US taxes are "fairer" than those in the UK

When I was at the New York office of The Economist, I witnessed the same phenomenon several times. A new correspondent would be posted there and settle happily in to his new office. Several weeks later, the first paycheck would arrive, and the swearing would start. Indignantly waving his pay stub, the recent arrival would march into the common are and demand to know why the hell people were talking nonsense about America being a low tax country?

We would patiently explain that New York is an outlier, which did little to remove the sting. But comparisons of the US and other countries often do overstate the laissez fair nature of our tax system, as Stumbling and Mumbling points out:

George Bush is a stronger believer in income equality than Gordon Brown.

These figures (pdf) from the CBO (via Greg Mankiw and the Kruse Kronicle) show that the poorest fifth of Americans paid an average of 4.3% of their income in federal taxes whilst the richest fifth paid 25.5%.

How do these figures compare to the UK? Table 16A here gives the answer. The poorest quintile in the UK paid 36.5% of their income in tax, whilst the richest fifth actually paid less - 35.5%.

. . .

However, if we look only at income tax and national insurance, the UK system is still less progressive than the US's, at the federal level. The bottom fifth pay 6.2% in direct tax (net of credits) whilst the top fifth pay 23.7%. The ratio of these tax rates is 3.8, compared to 5.9 for the US federal tax takes.

No one believes me when I say that George Bush's tax cuts made the tax system more progressive, but it's true--the cuts for poor people were, on a percentage basis, bigger than the cuts for rich people. The estate tax might change that picture, but it raises very little money, and is only really starting to kick in over the last few years. This is not an endorsement of the wisdom of the tax cuts, just an empirical observation about their effect.

Comments

But what about including state and local taxes? The UK is a unitary state so there are no "state" taxes though there is council tax (which is paid according to property value, not income). Comparing US federal taxes to UK taxes is like apples and oranges.

Posted by Andrew | March 6, 2008 7:18 AM

Oddly enough, I am coming from the exact opposite position vis-a-vis moving between the US and UK--I just arrived in Manchester 6 months ago.

I think this is a very hard comparison to make in general, and the crude basis in which it was done in your citation seems to leave out a number of key differences. Firstly, the lower quintile in the UK gets health insurance in return for these contributions, and given that NI is about 11% of one's salary I imagine that the poorest Britons are actually getting quite a bit back over the long haul, at least those who in the course of their lives suffer a major illness.

Further, I would imagine that given the incredibly low US minimum wage the lower quintile in the US makes a lot less money and so could not possibly pay any substantial amount of tax. Some of the commenters on the blog post you cite have made similar points--of course this is a complex question but I think on the whole the argument that the American tax system is more progressive is probably a bit misleading.

Posted by James | March 6, 2008 7:37 AM

It is a myth that British National Insurance payments are related to funding the NHS. It's no more so than for any other Government income stream.

Posted by dearieme | March 6, 2008 7:57 AM

The flip side to this is that inequality reduction (which a lot of liberals take to be the point of worrying about tax fairness and progressivity) doesn't have a whole lot to do with the progressivity of taxes. Coincidentally, I learned that point from the Economist a few years ago. More recently, made the same point by comparing inequality reduction from taxes and from government transfers across various nations.

Posted by Justin | March 6, 2008 8:11 AM

But what about income differential?

Posted by Tom | March 6, 2008 8:12 AM

One of the myths about "liberals" that keeps getting stated or implied on this blog (as well as elsewhere) is that we want a progressive tax code primarily as a tool for reducing income inequality or "soaking the rich"--as if it is all a matter of envy for those who are prosperous. I think I speak for most liberals when I say that I personally don't mind that some people are very rich. I want a progressive tax code not to "punish" them but for two reasons. (1) We need money to fund the government, and the rich have more to offer than the rest. (2) The alternative--a tax code that takes the same proportional bite from the income of the middle-class and poor as it does from the rich, or (worse yet) an even larger bite--is palpably unfair and would hurt those who can least afford it.

Yes, some degree of income redistribution is a side effect, but it is certainly not the chief motivation here.

Posted by Karl Weber | March 6, 2008 8:23 AM

Is there a British equivalent to the EITC? If we're doing some of our social-welfare spending within the tax code and they're not, it's not a very good comparison.

Posted by Paul Zrimsek | March 6, 2008 8:23 AM

Karl, if equalization is not a goal of liberals, you need to tell that to John "Two Americas" Edwards.

Posted by jody | March 6, 2008 8:39 AM

Megan, it is misleading to say reductions in income taxes made the system more progressive. The poor in the US are mostly taxed in two ways, the highly regressive payroll tax, and the income tax. Looking at income taxes in isolation of payroll taxes widely understates the extent to which the poor are taxed. As Warren Buffet found out, as a percentage basis, he paid less tax than his secretary. The WSJ editorial page disingenuously mocked this claim by saying his secretary must be making more than $500,000 to pay that rate in income taxes. Of course, they got to score the cheap and unfair points by misinforming their readers - Buffet's numbers included payroll taxes, and the WSJ Editorial Page's number did not.

And since the poor pay very little income taxes, reducing it, in exchange for reductions at the top doesn't look like a very good deal. Now, if the Republicans ever want to talk about reducing the payroll tax, I think they'll find a number of allies among progressives like me. So far, they're way more interested in the estate tax.

Posted by szr | March 6, 2008 8:41 AM

Karl Weber,

The EITC and welfare payments are hardly "We need money to fund the government" items; nor, are they a "side effect".

