Especially in recent years, the income of the wealthy has become more volatile than the income of the middle class and below. In good years, their earnings soar, and Uncle Sam reaps more revenue than expected. In bad years--particularly bad years on Wall Street, since most of that money comes in the form of some sort of security, rather than cash--tax revenues nosedive. Incidentally, the more we focus on taxing the rich, the worse this problem will get.
The Bush administration is already projecting record deficits next year. And unlike with their previous dire predictions, we're highly unlikely to get a happy surprise come the mid-year budget review. If I had to guess, I'd bet on revenues being even lower than currently projected.
Meanwhile, of course, the bailout is going to cost us. How much? No idea. Not, as some economically illiterate commentators are saying, the full amount of the loans--most of that money will probably be paid back. It's not unlikely that the Fed will actually make money in the long run. In the short run, however, we'll probably need to put more money into fixing this mess, particularly at Fannie and Freddie.
And though the rush of investors currently seeking a safe haven for their money has temporarily driven the interest on treasury debt down to practically nothing, I wouldn't bet that this will last. Depending on how spooked investors, particularly foreign investors, get about the future of the US economy, we may be paying more for our debt in the near future than we have in the past.
What does that mean for the grand plans of our two presidential candidates?
- McCain will probably not be able to make the Bush tax cuts permanent. It's possible that tax revenues will recover by 2010, though frankly I think the magnitude of the cuts on Wall Street will take years for the tax base to digest. But we won't know that until early 2011, after the tax cuts have already expired. He'll likely have to push this through with the grim memory of a plummeting 2009 revenue line fresh on everyone's minds. But Democrats shouldn't smile too much, because this also means
- Barack Obama will not get his middle class tax cut. Raising taxes on the rich will not raise all that much revenue in the next year or so. He'll need the stable middle-class base just to sort of cover current expenses. Plus,
- Barack Obama will probably have to radically trim back his spending plans. Unlike John McCain, he can't just wait a year or so and see if Wall Street bonuses rebound. He needs the political momentum that he will presumably derive from election to get a big package like his health care plan through. Given the budget problems, unless he's willing to spend money like a drunken sailor, those programs will come attached to a hefty tax increase that will need to fall, at least in part, on middle-class voters. Otherwise,
- The Democrats will have to abandon Paygo. It's not clear how much good this will do them, however. The price of money after the fallout settles may make this pretty unattractive--if not to Democrats, then to their constituents.
it is indisputable that they made our tax base more progressive
If Bush tax cuts are not made permanent, I would almost guarantee that congress will ensure that the tax cuts are made permanent on the lower and middle class. Which, would make the tax base even _more_ progressive, further compounding the problems you describe.
We're on our way to a country where the top 10% of earners pay all of the taxes. This is concerning.
This is concerning.
Sandman, sounds like you're in the top 10%.
the rich and very rich now pay a higher percentage of the total tax take than they did before Bush took office.
That's because their wages have increased, while the rest of the country has decreased or stagnated. It's almost a rinse and repeat cycle. Reduce taxes on the very wealthy, wealth concentrates even more, point out that the wealthy pay a high percentage of the income tax, use that as justification to lower their taxes and repeat.
We're on our way to a country where the top 10% of earners pay all of the taxes. This is concerning.
It's concerning because it shows just how much the top 1% and 0.1% make compared to the rest of the country. As a proportion of their wealth, they are paying a fair share of their taxes. Unfortunately, this wealth is so highly concentrated it also means they pay a high percentage of the taxes.
How do you figure that the Bush tax cuts made our tax system more progressive?
I'm not disputing that the rich pay a higher percentage of tax revenue than they did previously. Haven't checked the data, but may very well be the case.
But wouldn't this have more to do with the fact that the rich are responsible for a higher share of taxable income than they've ever been?
it is indisputable that they made our tax base more progressive,/i>
I am not sure it was the Bush tax cuts so much as the Credit Bubble driving both financial profits and bonuses at financial companies. Some have argued that the low capital gains rate caused a lot of cashing in but I have not seen the data on that.
