Taxes and inequality

August 13, 2012 9:52 AM

The comparative experience thus suggests that for inequality reduction, it is the quantity of taxes rather than the progressivity of the tax system that matters most. Affluent countries that achieve substantial inequality reduction do so with tax systems that are large but no more progressive than ours [America's].

As The Economist's Democracy in America blogger argues, the question that this raises is as follows: "if, as a matter of fact, high American inequality is a consequence not so much of rigged rules that benefit the rich, but because of a general failure to tax the middle-class at a level sufficient to finance significantly equalising progressive transfers, then ultra-rich rule-rigging would seem to be orthogonal to the real question: why the middle-class median voter won't support higher taxes to fund a more egalitarian welfare state. I think part of the answer is that huge numbers of middle-class Americans think downward redistribution from the middle to lower class is unfair precisely because the relatively poor are not perceived to be pulling their weight in the collaborative endeavour of American society."

posted by mattn (31 comments total)

[Comment removed. Fine if you want to post an article because you think it's interesting and people will enjoy reading it, but you cannot jump right in with "and here's my opinion" stuff in the thread to kick off a discussion. Let it be, people will engage with it as they are inclined.]
posted by cortex at 10:01 AM on August 13, 2012 [4 favorites]

Moving taxes up in parallel across all brackets, but using the higher revenues to increase the size of the welfare state is increasing the progressivity of the tax system. Especially if you means test components of the welfare state.
posted by JPD at 10:04 AM on August 13, 2012 [7 favorites]

I want to not like this, but ... it's hard to disagree with. It's probably true that the "middle class" (such as it is) should pay more in taxes, and that them doing so is what's required to actually create income security for the poor, if for no other reason than the past half decade has proven just how variable the incomes of the super-rich are.

There are other reasons, both ethical and practical, to work on tax reform in the top brackets, though. The sense of unfairness created by the idea that the real tax rate of the super rich is less than the middle class has some real social consequences. More over, it's not realistic to assume that the only goal of our tax system should be ensuring (relative) income security. We (should) want to make our institutions better, and we (should) want to spread that wealth to more impoverished places, and we (should) want to invest in important medical research, and we (should) want to go to freakin' space. We want to make life on the planet better, not just bearable. And that's the sort of thing that taxes on the rich could sustainably fund. Incidentally, it seems to be the sort of thing that some of the super-rich are spending their money on.
posted by Apropos of Something at 10:15 AM on August 13, 2012 [3 favorites]

If the "real" question is "why the middle-class median voter won't support higher taxes to fund a more egalitarian welfare state", then why start with the psychology of toddlers rather than the multi-billion dollar media machine insistant on lying to the public regarding the nature of the re-distribution in the first place?
posted by Hypnotic Chick at 10:41 AM on August 13, 2012

I'd guess because toddlers don't have their instincts for fairness pass through ideology filters before it influences their actions.
posted by VTX at 10:46 AM on August 13, 2012 [1 favorite]

I've said repeatedly here that ALL the Bush tax cuts should expire, not just those on the wealthiest. The Democratic position is just as pandering as the Republican position; it's just that the Republicans are pandering to the super rich and the Democrats are pandering to the middle and upper middle class.

Now, that's better than pandering to the super rich since raising taxes on the super rich is better than raising them on no-one at all, but it's still bad. Everyone needs to pay more taxes (except the very poor). Everyone. It's just that the rich should have their taxes increased by somewhat more than the middle class have theirs increasing.

You don't have a working social safety net by taxing the super rich. There just aren't enough of them. Social safety nets are paid for by a broad tax base.
posted by Justinian at 11:03 AM on August 13, 2012 [4 favorites]

This is inarguably true, but I think it misses part of the reasoning for a progressive tax system--which is as much rhetorical as practical. You sooth the middle-class's sense of resentment at bearing the brunt of the taxation burden by demonstrating that the super-rich are not just laughing all the way to the bank. I would guess that the best way forward would be a marked increase in the top marginal tax rate followed by the institution of a national consumption tax of some kind. The first would, in fact, be merely window dressing on the second (the "spoonful of sugar that makes the medicine go down"), but it could be very important window dressing.