Posted by Ed Reid | March 6, 2008 8:41 AM

szr,

The payroll tax funds two specific programs which provide direct benefits to those who pay the tax. I suspect liberals (progressives?) would be unwilling to see both the payroll tax and the programs it funds reduced for those in the lowest quintile. I suspect both FDR and LBJ would roll over in their graves were that to happen.

Posted by Ed Reid | March 6, 2008 8:47 AM

A new correspondent would be posted there and settle happily in to his new office. Several weeks later, the first paycheck would arrive, and the swearing would start. Indignantly waving his pay stub, the recent arrival would march into the common are and demand to know why the hell people were talking nonsense about America being a low tax country?

The fact that this is common practice explains so much about why I recently canceled my subscription. What sort of financial journalist isn't inquisitive enough to figure out what the taxes will be on their new job in a new country?

Posted by Sarah | March 6, 2008 8:52 AM

Re: Ed.. I suspect liberals (progressives?) would be unwilling to see both the payroll tax and the programs it funds reduced for those in the lowest quintile.

If only that were actually true. By this, I mean that payroll taxes do not directly fund Soc Sec anymore but the money just gets thrown into the big budgte pot. Because of this, the past couple of years have only had budget deficits of 300bill a year rather than 600 billion or so.. In a real sense, payroll taxes--which only apply to the first $90,000 of income (right?) are fairly regressive--if we just extended them to include all income... I wonder what we could do... (and how long Soc. Sec would then be set for..)

Posted by JKK | March 6, 2008 9:17 AM

Regarding the Estate Tax comment:

Please consider that this tax does more than raise revenue. One aspect is that the basis for holding an inheritance is increased to the value at the date of death (generally) of the decedent. Thus, if great uncle skippy leaves you 100 shares of ATT that he got at 1 cent per share(and his estate was valued below $1,000,000), and you sell it immediately, then there is no tax on the gain (and no tax on the Estate).

Now suppose the Estate Tax is repealed ... Again there is no tax on the Estate, but on that sale of the stock? As a short term capital gain, well, you'll be paying a chunk of change, as the basis will be skippy's $1 total cost.

Really, this repeal is a tax increase on the middle class.

Posted by Paul McMahon | March 6, 2008 9:27 AM

I wonder what we could do...

That question is pretty easy to answer- we could still run deficits of similar size to the economy.

Posted by Yancey Ward | March 6, 2008 9:29 AM

We're taxed lower, but the British don't notice it as much because we have no national VAT. A percentage on every purchase adds up quickly.

Posted by Tel | March 6, 2008 9:39 AM

As a pragmatist, I'd say we tax the rich for the same reason Willie Sutton robbed banks - that's where the money is. And I know conservatives don't like this, but 'the people' in their infinite wisdom (actually, their proxies, which changes the story quite a bit) want government to perform certain services. Those services cost money, and must be paid for, preferably now instead of later, when they will incur an interest penalty.

Don't like the services the government is offering? Go out and influence your Congressman. Or get another.

The other reason we tax, pragmatically, or should, is to strip the rich of as much political power as possible. In a saner world, the political opinions of Rupert Murdoch would matter just as much or just as little as our office secretary. Of course, the rich have worked very hard to make sure this is not the case, so we have to react to that reality.

Again, let me state what should be a very obvious fact - most people, 'liberals' included, don't mind that the rich are rich. Most people, however, mind very much if that wealth gives them disproportionate political influence.

That is very definitely anti-American.

Posted by ScentOfViolets | March 6, 2008 9:40 AM

Sounds to me like UK taxes are more fair (if higher) than US taxes.

By the way, for those who didn't follow the link, those figures are for all federal taxes (including corporate income taxes and the both halves of payroll taxes), and the rates are even higher in subsets of the upper quintile (up to 31% for the top 1%).

JKK:
In a real sense, payroll taxes--which only apply to the first $90,000 of income (right?) are fairly regressive--if we just extended them to include all income...

Right. Let's raise marginal tax rates on the most productive 10% of Americans by 12.4 percentage points. That's a great idea.

I wonder what we could do...

Congress would probably spend about half of it on corporate welfare, bridges to nowhere, and middle-class handouts. The rest they'd just waste.

Posted by Brandon Berg | March 6, 2008 10:28 AM

Hello? What about the huge deficits? What about the destruction of the economy?

Posted by John McCain: More of the Same | March 6, 2008 10:39 AM

if we just extended them to include all income... I wonder what we could do

Well, we'd have to index payouts the same amount, so what we'd do is make sure the government is on the hook for SS payments in the high six figures and possibly low sevens for the top 0.5% of earners.

Now, if you are saying we should call it a payroll tax and use it for something other than the payroll tax programs... why not just raise the top income bracket by 12.4%? It's at least more honest.

Posted by Skullberg | March 6, 2008 10:41 AM

The other reason we tax, pragmatically, or should, is to strip the rich of as much political power as possible.

How much influence do individual taxpayers, spending their own money, have over the political process, as compared to

In a saner world, the political opinions of Rupert Murdoch would matter just as much or just as little as our office secretary.

I imagine that Rupert Murdoch's political opinions are somewhat more informed than the typical office secretary's. Certainly he knows a lot more about the cost of government.

In any case, how exactly do you propose to limit the political influence of someone who runs a media empire?

Posted by Brandon Berg | March 6, 2008 10:50 AM

The unfinished sentence above should read:

How much influence do, say, the top 1% of individual taxpayers, spending their own money, have over the political process, as compared to corporations and the bottom 99%?