Moreover, there is the constant march of our economy towards a super-star economy.
Those two things increase inequality and hence the fraction of taxes paid by the rich.
"it is indisputable that they made our tax base more progressive"
Is it? Care to site any evidence that it's true, let alone indisputable. I think there's a cause/effect issue here. Just because the tax base has become more progressive during the last 8 years doesn't mean that it's the tax policy that caused it, it is very likely that the top 1% would be paying more if the tax rates had stayed the same. In fact, it seems likely that it the results would've been even more progressive.
Megan,
To clarify, the tax base has become more progressive, but tax rates have become LESS progressive. Basically, the increase in income inequality the country experienced during the Bush years more than offset any decrease in progressivity, in terms of tax rates. Am I wrong? Am I missing something?
Megan,
You live off of basically being qualitatively right, and quantitatively wrong. Care to cite any legitimate studies of income dynamics and fluctuations which would support your conclusions? There are PSID studies which will give you estimates of how volatile these things are, so why not look them up before writing a long post? You're a blogger, sure, but you should have learned more than hand waving at Chicago.
-Michael
Megan, you are exactly right and what's worse is that any RTC II-type bailout will serve to propagate further inequality, as those with ready cash will be the ones stepping in to take liabilities off the government balance sheet for a song. I managed the work-out of a major California S&L last time around. The linchpin was the sale of a $700 million portfolio (construction costs) of newly finished office and retail properties to an affiliate of the Bass Brothers for $46 million. That portfolio alone made the buyers close to $3 billion over the next decade. Every real estate billionaire you know of today was a guy with $50 million in his pocket and a few rich friends in 1989.
The tax base is very dependent on the top 1% (10%?) and therefore will fluctuate quite a bit. Unfortunately, the government doesn't have a lot of ability to adjust spending on a yearly basis. Doesn't it make more sense to look at things on a broader basis than year-by-year? Even if the government is totally fiscally responsible, we'd still expect there to be large deficits in certain years.
I realize the political realities may dictate otherwise, but from a theoretical standpoint, is there any reason why a temporary dip should affect long-term spending policies by our next President?
No, the marginal income tax rates, which raise the lion's share of the revenue, have become more progressive because of the cuts at the bottom. With the introduction of the new 10% band and the expansion of the EITC, the actual rates are more progressive, not just the distribution. The poor and middle class got larger tax cuts as a percentage of their income and of their original taxes. It's just they weren't paying much to begin with, so the ordinal amounts are much smaller.
One could argue that it changes if you add in capital gains, but if that were true, we should see the middle class and poor paying more, since capital income has been relatively flat. They're not.
As for volatility, that's the bog standard explanation of the behavior of tax revenues from 1995 on. Do you have evidence that contradicts it?
Ahh Megan, you made the mistake of mentioning Bush tax cuts, and you will have pages of responses about that, instead of the main point of your article.
So how about we all ignore that statement, and replace it with this one:
"Whatever your opinion of the last eight years, it is indisputable that our tax base is now more progressive: the rich and very rich now pay a higher percentage of the total tax take than they did before Bush took office."
Wow, this is some really amazingly blind ignorance of the difference between correlation and causation. You CANNOT say that "it is indisputable that [the Bush tax cuts] made our tax base more progressive" without it being indisputable that it was the tax cuts that caused the massive proportional rise in the top 10%'s taxable income vis-a-vis everyone else's. And that sounds exactly like the "tax cuts raise revenue" argument that, given current tax rates, even Megan disowns. This is just flat out wrong, and unless i am not following, it also makes the rest of the post irrelevant.
I read this blog because I usually find Megan to have interesting and insightful things to say. This is the kind of post that, without correction, would make me need to start discounting other "interesting" posts on the basis of suspicion of poor reasoning being the typical cause.
Whatever your opinion of the Bush tax cuts, it is indisputable that they made our tax base more progressive: the rich and very rich now pay a higher percentage of the total tax take than they did before Bush took office.