I'd be interested to know what top marginal rates were in most European countries at the time when they introduced their national consumption taxes. I'm guessing that they were in most cases considerably higher than they are in the US currently.
posted by yoink at 11:03 AM on August 13, 2012 [1 favorite]

This is a really valid point, and it frustrates me that so much of our discourse seems to surround the fairness or unfairness of asking the wealthy to pay more in taxes when it is almost all of us who should be paying higher taxes. I wish the question we were trying to answer would be "What tax system would do the best job of fully and fairly paying for the society we want?" rather than "Shouldn't the rich be paying more in taxes?"

Even if we ultimately answer the second question "yes," we won't have moved as far along as we need to in answering the first question.
posted by MoonOrb at 11:06 AM on August 13, 2012 [2 favorites]

I've said repeatedly here that ALL the Bush tax cuts should expire, not just those on the wealthiest.

I don't think the Democrats disagree with you on that--it's about timing. You don't suddenly raise income taxes on the middle class during a recession or when a recession is threatening. That's not pandering, that's just good economic sense.

The "Bush tax cuts" would have been pretty good policy if they'd been FIRST instituted in 2009--of course, there's a chance that if they hadn't been instituted when the were we'd have skipped the crazy bubble economy they helped fuel and we wouldn't have needed them in 2009. In any event, they'd have been far more affordable because our national debt would have been considerably lower.
posted by yoink at 11:06 AM on August 13, 2012 [1 favorite]

And here it is. The game plan is simple: tax the hell out of the middle class while ripping away public services and gaming the financial system against them. This is the conservative plan - enrich the wealthy, impoverish the middle class, and let the poor starve in third-world squalor. They won't rest until this is reality.

And the bitter, gruesome irony is that the apologists for neo-feudalism claim virtue - it's not fair that the average family isn't obligated to pay the same tax rate as a millionaire, it's not fair that the rich need to pay interest on their capital gains.

No. It's not fair that middle class children can't go to college without a house-size loan they can never escape - even in death. It's not fair the GOP completely wrecked the economy through frivolous and profligate spending - two major overseas conflicts that took up the better part of a decade, funded entirely with debt, and compounded by a tax break on the wealthiest. It's not fair that major corporations get enough loopholes custom crafted into the tax code where the government pays them at tax time. It's not fair we're subsidizing corporate "farmers" while the quality of education creeps down year after year.

Making the oligarchs and theocrats pay for a civilization that allows them to benefit from their wealth? That's fair.
posted by Slap*Happy at 11:13 AM on August 13, 2012 [7 favorites]

Everyone knows the poor are lazy. That's why they're poor!

Why does everyone try to make it so complicated?

hamburger
posted by blue_beetle at 11:17 AM on August 13, 2012 [3 favorites]

I don't think the Democrats disagree with you on that--it's about timing.

You may be correct in theory; in practice I'm guessing they will never find a good time to raise taxes on the middle class.
posted by Justinian at 11:25 AM on August 13, 2012 [1 favorite]

I'd be perfectly happy to pay higher taxes, but I'd want to know that I'd be getting a good return on my investment. Take, for example, the $200 a month I give to a private corporation for medical insurance. If I could give that money to the government instead, and get universal health care, I'd go for it in an instant.
posted by Faint of Butt at 11:55 AM on August 13, 2012 [3 favorites]

Progressive taxation may not be necessary or sufficient to establish and maintain a robust state with the resources needed to properly look after the welfare of all its people, but a well designed progressive tax system used effectively to ensure the maximum social mobility and economic opportunity for the most people is even better than a comparable system that provides expansive benefits in the long-term but disproportionately depletes the spending power of the lower income earners in the short term. Progressive tax schemes that don't incorporate so many higher-end loopholes and business exemptions are an improvement even on systems that rely more on a VAT than on a progressive taxation scheme.
posted by saulgoodman at 12:05 PM on August 13, 2012

The Economist blogger's presentation of this evidence is quite deceptive. Having high taxes plus generous transfers to the middle classes (free health care, free higher ed, generous unemployment insurance, generous public pensions) is distributionally pretty much the same thing as a lower tax rate for the middle class. You can do it through the tax or the transfer system. Generous new entitlements to the middle class are not on the table politically here so it's disingenuous to say that the U.S. should have the same tax structure as countries with such entitlements. Also, the payroll taxes that fund middle-class entitlements like SS and Medicare are already pretty much flat or even regressive. It's also deceptive because no other advanced country is as unequal as the US in its income distribution, so in no other country is the question of making the rich pay their fair share as pressing as it is for us. It certainly doesn't offer a good reason for the Democrats to take the politically suicidal step of calling for higher middle class taxes. In fact, it's the Republicans who are going to need to have higher middle class taxes if they really want to cut taxes on the rich and cut deficits simultaneously.