Posted by Brandon Berg | March 6, 2008 10:51 AM

Corporations are persons under the law; certainly they count as part of the rich.

Now, just for the record, do you think that some people _should_ be more politically powerful because they have more money?

I, for one, most emphatically do not think so. I suspect most Americans would agree with me, and in fact to say otherwise is to be anti-American.

But you, apparently, believe that the wealthier a person is, the more political influence they should be allowed to have? Is this true?

If so, you are very definitely part of the problem, and you are, most assuredly, profoundly anti-American.

Posted by ScentOfViolets | March 6, 2008 11:02 AM

"Firstly, the lower quintile in the UK gets health insurance in return for these contributions, and given that NI is about 11% of one's salary I imagine that the poorest Britons are actually getting quite a bit back over the long haul, at least those who in the course of their lives suffer a major illness."

Apparently you've not heard of medicaid. The poor in this country are covered. It's the lower middle class that isn't, although with schip their children are.

Posted by JimS | March 6, 2008 11:13 AM

Teresa-Heinz Kerry, who has her stupendously huge fortune largely invested in tax-free municipal bonds, pays a very low average tax rate (though I imagine the absolute number is quite high). A mid-level associate at a NY law firm (as just a totally random example) earns a pretty nice 6 figure salary, but returns a hell of a lot of it to the various levels of government, since it is almost all derrived from income rather than investments. Now I am not complaining about being underpaid, but I am a little upset that the government seems to classify me as "rich" along with the likes of Ms. Heinz-Kerry. Granted, if I had my salary to spend in a lower-cost, lower-tax state like Texas, I would probably even feel rich, but living in NY I sure as hell don't, and consider myself to be in the (hopefully) upwardly mobile middle class. I live in a condo in New Jersey, I drive a fairly sensible American made automobile, I don't have a butler - how on earth can I be "rich"? I remember watching "Diff'rent Strokes" as a kid - those guys were rich, they lived on Park Avenue etc. Not that I am a fan of class warfare, but it seems like the Dems would have a lot more luck with their program if they narrored their definition of rich so that it only included the really rich, folks like George Soros (ScentOfViolets would agree he has too much money which he uses to share his opinions), Warren Buffet, Ms. Heinz-Kerry, John Edwards, Micheal Bloomberg, Steve Jobs, John Corzine, Peter Lewi and Mark Cuban.

Posted by holdfast | March 6, 2008 11:18 AM

"your citation seems to leave out a number of key differences. Firstly, the lower quintile in the UK gets health insurance in return for these contributions"

Actually that's not a key differnce at all - the lowest quintile in the US gets health insurance too. In fact, Medicaid eligibility extends well into the second quintile, and way beyond that for children in many states.

Posted by J | March 6, 2008 11:21 AM

I, for one, most emphatically do not think so. I suspect most Americans would agree with me, and in fact to say otherwise is to be anti-American.

Whoa there with the patriotism-questioning... I'm pretty sure that's out of bounds.

As for whether someone should have more political influence than someone else, that's a nice sophomoric question, but not really helpful.

By necessity of profession, social circles and wealth among others, people WILL have more political influence, so long as anyone does. The amount of income you keep after taxes changes that very little. The head of media companies (including PBS and CPB) will always wield significantly more influence than your average citizen, even more than Charles Koch, who heads a 60B private company.

If you wanted to blunt political influence, remove all private funding of campaigns, outright ban it. Make every race public funded down to dog catcher, eliminate advertising except for government printed signs displayed on government land, compel voting. That would even the influence distribution and be much more fair. That or simply draw lots from interested, qualified people in a district.

Posted by Skullberg | March 6, 2008 11:46 AM

ScentofViolets:

Your aggressive stupidity and bad faith have made us all dumber. Congratulations.

Posted by MrJones | March 6, 2008 11:50 AM

oh, and HOW DARE YOU QUESTION MY PATRIOTISM!!!!!

Posted by MrJones | March 6, 2008 11:51 AM

Karl Weber: Next time around, try not to sleep through the second half of your Civics class the day that tax mechanisms are discussed. Once the tax has been collected, a majority of the proceeds are not used to heat the building. They are generally -- wait for it -- redistributed via transfer payments and social services programs. And you may have noticed that the average "liberal" these days favors higher taxes in order to fund more redistributive programs.

No myths involved, save possibly for the ones you were trying to invent.

Posted by anony-mouse | March 6, 2008 11:58 AM

It's a pity we don't have a clear conversation about this on a national level, and I think discussions like this help.

I don't think we reckon clearly with some key definitions:
Is social security an entitlement or an investment, or some combination? Is it a safety net or a right? How does how we think about it affect how we perceive the wage cap (which Obama is talking of eliminating)

Is the EITC an effective or efficient way of combatting the regressiveness of the Wage cap? (My understanding is that's what it was initially introduced for.)

Also:

Does the fact that the retirement age for Social Security was initially set at about the average life expectancy matter to what the program has become today?

What is the purpose of the program?

It is hard to have an honest discussion about these things, and this is just about Social Security. The discussions about income tax and medicare seem equally difficult, but it's good to see people of differing ideologies here talk frankly about redistribution vs. efficiency etc. etc.

Finally (apologies for long post) --

A few questions from the above discussion:

Are tax-free muni bonds unfair because they let the rich pay a lower effective tax rate?

Is capital gains the same thing as income? Is there a difference between them being the same thing morally (Buffet's implication vis-a-vis his secretary) and them being the same thing economically?

Thanks for your posts.