OK, now this is a flat out lie. "Progressive" is a word, in the English language, with a definition. That definition is NOT based on the percentage of total taxes paid by the rich. From the Free dictionary, the first thing that pops up when googling "progressive taxation", such taxation:
"Characterizes a convex tax schedule that results in a higher effective tax rate on higher income levels."
The Bush tax cuts lowered effective tax rates on the rich by more than it lowered effective tax rates on the poor, it made the tax schedule less convex, hence it reduced progressivity.
The method here is making up definitions of words to suit your political prejudices.
This is the kind of post that, without correction, would make me need to start discounting other "interesting" posts on the basis of suspicion of poor reasoning being the typical cause.
that would be a smart move.
Cite please...
Megan,
You're point is well taken. However, I (and many others) would measure "progressivity" by changes in after-tax income. After-tax incomes increased by smaller percentages for lower income families than for wealthy families. So even if the percentage change in marginal tax rates has been progressive (not sold on that yet), the effects appear, to me, to be regressive. If nothing else, the progressivity or regressivity of Bush's tax cuts is not indisputable.
Look, the top rate went from 39.5 to 35; the bottom from 15 to 10. Any way you dice that, it's a bigger cut for the poor than for the rich. The ratio of the top to the bottom is higher. The take from the top is higher, both as a percentage of tax taken and as a percentage of their income.
That doesn't mean that it made the budget more progressive--progressivity is measured by payout rather than pay-in, which is why liberals complain that the tax cut was regressive--though it reduced the income tax on the poor and middle class more, it meant we took less from the rich to give to the rest of society. But the actual revenue is more progressive: it relies much more heavily on the top than on the bottom, and AFAIK this was true even in 2002, when the rich were still hurting from the recession.
That's not a value judgement about the desired level of taxation or spending. It's a technical assessment of where the money comes from, and what that means for the budget in the next few years. "Progressive" is not a synonym for "good" or "just". It's a description of the relationship between tax bands and income.
Megan,
Your comment focuses on the extremes, i.e., the top and bottom rates. If those were the only two rates, then yes, the tax cut would have been progressive. That's precisely how Republicans were able to sell this tax cut. However, if you factor in the other tax brackets, you see that those in the middle brackets got less of a percentage cut than the highest bracket.
This is a classic arguement that i've come to expect in late election cycle after late election cycle, and usually it's bull. Here's why:
1) Obama's rolling back of Bush's tax cuts will make capital and debts cheaper as the deficit will begin to shrink
2) the Dollar will rebound further and a stronger dollar creates increasing revenue
3) Stronger dollar, increasing revenue, prudent spending (like that Obama health care plan, which isn't all that expensive FYI, do the math Megan) = Stronger economy
So in the end, it starts with the tax increase and grows from there. As the economy recovers, Obama will have political capital and votes on the Hill to get things passed in a measured way when the time and budget are right.
First things first, End the war in Iraq FAST and fix Medicare Drug Costs, and other spending measure cuts, and you'll see money free up in the budget as well, which can then be applied to better policies that are revenue generating instead of revenue disruptive.
Abandon Pay-go? When have they stuck to it? The Iraq war and these bailouts make Pay-Go obsolete, Pay-Go is a smooth water system. Not a stormy Pacific night. But the deficit needs to be tended to. If Obama wants to do everyone a long-term favor and free up some interest-servicing money that would be a good thing.
Oh and McCain will not cut taxes, not one bit, why people treat that as truth is beyond me.
OK, now this is a flat out lie. "Progressive" is a word, in the English language, with a definition.
So is the word "lie", especially when used with emphatic descriptive modifiers. It refers to a false statement made with the intent to deceive. Unless you've got some spectacular evidence of the latter, your response is evidently premised around judging motives.
That might be the kind of thing that would convince people to analyze your argument on the assumption that it was presented in bad faith. In fact, it might be a "smart move" if they began analyzing all of your arguments that way...right?
Or maybe instead, maybe we could all -- if not get along -- at least have a collegiate discussion?