This is propaganda, pretty much. If you want to make a point about a supposed need for higher middle class income tax rates do it with the ample U.S. data available, not these kind of generalities.
posted by zipadee at 12:05 PM on August 13, 2012 [6 favorites]

You can do it through the tax or the transfer system

The thrust of the second link is that you can only do it through the transfer system. At least, that is what is suggested if you look at the Anglosphere + Northern Europe and eat a big bite of correlation-is-causation and believe your comparing apples to each other. I don't see a measure of progressiveness of the tax burden (not sure if a delta of this Gini coefficient thing is that; if you take the stinking rich a ton but they're still relatively stinking rich, you might not be reducing that Gini coefficient much but that doesn't mean that you've got the wrong distribution of tax burden).

Taking the stuff from the second link to mean "to achieve greater income equality, the US just needs to raise more revenue across the board" is some pretty tenuous shit. Then going from there to shaking one's fist at the bourgeoisie, as the first link does, it's not even tenuous anymore.
posted by fleacircus at 12:39 PM on August 13, 2012

There's a lot of economic evidence that a VAT is a better kind of tax than an income tax. It doesn't discourage people from working (like an income tax); it doesn't punish saving (like a capital gains tax); it can be easier to enforce (in a VAT, each producer has an incentive to make sure its upstream producer is complying with the law). But, of course, it's difficult to make a VAT progressive. So you end up with this whole body of economic commentary that income taxes aren't really that progressive right now, and in any case progressiveness isn't really as desirable as it would seem. That's the background for this discussion.

The blog posts do not address this issue: totally separate from any kind of equality effects, we should tax rich people more than poor people because rich people don't need the money as much. A small fraction of people in the US control more assets than they could ever use for their own consumption, and these people have enough to make a substantial dent in the government's budget problems. Isn't it better to tax these people's wealth than to tax the income of people who actually need it? And yet this has not been a part of the discussion.
posted by miyabo at 12:58 PM on August 13, 2012 [2 favorites]

As if I were not unelectable enough, I'd love to see a VAT. Exclude food. I'd like to find a way to exclude clothing as well but at then you've got people buying $5000 suits without VAT and you're starting to get back to what we have now with a hodgepodge of crazy deductions. So perhaps just food.

(That's how you make a VAT more progressive, I should think; exclude something or somethings that makes up a large fraction of expenditures for the poor but a tiny fraction of expenditures for the rich.)
posted by Justinian at 1:52 PM on August 13, 2012

In a calculation like this, is the mortgage interest deduction assumed to be a wealth transfer, or is it treated as part of the overall tax rate? Or is it just disregarded?

Suppose the deduction didn't exist. And suppose that someone then proposed the government write checks to American homeowners, with rich Americans who bought big, expensive houses getting bigger checks than middle-class Americans with median-size, median-priced homes. I don't think it would go over well. And yet from a bottom-line perspective, this is exactly what the current system accomplishes.

I feel like I'm willing to settle for so little and yet asking for so much. "Let's stop transferring wealth to the rich," seems like such a reasonably modest request. I even think that a long-term, multi-decade phaseout of the deduction makes sense. But it seems unlikely to ever happen.
posted by compartment at 1:55 PM on August 13, 2012 [2 favorites]

It doesn't discourage people from working (like an income tax); it doesn't punish saving (like a capital gains tax);

So a VAT directly discourages people from spending and consuming, not a bad goal from an ecological point of view, but an economic nightmare. And an increase in income tax does NOT discourage people from working... if you suddenly have less income from the same amount of work, you have serious motivation to work more. I was employed and working hourly with some overtime when the Reagan tax cuts hit... it gave me the opportunity to work LESS overtime. If you are discouraged from working by an increase in income tax, you have WAY too much discretionary income.
posted by oneswellfoop at 2:14 PM on August 13, 2012

I even think that a long-term, multi-decade phaseout of the deduction makes sense. But it seems unlikely to ever happen.

The UK phased out the mortgage interest deduction in the 90's over 12 years and this might shock you. The World did not end. Not only that, but the party that did it stayed in power.
posted by JPD at 2:24 PM on August 13, 2012 [4 favorites]

The problem is there's two middle classes really:

* Your typical college grad or college educated couple with no kids, a good job and and way too much disposable income (even after crippling loan payments if applicable).
* Your typical family struggling to make it by with the cost of trying to raise, educate and keep healthy their children.