Posted by marc | March 6, 2008 12:02 PM

Now, just for the record, do you think that some people _should_ be more politically powerful because they have more money? I, for one, most emphatically do not think so. I suspect most Americans would agree with me, and in fact to say otherwise is to be anti-American.

Good grief, this is like being back in my 8th grade social studies class, listening to the class clown try and score points against the teacher with feeble questions of entrapment. I think I'll go put my eyes out with a spoon to reduce the headache.

You say you're a pragmatist, but provide precious little evidence of it. The pragmatist understands that some people WILL be more influential on account of wealth, and it is simply something s/he must find a way to cooperatively work with, or cleverly work around.

The pragmatist also has better things to do than to set up half-blinkered rat traps like the one quoted above. You're going to end the day with a broken finger if you keep that one up.

Posted by anony-mouse | March 6, 2008 12:15 PM

I think the arguments about tax scale being somehow based on "fairness" are conceptually unsound. "Fair" is in the eye of the beholder. Fairness is not measurable and cannot be established by a democratic vote. If a bunch of shipwreck survivors, adrift in the ocean on a raft, started eating their weakest members first, would that be fair just because the majority decided so? How about fattest first? How would the result change from the standpoint of fairness if the weakest (or fattest) had a gun?

Arguments based on maximizing utility are a totally different beast and can conceivably be used to justify both the progressive scale and the income redistribution, but they are much harder to maintain, especially since economics generally cannot provide dispositive proofs in the sense that natural sciences (not to mention mathematics) do. So in the end it all goes back to the articles of faith -- and discussions devolve into proselytizing by both sides.

Can anyone tell me why am I coming back to this and other politico-economical sites instead of discussing the art of programming elsewhere?

Posted by ...Max... | March 6, 2008 12:34 PM

It would be sensible to get rid of the separate social security and medicaid taxes as they already go into the general fund. Payouts can be calculated the same whay they always have been. The reality is that social security revenues and payouts aren't linked anyway.

SoV, how in the world would you propose limiting the political influence of the very rich? Even the most ethical rich person can spend money to support favored causes, favored politicians, buy advertising time, etc... that a poor person just can't do. In addition, rich people often know other rich people. Even in the most idealistic world, everyone shouldn't have the same political influence... in the case of an idealistic and perfect world, people who are competent and compassionate and wise should have the most political influence while evil, greedy people should have less. But the reality is that we can't look into the hearts of people nor can we magically limit the influence of the rich.

In a perfect world, there would be no birth defects and everyone would eat healthy and get plenty of sleep and exercise. And no one would cheat. But we don't live in that world.

It's not "okay" or "not okay" or "fair"... it just is. And our government has to function in this world.

Posted by Earnest Iconoclast | March 6, 2008 12:34 PM

Holdfast:
The problem with tax-free municipal bonds is that their tax-free status means that the issuers can get away with paying significantly lower rates than they would for comparable taxable bonds. So when you buy tax-free bonds, you are in essence paying a tax to the issuer in the form of a lower interest rate.

SoV:
Corporations are analogous to individuals in a few limited ways, but they are not "persons under the law." Even if they were, this would be totally irrelevant to the question at hand, because big corporations need lots of cash to conduct their operations. You can't tax away their ability to bribe politicians without rendering them nonfunctional.

And yes, people who pay hundreds of millions of dollars in taxes each year should have much more of a say in how those taxes are spent than people who pay little or nothing in taxes. Also, education (and therefore income) correlate with the ability to make informed political decisions.

If you think this is anti-American, I suggest that you review the history of elections in the early days of the Republic.

In any case, you still haven't explained your plan for equalizing the political influence of your office secretary and the head of a media empire.

Posted by Brandon Berg | March 6, 2008 1:05 PM

"And yes, people who pay hundreds of millions of dollars in taxes each year should have much more of a say in how those taxes are spent than people who pay little or nothing in taxes."

What theory of government is this? Is this guy sane?

Posted by Stan | March 6, 2008 1:13 PM

The payroll tax funds two specific programs which provide direct benefits to those who pay the tax. I suspect liberals (progressives?) would be unwilling to see both the payroll tax and the programs it funds reduced for those in the lowest quintile.

Well, I'm certainly an economic liberal. And I'd like to see payroll taxes not just reduced, but eliminated, for everybody. I can't think of a more terrible policy than imposing a direct tax on job creation.

Posted by Jasper | March 6, 2008 1:41 PM

ScentOfViolets:

The other reason we tax, pragmatically, or should, is to strip the rich of as much political power as possible. In a saner world, the political opinions of Rupert Murdoch would matter just as much or just as little as our office secretary. Of course, the rich have worked very hard to make sure this is not the case, so we have to react to that reality.

So, let me see if I can follow your logic:
1) It's not right that some people have more political power on account of having more money.
2) Therefore, the way to fix the situation is to take away as much of their money as possible, so that they won't have more money anymore.

I hardly need to point it out, but your stupid approach doesn't solve the "problem of rich people having more political power" at all. Instead, it's just an attempt to make sure there are no rich people by having the government confiscate their property (which just means the government has all the power instead).

Now, just for the record, do you think that some people _should_ be more politically powerful because they have more money?

I, for one, most emphatically do not think so. I suspect most Americans would agree with me, and in fact to say otherwise is to be anti-American.

Oh I see. It's the Preemptive Projection strategy. Aggressively and preemptively call anyone who doesn't agree with you an "anti-American" before they get around to noting that you are, in fact, a flat-out Communist.