I think that they have already pretty much abandoned by waiving it anytime they really really really want to dole out a package of goodies like the 2007 Farm Bill and the recent “stimulus package.” The fact is you can try to put in whatever safeguards you want – call it “PayGo” or a balanced budget amendment but if elected officials think that the people who elect them – public opinion polls notwithstanding - really care more about receiving the largess of their favorite welfare program than limited government or a balanced budget, they’ll find a way around whatever rules are put in place.
According to the CBO the share of all federal liabilities for the highest quintile was:
2001 65.3%
2002 64.8%
2004 67.2%
2005 68.7%
So Meagan is correct that federal revenue is more dependent on the wealthy later in the decade than earlier.
All the information about effective federal tax rates is available at www.cbo.gov
Someone can pick and choose quintiles or whatever but the end result is that federal revenue is a little more dependent on the wealthy now, than it was earlier in the decade. I think that was what Meagen was referring to anyway. This could have more to do with changes in income distributions but tax policy over the last 7 years probably plays a role as well.
This is why Warren Buffett pays a lower effective tax rate than his secretary. Because she is richer.
Look, the top rate went from 39.5 to 35; the bottom from 15 to 10. Any way you dice that, it's a bigger cut for the poor than for the rich. The ratio of the top to the bottom is higher. The take from the top is higher, both as a percentage of tax taken and as a percentage of their income.
Also false and misleading; you're either being deliberately misleading or you are confused about the difference between average and marginal tax rates -- a pretty elementary economic concept. Marginal tax rates on bands of income, which is what you are quoting, are a very poor approximation to the overall progressivity of the system. Remember, rich people get the cut from 15 to 10 percent on their initial income initial income through the top of the first bracket. And many poor people end up with less taxable income then the top of the first bracket, thus not getting the full benefit of the cut from 15 to 10 percent.
All the information necessary to think about progressivity is readily available from the simulations run by the Tax Policy Center, which are all up on the web. Table 4 of this document shows changes in Federal tax rates by dollar income class:
--Households earning from $10-20,000 reduced their Federal tax rate by 1.1%,
--Households earning from $50-75,000 reduced their tax rate by 1.8%
--Households earning from $500,000-1$ million reduced their tax rate by 3.3%
--Households earning over $1 million reduced their tax rate by 4%.
That doesn't seem very progressive to me.
And look, I know it's rude to call Megan a deliberately mendacious, but frankly it seems to me that she's either ignorant of economics or deliberately skewing what she says.
Adding
"Whatever your opinion of the Bush tax cuts, it is indisputable that they made our tax base more progressive: the rich and very rich now pay a higher percentage of the total tax take than they did before Bush took office."
This is so outrageously stupid it is hard to argue with. I mean how do you beat stupid?
Do you know the difference between a rate and a gross figure? If I pay $10 tax on $100 income and my neighbor pays $11 tax on a $200 income, does he pay more taxes? Yep he sure does! How progressive!
Of course the wealthiest pay the most taxes. They make most of the money (way more than 68%, btw).
But like the Wall Street Journal said, those who make so little they don't pay any taxes are some real lucky duckies.
Megan,
If you actually believe that taxing the rich (those making over $650k or so) almost exclusively has dire implications for the economy, how does that change your view of Obama's economic plans? As far as I can tell, his plan is built on the increased taxes on the rich (and oil companies!) paying for basically everything. Except for lipservice about finding efficiencies and deadweight in the budget (yeah, right) his spending and middle-class tax cuts are paid for by taxing the rich, and taxing large corporations. If current tax rates on the rich have dire implications, doesn't Obama's entire economic plan have extremely dire implications? And if it is now void, based as it is on tax cuts that won't work, what does he have to offer? His latest ad isn't all that reassuring if the plan he's encouraging you to read about is out of date, and would now do more harm than good if it were implemented.
The year that the top quintile was responsible for 68% of federal revenue they held a 55.1% share of income.
And look, I know it's rude to call Megan a deliberately mendacious, but frankly it seems to me that she's either ignorant of economics or deliberately skewing what she says.
