go of your focus on tweaking the income tax. You're just rearranging deck chairs for a better view or finer acoustics. Focus on the iceberg. We can obliterate it, and leave a safer ocean, a sailable ocean, an ocean on which all can thrive.

Read Henry George. Start with his speeches at wealthandwant.com, or read "Progress & Poverty," or "Social Problems." Look for Mason Gaffney's website (.org). Read lvtfan.typepad.com. We can do much better than an income tax, and NOT by shifting to a tax on consumption. That's no improvement.

Land Value Taxation would put us well on the road to solving problems you currently think are intractable.

(And if wealth distribution data is your thing, check out the SCF 2004 data at wealthandwant ... an eye opener ... and a bit of 2007 SCF data at lvtfan.typepad.com -- both wealth and income distribution data which no one seems to have picked up on yet.)

Since the Middle Class (which the President apparenly wants to pay less in taxes) needs to pay more in this model, the only apparent solution is a massive cut in the size of government.

Well written but very deceptive-- 38% of income earners pay no federal income tax whatsoever---is there any doubt they receive a disproportionate share of federal largesse ? With Obama's scheduled tax rebate to those who pay very little in federal income tax this percentage is expected to rise to 50% which will become the tipping point to the slow dissolution of the union as the majority will support spending at any level as they will not have to pay for it. Only in the fantasy world of the Socialist does someone receive an income tax cut when they pay no income tax. The only fair solution is a flat tax where everyone pays the same percentage or a "fair tax" where everybody pays the same rate at the till. Face it anything else is discrimination and says one person should be punished to reward another. The idea that one who earns more owes more because they received disproportionate advantage from the government is really reflective of the Socialist / Communist mindset. The creation of wealth happens despite the federal government conducting activities not outlined in the Constitution not because of it. "The problem with Socialism is you eventually run out of other People's money." Margaret Thatcher

All of this blather is akin to debating how many angels can dance on the head of a pin.

The level of govt. spending and benefits that you support is not consistent with a tax base where the bottom 50pct of the population pays almost nothing (net of benefits).

Rather than debating fanciful concepts, why not look at real life examples?

1) there are dozens of social democratic states that offer the benefits Americans (on this website) dream of

2) it is politically popular to impose high taxes on a very few in order to buy the votes of the many with "free" benefits

Hence, if it were possible for the states in category (1) to pay for their benefits using policy (2), we should find dozens of real life examples of this. Where are they? I've lived in both the UK and Canada and they tax the hell out of the middle quintiles. For instance, the 40pct income tax bracket starts at about $50k in income in the UK and everyone pays 17.5% VAT in addition to high energy and sin taxes.

There is no country that has built a social democratic "paradise" off the backs of the rich.

I can't find any major developed country where the bottom 50pct of the population (in income terms) pays less taxes.

There is no country that has built a social democratic "paradise" off the backs of the rich.

I am a patriot who firmly believes in American exceptionalism. We are after all, the city on the hill and the last best hope of earth.

The most imortant factors I learned from Drum's article were gleaned from the various comments, all of which are intelligent and no doubt sincere. My conclusion is that there is no easy solution. I was almost swayed by the higher income respondents who stated that a progressive tax is unfair, until I pondered on the comment that stated that a dollar to a poor man is not equal to the dollar of the rich man. This means to me that while the rich are paying a higher ratio of the overall tax burden, they are paying it with "cheaper" dollars. Thank you for this article as well as poresenting all the pros and cons.