Posted by The Deuce | March 6, 2008 3:34 PM

The payroll taxes (SS & Medicaid) don't fund specific programs... they essentially go into the same pot as income taxes. The programs the "fund" are funded out of the general fund. Sure, there are some shenanigans with the government loaning itself money and issuing itself bonds, but money is fungible and it all goes to the same entity and is paid out by the same entity.

They could be rolled into income taxes with benefits determined any old way you want. It might even help with fixing the system as it would explicitly show that the funding and the benefits aren't actually directly tied together.

Posted by Earnest Iconoclast | March 6, 2008 3:37 PM

I, for one, most emphatically do not think so. I suspect most Americans would agree with me, and in fact to say otherwise is to be anti-American.

Whoa there with the patriotism-questioning... I'm pretty sure that's out of bounds.

Really? What color is the sky in your world? Conservatives question the patriotism of non-conservatives all the time.

Do you mean to say you were really unaware of this? And if you are aware, can you give us any examples where you, personally (with cites) condemned those who questioned the patriotism of others?

How about this - next time someone is abusive and nasty towards me, you step in and personally object? Then I'll think you're being sincere. Deal?

As for whether someone should have more political influence than someone else, that's a nice sophomoric question, but not really helpful.

Really? I would have thought this a rather deep question, one that is subject to ongoing debate . . . on a number of levels.

Notice, btw, that I am not asking what you imply that I have; I am asking, quite simply, if a person should have more political power or political influence merely because they have more money.

I don't think so, and I don't think most Americans think so, and indeed, from the flap of a few weeks back, politicians like McCain will say quite publicly that they don't think so.

So this is not the inconsequential question that it looks like you're trying to make it out to be (and since this holds for all sorts of categories - for example, just about everyone agrees that no one should have more political power merely because of who their parents are - I would suggest that _you_ are engaging in the rather sophomoric tactic of calling something sophomoric because you really don't want to publicly commit to the idea that yes, you think that people should have more political influence and power, just because they have more wealth. If you don't think this, then just say so.)

By necessity of profession, social circles and wealth among others, people WILL have more political influence, so long as anyone does. The amount of income you keep after taxes changes that very little. The head of media companies (including PBS and CPB) will always wield significantly more influence than your average citizen, even more than Charles Koch, who heads a 60B private company.

Perhaps, perhaps not. But this in no way addresses the question of whether people _should_ have more political power because they are wealthy. But it's nice to know that you think that 'the media' isn't really 'liberally biased' because more reporters are registered as Democrats rather than Republicans. Thank God for small blessings.

If you wanted to blunt political influence, remove all private funding of campaigns, outright ban it. Make every race public funded down to dog catcher, eliminate advertising except for government printed signs displayed on government land, compel voting. That would even the influence distribution and be much more fair. That or simply draw lots from interested, qualified people in a district.

Posted by Skullberg

As a matter of fact, I would like to get rid of the influence of money in politics by severly limiting it's use in the larger elections. It's supposed to be a marketplace of _ideas_, remember? Not who has the best advertising.

But the fact of the matter is, 'the rich' have worked very, very hard to assure that they have a disproportionate voice in politics, so yes, it does make sense to tax them as much as possible if you want to mute that voice. Iow, taxation as a way to lessen inequality in the political, not economic sphere.

Like I said, I have absolutely no objection to someone having more toys than I do. I - like all patriotic Americans - do object greatly to others having a greater voice in politics merely because they are wealthy. It didn't have to be this way, but that's the way 'the rich folks' wanted to play.

Posted by ScentOfViolets | March 6, 2008 3:46 PM

In general, taxation is somewhere between a blunt instrument and an irrelevance as a means to diminish political power. In order to have any affect, taxation would have to be orders of magnitude above current levels AND its form would have to change to eliminate the tax status of think tanks, foundations, etc. How much would you have to confiscate from the truly wealthy to keep them from engaging in lobbying, etc.? 90%?

Furthermore, I pay the top federal and state rates, but I have no political power at all. There are millions more like me. Why penalize us?

Ultimately, the use of the tax code to equalize political power is like using an axe to lance a boil on your face. You are very likely to miss and certain to cause lots of collateral damage.

I will point out that SOV first applied the term 'un-american' to an idea, not a person. I've had many disagreements with SOV, including here, but he wasn't accusing me of being un-American or lacking patriotism. I'd actually agree that promoting aristocracy is not a particularly American idea, at least today. His means of combating/preventing an aristocracy are very poorly formed. Even the estate/inheritance tax is unlikely to help.

Posted by "Mindles H. Dreck" | March 6, 2008 4:13 PM

In general, taxation is somewhere between a blunt instrument and an irrelevance as a means to diminish political power. In order to have any affect, taxation would have to be orders of magnitude above current levels AND its form would have to change to eliminate the tax status of think tanks, foundations, etc. How much would you have to confiscate from the truly wealthy to keep them from engaging in lobbying, etc.? 90%?

Well, if your strategy for diminishing the political clout of the rich is to take away their money so that they can't use it to exert more influence than the next guy, then in order to make it work, you'll need to take away so much that they aren't appreciably wealthier than the next guy anymore. In other words, the government will have to confiscate so much property as to make it impossible for rich people to exist.

Of course, that's Marxist thugonomics in a nutshell, which is why ScentOfViolets is a Communist. His weird, unprovoked "anti-American" charges are a bit of projection: loudly accuse other people of a deficiency you secretly know yourself to possess and are insecure about, to preempt them from pointing it out about you.