I only understand about half of what Megan says when she gets deep into economics analysis, and about half of what commenters like you say when they respond. I read both anyway because I usually increase my understanding by another percent or so, and that benefit is cumulative over time.
So far, in regards to the actual substance of this post, the substance in the half of what you're saying doesn't seem to conflict significantly with the substance of the half of what she's saying, other than some quibble over a peripheral clause that looks suspiciously like an attempt to valiantly defend the windmills from Don Quixote.
I liked those figures you just provided, BTW. They help advance my economics knowledge by that next percent that I'm always looking for.
If current tax rates on the rich have dire implications, doesn't Obama's entire economic plan have extremely dire implications?
Current tax rates for the rich are lower than tax rates under Clinton from 1993-2000, and MUCH lower than the tax rates over the entire period from WWII to the 1980s. Obama only contemplates raising tax rates for the rich back to Clinton-era levels. Somehow, the Republic survived those tax rates and I think it might again.
Mouse, I think the question of whether the biggest change in tax policy of the last ten years is fair and equitable or not is a pretty important one, no? The first paragraph of Megan's 5:16 reply really does show a lack of comprehension of how even the income tax system works. I forgot to mention above that it also completely leaves out the changes in capital gains and dividend taxes that are the source of many of the gains to the wealthy from the Bush tax cuts. (I actually favor revenue-neutral changes in dividend taxes, but that's another story).
claron I take your point but I'm talking a little more broadly than whatever definitions the Tax Foundation uses to make us weep for the rich. Or the Wall Street Journal op-eds that can barely contain their chuckles while trying to convince us that Bush is the next coming of FDR.
But I suppose we could go all "What's the Matter with the Country Club?" and wonder why it is all these caviar-huffing suits are going against their economic interests by supporting the dude who is stealing their money away (worse than the Clenis!).
MQ, your analysis based on that report is rather misleading; what you're not factoring in is that, below certain income levels, you pay no federal income tax at all. For 2007, the standard deduction for individuals was $5350. According to that same table you cited, the average income for households earning between $10k and $20k was $15,564. Thus, the average household in that bracket would pay federal income taxes on less than 2/3 its income, and that's assuming a standard deduction for a single taxpayer with no dependents. Households filing as married filing jointly or head of household get a bigger deduction. Still more with any dependents. Thus, a reduction in the tax from, say, 15% to 10% will not give such a household a 5% increase in income: it will get back 5% of its taxable income.
Another way to see this is to examine the column "Average Federal Tax Rate". The $10k - $20k bracket pay 5.4% of their income as taxes despite the lowest bracket being 10%. Thus, Megan is correct that the marginal tax rates are more progressive now than they were prior to 2001.
Megan's post excludes the decrease of the tax rate on capital gains and dividends in Bush's tax bills. I can't believe that she doesn't understand how this undermines her argument, and I can only conclude that her post was dishonest and that she knew it was dishonest when she wrote it.
I don't see your point, Tom. Of course households get exemptions and so forth. I'm well aware of that. That is exactly one of the reasons why Megan is wrong and the Bush tax cuts are retrogressive any way you cut it, giving larger tax benefits to wealthier than poorer families. Middle class families have a smaller percentage of their total income subject to income tax, hence cuts in income taxes tend to benefit them less than wealthier families. Then add on cap gains breaks to that and things really get ugly.
Now, we do have a tax which is the reverse of the income tax -- middle class families have more of their income subject to the SS payroll tax than wealthy families do (because of the payroll tax cap). You'll notice that Republicans *never ever* talk about cutting that middle class tax.
If you need the progressivity point made really obvious for you, look at the column heading "Percent Change in After-Tax Income". In 2009, the Bush tax cuts will result in:
--a 2.3 percent boost in after tax income for families making $50-75,000 year
--a 6.3 percent boost in after tax income for families making over $1 million per year.
In what universe is that progressive?
Over the long run, even that is misleading, since the tax cuts are funded with borrowed money (a deficit). If the money borrowed to fund the "tax cut" is paid back with cuts to middle-class entitlements (as Republicans are constantly arguing for), then the family making $50-$75,000 could easily end up with no net benefit.