The former need to be taxed more to broaden the base. I know. I am the former. The latter are the ones that need help. Childless couples earning >$100K? They could stand to weather an extra 3-5%.
posted by Talez at 2:42 PM on August 13, 2012

I'm not complaining or anything, but the former is already paying an extra 3%-5% mostly because that cohort usually doesn't own a home, also obviously we have less deductions.

If anything our tax system already gives out pretty big handouts for getting married, having kids, and buying a house. Not so sure that's right.
posted by JPD at 2:51 PM on August 13, 2012 [1 favorite]

I'm not complaining or anything, but the former is already paying an extra 3%-5% mostly because that cohort usually doesn't own a home, also obviously we have less deductions.

It's complicated. My wife and I actually pay about $4,000 extra in taxes for the privilege of being married (because we both earn about the same amount, pushing us into a higher tax bracket than we would be individually). But if I quit my job to be a stay-at-home dad, we'd save about $4,000 over being single.

The mortgage interest deduction doesn't exceed the standard deduction until you have a house worth over $200k (and it has to be worth much more for it to really be significant). In some parts of the country huge mortgages are common, but around here a perfectly nice house in a great neighborhood is like $150k, so the mortgage interest deduction isn't doing middle-class people any facors.
posted by miyabo at 3:05 PM on August 13, 2012

A VAT is hardly an economic nightmare: almost every American state has a sales tax, which is a form of VAT. I don't think anyone here is saying we should only have a VAT, but that we should have a VAT and a progressive income tax.

I'd favor a VAT that excluded things like food, medical care and drugs, rent, basic utiltiies, public transportation, and clothing. I'd combine that with an exclusion on the first $100k or so of income, and then start taxing progressively from there.
posted by MoonOrb at 3:05 PM on August 13, 2012

So a VAT directly discourages people from spending and consuming, not a bad goal from an ecological point of view, but an economic nightmare

This, like many of the posts in this discussion, ignores the fact that we have lots of experience of economies that have been running VATs for a good long time without these disastrous consequences. These economies include most of those which are usually praised on Metafilter as being much more enlightened than the US.

American Exceptionalism is both a Right and Left wing habit of mind, it would seem.
posted by yoink at 6:10 PM on August 13, 2012

The Economist blogger's presentation of this evidence is

...

propaganda, pretty much.

FTFY.

Keep in mind: this applies to the whole of the media content produced by The Economist.
posted by mwhybark at 11:49 PM on August 13, 2012

Comment removed. Fine if you want to post an article because you think it's interesting and people will enjoy reading it, but you cannot jump right in with "and here's my opinion" stuff in the thread to kick off a discussion. Let it be, people will engage with it as they are inclined.

OK, what was the link?
posted by Yakuman at 9:14 AM on August 14, 2012

You may be correct in theory; in practice I'm guessing they will never find a good time to raise taxes on the middle class.

There's a strong, and demonstrably erroneous, belief on the right that when "taxes go up they never come down"--now there appears to be a strong, and demonstrably erroneous, belief on the left that when taxes go down they never go back up. Reagan raised taxes, Clinton raised taxes. Some future President will raise taxes. If you want a better revenue/spending balance than we've got now then vote for your local Democratic Party candidate for the House and Senate. As long as the Republicans are the party of Grover Norquist and as long as they have veto power in the Senate (to say nothing of control of the House) you're right--the Bush tax cuts aren't going anywhere. But this too shall pass.
posted by yoink at 11:06 AM on August 14, 2012

Well, sure, you should read my "never find a good time" as hyperbole. I actually mean they will not find a good time in the near future. And every month that passes with our debt increasing at the current rate is compounding the problem.

Frankly, I'm hoping the sequestered cuts all go into effect and the tax cuts all expire. That will mean serious short term pain. It will also mean significant progress towards getting the budget under control in the long term.
posted by Justinian at 1:30 PM on August 14, 2012

VTX: I'd guess because toddlers don't have their instincts for fairness pass through ideology filters before it influences their actions.

I'd bet most voters don't, either. From what I've seen in life & studies, a lot of decisions come from instincts (fear, jealousy, longing, desire, hunger...), and get garnished and decorated and justified by ideology constructs.

Not all, but a lot more than most of us are comfortable believing. And not just the decisions of "them", or "everyone else."
posted by IAmBroom at 12:08 PM on August 16, 2012