Ultimately, the use of the tax code to equalize political power is like using an axe to lance a boil on your face.

Actually, it's more like skinning a person in order to make it impossible for them to get boils.

Posted by The Deuce | March 6, 2008 5:28 PM

Generally in agreement on taxation, but not ready to join the Blog Un-American Activities Committee.

Posted by "Mindles H. Dreck" | March 6, 2008 5:51 PM

Interesting that the concern about the political influence of the rich was focused on Rupert Murdock, rather than on "Pinch" Sulzberger, the head of the Democrat/Liberal/Progressive policy shop which used to be a "newspaper".

Posted by Ed Reid | March 6, 2008 5:59 PM

No one believes me when I say that George Bush's tax cuts made the tax system more progressive, but it's true

That's because they know you're being mendacious, as usual.

According to the CBO numbers you want to claim prove your point, from 2001-2005, total effective Federal tax rates dropped by .8 percentage points for the bottom quintile, but 1.6 percentage points -- twice as much -- for the top 1 percent.

Tax rates are only that high for the wealthy because they've been raking in the money in the Bush economy, thanks to soaring profit rates and low wage growth. There are some unavoidable cap gains involved. From 2001-2005, real average post-tax income for the top 1% increased by about $300,000, or 30 percent. That's compared to a decline for the bottom quintile and an increase of less than 3 percent (about $1,300) for the middle quintile.

(See Tables 1A and 1C here:

http://www.cbo.gov/ftpdocs/88xx/doc8885/Appendix_tables_toc.xls )

Let's isolate the Bush tax cuts alone, as opposed to the vestiges of our pre-Bush tax system that make rich people pay some taxes on their cap gains. About one-third of their Bush tax cut dollar value goes to the top 1% of earners. Once the estate tax stuff is fully phased in (2010), the Bush tax cuts increase post-tax income among the top 1% by 6.8%, as opposed to just a 2.3% increase among the middle quintile. Not very progressive there.

http://www.taxpolicycenter.org/numbers/displayatab.cfm?Docid=1483&DocTypeID=2

Plus, the whole mess was funded through borrowing. If we eventually balance up the budget by cutting entitlements -- as we are constantly being told we should do -- then the majority of the public loses. The Bush tax cuts balanced out by per-capita cuts in Federal spending will lead to income declines for over half of households (probably close to three-quarters), but the top 1% will see big income growth.

Posted by mq | March 6, 2008 6:12 PM

Interesting that the concern about the political influence of the rich was focused on Rupert Murdock, rather than on "Pinch" Sulzberger, the head of the Democrat/Liberal/Progressive policy shop which used to be a "newspaper".

His wealth is already deteriorating.

Posted by "Mindles H. Dreck" | March 6, 2008 6:33 PM

MQ, look at the share of the income tax borne by the top one percent, versus the bottom quintile; the bottom quintile's dropped, while the top's rose. This despite a collapse in the stock market.

Posted by Megan McArdle | March 6, 2008 6:54 PM

According to the CBO numbers you want to claim prove your point, from 2001-2005, total effective Federal tax rates dropped by .8 percentage points for the bottom quintile, but 1.6 percentage points -- twice as much -- for the top 1 percent.

Not quite right, but choose your period and spin away:

Lowest Quintile |Highest Quintile
2000 6.4 | 28.0
2001 5.1 | 26.7
2002 4.7 | 26.0
2003 4.6 | 25.0
2004 4.3 | 25.2
2005 4.3 | 25.5

Change 2001-2005 0.8| 1.2
Change 2000-2005 2.1| 2.5

change 2002-2005 0.4| 0.5

Posted by "Mindles H. Dreck" | March 6, 2008 6:55 PM

Sov - here's a thought: The more you try to hit the rich with high taxes as a form of penalty, the more likely they are to spent large amounts of money to influence the political system to stop it - or to put it onto someone else. This is not unlike the rise in corporate lobbyists and lobbying that has been causes, at least in part, by the increased regulation of business in the US - if you have to be wary of every random bill lest it ruin your business, you're going to spend whatever it takes to maintain a strong voice in the legislature.

Oh well, Obama has promised to fix all this anyway through more hope and magic stuff.

Posted by holdfast | March 6, 2008 7:03 PM

Now, just for the record, do you think that some people _should_ be more politically powerful because they have more money? I, for one, most emphatically do not think so. I suspect most Americans would agree with me, and in fact to say otherwise is to be anti-American.

Good grief, this is like being back in my 8th grade social studies class, listening to the class clown try and score points against the teacher with feeble questions of entrapment. I think I'll go put my eyes out with a spoon to reduce the headache.

Gee, why don't we discuss whether or not people who are pointlessly abusive and have poor reading comprehension should have as much political influence as anyone else? I don't think they should, but you no doubt for the obvious reason disagree.

In a word, no. You are, in point of fact, displaying an immense ignorance about a very profound question that has been booted back and forth through the ages. Yes, A., the question of who should have how much of what kind of power is a hot topic, your protestations of sophmorism notwithstanding.

But you go ahead and maintain that libertarians et al are being sophomoric when they are discussing how much of what kind of powers the government 'should' have.

You say you're a pragmatist, but provide precious little evidence of it. The pragmatist understands that some people WILL be more influential on account of wealth, and it is simply something s/he must find a way to cooperatively work with, or cleverly work around.

Gee the pragmatist understands that some people WILL (to use your recherche caps) cheat, bribe, kill, steal, embezzle, defraud, lie, etc. all to gain a personal advantage. And that often, they will gain that advantage with absolutely no adverse consequences.