MQ, you are confusing progressive effect with progressive composition. For the purposes of this post, it is irrelevant what the tax changes do to the income distribution. What is relevant is that the overall shift is towards taking more of the tax burden from the rich--even if the income distribution had remained the same, the rich would be paying a higher share. I'm not trying to discuss the justice of the Bush tax cuts--and I know that half a dozen commenters are readying to write scathing posts telling me that this is hypocritical, hackish, or missing "the real issue". The purpose of this post was to illuminate a shift in the budget mathematics, not to defend or detract from Bush's tax cuts. That's why I said that the tax base had become more progressive, rather than the tax code--the income included in the taxable income base is now structured more progressively.
MQ, the point is, when you're not paying taxes on income, you can't cut taxes any further on that income. Someone who makes less than $5350 effectively gets no tax cut at all (albeit because he doesn't pay federal income tax in the first place). Are you standing for the proposition that someone who makes more money than $5350 should never get a tax break on the grounds that he will get more of a tax cut than the first guy and therefore the tax cut is "regressive"?
IN any event, Megan did say she was talking about marginal tax rates, and I don't see how you can say 5%
Stan, I thought it clear that Megan was talking about federal income taxes and not the entire tax bundle (in addition to capital gains, you forgot to mention social security taxes, sales taxes, and the like, all of which are regressive in fact, whereas the federal income tax is progressive, though perhaps not as progressive as some would prefer). I don't see how she was dishonest at all.
We appear to have yet another another Sarah Palin in our midst. Here's what what said up above:
It's just been pointed out, very unassumingly, and very effectively, that those tax cuts were _not_ progressive. So they could not possibly have contributed to the tax base becoming more progressive. What is _wrong_ with you? Just 'fess up that you made a mistake and move on. You being a 'responsible' libertarian and all. Or is this just a bit of intentional mischief?
I question the cause and effect logic here.
Three events correlated here.
1. The Bush tax cuts happened
2. The tax spectrum became more progressive
3. Income inequality increased
3 has strong reasons to cause 2, 1 may or may not have reason to.
Without the Bush tax cuts, had income distribution happened the way it did, the tax base would have become more progressive.
You claim that "they made our tax base more progressive." This is a causal claim. I argue that there are conflating variables, and while you may not be wrong, it is not reasonable to claim causation without further evidence.
My claim of conflation is falsifiable given proof of either of the following:
1. Prior tax rates would have been less progressive on current income distribution than Bush tax rates.
2. There is compelling evidence to be given that the Bush tax cuts increased income inequality at a greater rate than otherwise would have happened.
Give it up, Megan.
They don't care what your point is. They only care about the point they want to make of it.
;)
So many egos. So little affirmation.
Sad, really.
Scent, I don't think Palin and McArdle are the shrinking violets you're evidently used to abusing...
Megan,
progressive has a meaning in the English language (as has been said), and you aren't using it correctly. You can't just borrow normative words to describe something else you're trying to get at, and expect people to give you a pass. It is, as others have pointed out, deceptive. From a more pragmatic standpoint, it distracts people from any valid argument you might have.
"This is why Warren Buffett pays a lower effective tax rate than his secretary. Because she is richer."
According to these data from the non-partisan Congressional Budget Office, effective federal tax rates in America (taking into account payroll taxes as well) are highly progressive. In 2005, the lowest quintile of earners had an average effective federal tax rate of 4.3%, and the highest quintile had an average effective federal tax rate of 25.5% (the top 1% paid 31.2%). It's possible that the ultra-wealthy such as Buffett have lower effective tax rates than the top 1%, because nearly all of the income of the ultra-wealthy comes from capital gains, but I doubt the ultra-wealthy have lower effective tax rates than housekeepers and secretaries. I'd be more inclined to believe that Buffett's physician has a higher effective tax rate than him than that his housekeeper does. Perhaps Buffett will make public his and his secretary's and housekeeper's tax returns so others can verify this.