But according to you, the pragmatist, won't say, inveigh the government to pass laws against theft, murder, bribery, embezzlement, etc. Wouldn't be pragmatic, right? No, according to you, the pragmatist will 'cleverly work around' this fact of life.

I do not think the word pragmatist means what you think it means.

The pragmatist also has better things to do than to set up half-blinkered rat traps like the one quoted above. You're going to end the day with a broken finger if you keep that one up.

Posted by anony-mouse

Uh-huh. So you think that 'the rich' _should_ have more political influence merely because they are rich. Not, "it's a regrettable fact of life that they do", not "that's just the way it is,", but - according to you - the way it should be. The original question I posed, and not the parody you want to tilt against.

Just come out and say it.

Me,I think that the ones with the _best ideas_, the ones most able to govern should have more political influence. Not the ones whose money or media power can be used to drown out others.

But, looking below, I see that makes me a 'communist'. By the lights of some at least. By the lights of those far, far out of the mainstream.

Posted by ScentOfViolets | March 6, 2008 9:20 PM

Well, if your strategy for diminishing the political clout of the rich is to take away their money so that they can't use it to exert more influence than the next guy, then in order to make it work, you'll need to take away so much that they aren't appreciably wealthier than the next guy anymore. In other words, the government will have to confiscate so much property as to make it impossible for rich people to exist.

Right. That's exactly what happened starting with the New Deal on up to sometime in the 70's.

Oops, wait. Despite 'high' levels of taxation, there were still plenty of wealthy people, and their voices were not so dominant as they are now.

Do you even try to make sense, or do you just wait for an excuse to go in with both guns blazing?

Of course, that's Marxist thugonomics in a nutshell, which is why ScentOfViolets is a Communist. His weird, unprovoked "anti-American" charges are a bit of projection: loudly accuse other people of a deficiency you secretly know yourself to possess and are insecure about, to preempt them from pointing it out about you.

Nope, Deuce is just a yahoo, obviously. Of course, it's mathematically possible that McCain really is a Communist, as Deuce seems to think.

But I wouldn't bet the farm on it.

Posted by ScentOfViolets | March 6, 2008 9:26 PM

SoV, how in the world would you propose limiting the political influence of the very rich? Even the most ethical rich person can spend money to support favored causes, favored politicians, buy advertising time, etc... that a poor person just can't do. In addition, rich people often know other rich people. Even in the most idealistic world, everyone shouldn't have the same political influence... in the case of an idealistic and perfect world, people who are competent and compassionate and wise should have the most political influence while evil, greedy people should have less. But the reality is that we can't look into the hearts of people nor can we magically limit the influence of the rich.

Really? How about jacking up the tax rates again? How about eliminating the disparity in the way types of income are taxed, or even reversing the disparity? How about re-instituting some version of the Fairness Doctrine?

None of those options seem 'magical' to me.

In a perfect world, there would be no birth defects and everyone would eat healthy and get plenty of sleep and exercise. And no one would cheat. But we don't live in that world.

And so what do we do in our imperfect world? Right. We punish the cheaters whenever we can catch them. We throw embezzlers in jail, require those guilty of fraud to pay heavy fines as well as make restitution.

This seems to be a difficult concept for you to grasp. May I ask what the source of difficulty is?

It's not "okay" or "not okay" or "fair"... it just is. And our government has to function in this world.

Now you're just being silly. Cheating is most assuredly not okay, nor is murder, nor is theft. None of those things are considered 'fair' either, in fact, they are considered extremely 'unfair'.

Why did you even say this? It makes absolutely no sense.

Posted by ScentOfViolets | March 6, 2008 9:35 PM

According to the CBO numbers you want to claim prove your point, from 2001-2005, total effective Federal tax rates dropped by .8 percentage points for the bottom quintile, but 1.6 percentage points -- twice as much -- for the top 1 percent.

Putting aside the dubious choice of endpoints pointed out by Mindles H. Dreck*, this is consistent with what Megan said:

0.8 / 5.1 = 16%
1.6 / 32.8 = 4.9%

The lowest quintile's effective tax rate fell by 16%, while the top percentile's fell by 4.9%. If we use a time frame that actually includes the cut on the lowest bracket, we get:

2.1 / 6.4 = 33%
1.8 / 33 = 5.5%

The lowest quintile's ETR fell by 33%, while the top percentile's fell by 5.5%.

To illustrate the absurdity of comparing the rate cuts in absolute percentage points, suppose the rates on the bottom quintile had been cut 6.4 percentage points from 6.4% to 0%. Would you then say that the tax cuts made the tax system less progressive if rates on the top percentile were cut 8 percentage points from 33% to 25%?

*Remember that the 2001 tax cut bill provided for reductions in all brackets, but that the only immediate change was the retroactive creation of a new 10% bracket at the low end of the 15% bracket. The rest were to be phased in over a period of 5 years. The 2003 tax bill just accelerated the phase-in. So your argument, essentially, is that the rich got a better deal because they had to wait longer for smaller tax cuts. Who's being mendacious, exactly?

Posted by Brandon Berg | March 6, 2008 11:06 PM

MQ, look at the share of the income tax borne by the top one percent, versus the bottom quintile; the bottom quintile's dropped, while the top's rose.