Especially in recent years, the income of the wealthy has become more volatile than the income of the middle class and below. In good years, their earnings soar, and Uncle Sam reaps more revenue than expected. In bad years--particularly bad years on Wall Street, since most of that money comes in the form of some sort of security, rather than cash--tax revenues nosedive. Incidentally, the more we focus on taxing the rich, the worse this problem will get. -- MM
One way to solve this problem would be to stop running deficits every year and instead tax rich people so heavily that we run a surplus. Then we could save up the money and use it when rich people's incomes and hence tax revenues fall.
Alternatively, we could increase taxes on the median worker, whose income has already fallen $2000 over the last 7 years. Something tells me that won't be too popular.
According to the Tax Foundation the top 1% of earners earned 22% of income and paid 40% of Federal taxes.
According to the Tax Foundation
I generally stop reading there.
But to answer more completely: that high earners bear a higher percentage of the total tax burden than is predicted by their percentage of earnings is the meaning of the phrase "progressive taxation". If the top 1% of earners earned 22% of income and paid 22% of the tax, we would call that a "flat tax".
Let's try to address the progressivity question objectively. To objectively evaluate any claim that X has or is "more P" than Y, we need a metric, i.e. a way to compute numbers P(X) and P(Y), so that we can see whether P(X) > P(Y).
There are, broadly, two kinds of progressivity metrics, which I'll call "a priori" and "a posteriori". A priori metrics look only at the tax code itself, comparing the tax rates in high and low brackets. A posteriori metrics take into account the distribution of income, comparing the tax rates paid by richer and poorer segments of society.
I'm going to compute the progressivity of the tax system in 1995 and 2005 according to various metrics. I choose these years because 2005 was the last year I could find the detailed CBO statistics necessary for a posteriori progressivity measurements. 1995 and 2005 are about equally far from the Bush tax cuts, and at roughly similiar points in the business cycle. The only major tax policy change between 1995 and 2005 were the Bush tax cuts.
Start with some a priori metrics. Two obvious ones are the absolute difference in the lowest and highest tax rates and the ratio of the lowest and highest tax rates. From 1995 to 2005, the lowest bracket fell from 10% to 15%, and the highest bracket fell from 39.6% to 35%. Using the absolute difference metric P(1995)=24.6% and P(2005)=25.0%, so 2005 is very slightly more progressive. Using the ratio metric P(1995)=2.64 and P(2005)=3.50, so 2005 is significantly more progressive.
Next consider the a posteriori metrics. For these, we take into account the effects on actual income quintiles. This has the advantage that it gives us more of an idea of how tax policy actually affects "the rich" and "the poor", but it has the disadvantage that income changes in income distribution interact with change in tax policy.
Some possible measures of progressivity include the top quintile's share of taxes, the bottom quintile's share of taxes (which decreases with increasing progressivity), and ratio between effective average tax rates for the top and bottom qunitile. Using the top quintile's share of taxes metric, P(1995)=62% and P(2005)=69%, so 2005 is more progressive. Using the bottom quintile's share of taxes metric, -P(1995)=1.1% and -P(2005)=0.8%, so 2005 is more progressive. In 1995, the effective average tax rates of the lowest and highest quintiles were 6% and 28%; in 2005 they were 4% and 26%. So using the difference in effective average rates between top and bottom quintile metric, P(1995)=4.7 and P(2005)=6.5, so 2005 is significantly more progressive.
For all these a posteriori calculations, I used CBO's rates and shares for total federal taxes (social security, income, corporate, and excise) not just income taxes. If you use just income taxes, the increase in progressivity between 1995 and 2005 becomes more striking.
Several commenters have expressed worries about the middle class. While this is not directly germane to the progressivity metrics I have proposed, those commenters might be intererested to know that, between 1995 and 2005, the effective tax rate on the middle quintile approximately halved, from 19% to 9%.