I know that this is the favorite Republican talking point. But progressivism, which is what you were talking about, has nothing at all to do with the share of total Federal receipts paid by anybody. It has to do with the figure I was using -- the percentage of household income paid in taxes, or the tax burden. Say Poor Guy makes $1,000 a year and pays $500 in taxes, for a 50 percent tax burden, and Rich Guy makes $1 million a year and pays $10,000 in taxes, for a 1 percent tax burden. Then Poor Guy pays 5 percent of total taxes and Rich Guy pays 95 percent. But Rich Guy's tax burden is 1% and Poor Guy's is 50%. Is that progressive?

The Bush tax cut reduced the tax burden more for rich people than poor people, ergo they are anti-progressive. The share of Federal taxes paid has nothing to do with it.

The lowest quintile's effective tax rate fell by 16%, while the top percentile's fell by 4.9%

True, but irrelevant. Just an artifact of percentages on small bases. The bottom quintile pays very little in taxes to start with. A small number on a small base is a greater effective percentage than a big number on a big base, but the small number is still small and the big number is still big. Would you really say that a 50 cent cut on one dollar in taxes is a bigger tax cut than a $300,000 cut on one million dollars in taxes?

Look, the size of government has not declined at all. The "tax cuts" are basically a debt-funded subsidy or income transfer program, not a reduction in the size of government that is then returned to the people. They are economically identical to collecting the old tax rate, then borrowing money sufficient to mail everybody back a check equal to their "tax cut".

Right now, we know that this big subsidy program question is giving massively bigger checks to the rich than the middle class, let alone the poor. Which seems sort of hard to justify. The long-term question is what government spending this debt is going to displace, or what taxes will be raised to fund it. If it displaces government spending across the board, then the distributional effect is going to be to reduce net income for everybody but the rich. That's totally clear...it will be hard to obscure the issue with red herring numbers once that happens.

Remember that the 2001 tax cut bill provided for reductions in all brackets.... So your argument, essentially, is that the rich got a better deal because they had to wait longer for smaller tax cuts. Who's being mendacious, exactly?

True that EGTRRA is back loaded, helped obscure the fiscal impacts. That's why I linked to distributional tables for 2010 (it's already showed up clearly in 2007). My point was that the progressivism argument wasn't even supported for total Federal taxes over 2001-2005, let alone the Bush tax cuts alone after full phase in.

Fortunately, this is probably all academic since most of the cuts won't be renewed. But thanks for the workout. Go work on those talking pointsm folks.

Posted by mq | March 7, 2008 12:40 AM

Look, the size of government has not declined at all. The "tax cuts" are basically a debt-funded subsidy or income transfer program, not a reduction in the size of government that is then returned to the people. They are economically identical to collecting the old tax rate, then borrowing money sufficient to mail everybody back a check equal to their "tax cut".

Any time debt funding of government exists, some of this comment can be made, thanks to the miracle of fungibility. But the idea that this is an income transfer program is a hoot, given the shares of tax burden cited above. Whether you measure the Bush tax cuts in incremental change in dollars or percents, the tax system was and is highly progressive.

The impact of the additional debt on cohorts of the population remains to be seen, actually, as its effects will be shaped by future taxation and financial market impacts. The only reaonably certain element is that it will transfer costs from older to some group of younger citizens.

At any rate, are you ready to retract the 'mendacious' comment, or do you want to stick by that teetering bit of snark?

Posted by "Mindles H. Dreck" | March 7, 2008 10:19 AM

One problem with removing the payroll tax and decoupling social security tax from contributions is that it would become just another welfare program and would lose a lot of its popular support.

If the payroll tax were eliminated, how would the amount of your social security payments be fixed? If everybody gets the same amount or people who made more when they were working get less, the program is on a fast track to repeal. If those who earned more get more, the lefties aren't gonna like it. If those who have more saved up get less, that will send a message that you need to not save for retirement.

One problem with removing the FICA contributions cap is that people who make more will get more, with no upper limit. The formula does not have a cap; the de facto cap on social security benefits is a consequence of the fact that the formula is a strictly monotonically increasing function of the payroll taxes paid during your ten best years, and that has an upper limit now. If Bill Gates retires the year after the law is changed to remove the payroll cap, he will get what to readers of lurid articles will sound like a lot of money; fifteen millions of dollars per year for each billion he earned and paid payroll taxes on in his last working year.

-dk

Posted by Dick King | March 7, 2008 1:00 PM

Really? How about jacking up the tax rates again? How about eliminating the disparity in the way types of income are taxed, or even reversing the disparity? How about re-instituting some version of the Fairness Doctrine?

Unless you tax the rich until they only end up with as much money as the poor, they will still have more money to fund things they like. More money = more power and more influence.

The fairness doctrine is a joke... opinions are so subjective that there is no real way to determine the "opposing" viewpoint. One could argue for higher taxes. Then you have to provide equal air time to those who advocate lower taxes, right? What about those who advocate no taxes? Or changing the taxes structore? Or raising taxes even more? How many sides get equal air time? Any and all? Who determines this? Or would it be a Democrat/Republican thing where we further enshrine the two dominate parties and make it even harder for third parties?

One problem with removing the FICA contributions cap is that people who make more will get more, with no upper limit.

You can remove the caps on contributions while keeping them for benefits. You'd have to change the formulas, but that's no difficult. Yes, it would probably confuse people and/or make them believe it wasn't fair. But it would more accurately reflect the reality.

Posted by Earnest Iconoclast | March 9, 2008 2:16 PM

Is there a UK equivalent of EITC?

Yes. Working Tax Credit.

Also see Child Tax Credit.

Posted by Sam | April 29, 2008 6:15 PM