Interested readers can find my CBO statistics for 1995 at http://www.cbo.gov/ftpdocs/28xx/doc2838/HistoricalTaxRates.pdf and for 2005 at http://www.cbo.gov/ftpdocs/88xx/doc8885/12-11-HistoricalTaxRates.pdf. If any commenter can propose any reasonable progressivity metric under with 1995 was more progressive than 2005, I would be interested to hear from him.
Sigh. Don't even try to make this into a matter of politics. This is simple arithmetic. If the effective tax _rates_ have become less progressive, then all things being equal the tax _base_ would become less progressive as well. So if the tax base becomes more progressive, it's because of something else, pretty pathetically obviously that it's because incomes at the top of the scale more than increased enough to offset the rate change.
Again: this isn't some weird, arcane,ideological argument. This is arithmetic.
To argue then that the tax base became more progressive because of regressive tax cuts is to make some sort of economic claim. Something that is, to say the least, heavily in dispute.
I equate Megan's behaviour to Palin's because in this case she keeps explaining in each successive comment that what she _really_ meant isn't what she said. I even quoted her.
That you think arithmetic and posting quotes side by side is tantamount to some sort of idiosyncratic ideology . . . well, it doesn't say a whole lot good about your powers of analysis, does it?
Let me quote from MQ's cite, btw, since I see more than a few partisan types refusing to read it:
And what measure do they use?
I don't see how looking at after-tax income changes is anything but reasonable.
SoV,
"If the effective tax _rates_ have become less progressive..."
But they have become more progressive. See what David Wright wrote, or check out the CBO data yourself.
You seem to be confusing two different phenomena. Higher after tax income among the rich is due to... wait for it... higher incomes among the rich. The tax code became more progressive during the Bush administration and income inequality grew (as it usually does during economic expansions). The two different phenomena aren't mutually exclusive.
With the bloodletting on Wall Street this year, expect inequality to decline the next time it's measured.
We're on our way to a country where the top 10% of earners pay all of the taxes. This is concerning.
We are on our way to a country where only the top 10% can afford to pay income taxes (the poor and middle class will always be paying consumption, property and excise taxes, of course). This is even more concerning.
It is political season, so let me quibble with the notion that Bush "cut taxes" and the notion that what he did could be "made permanent".
Bush deferred taxes.
The GOP's continued bet on "trickle down" has hardly amplified the tax base, to the point that many conservative commentators no longer defend "trickle down".
Raising taxes on the rich will not achieve any of Obama's goals. There will be no increase in revenue; indeed revenue will decrease because Rich People are tricky (that's why they rich) and very good at bribing congressmen to create tax loopholes just for them. Or rich people just stop earning money and start earning personal favors. Second there will be no increase in social equality. Third, rich people will keep bribing politicians with money and favors. And we will not get universal health care.
So, as Lenin asked, What Is To Be Done?
Take the Fortune 500 list of rich and take all their money and property. Boom! - you get money and social equality. Fire all the people working in the rich people's former companies and give the jobs to the poor and the unemployed. Re-educate the unemployed who refuse to work. Boom! - no more unemployment.
Take all the money and possessions from Doctors and Health Care providers because they are rich. We got their names. Give their jobs to the poor and homeless. Tell them to provide health care to everybody what needs it. Boom!
1. universal health care just like the world famous health care in Cuba;
2. no unemployment because unemployment is illegal;
3. no gap between rich and poor because rich people are illegal;
4. universal social equality
5. Government corruption is ended because there are no more rich people.
See how easy it is. All it needs is a little bold leadership willing to make a few Changes and Obama's plan can come true!! Boom! Boom! Boom! Eternal Health to our Beloved Leader!
The absolut best way to keep American jobs in the United States and prevent exporting jobs is to have a very weak dollar. The weaker the better.
A weak dollar means it takes for dollars to pay wages in China. Suppose the Exchange rate is $1 = 100 yen and a the wage in China is 100 yen /hour for a job that pays $20/hr in the US. Then, the US job gets exported to China because the Chinese worker will work for $1 per hour.
Assume Obama Changes the value of the dollar to $1 equal 1 yen. Then, a Chinese worker earns $100/hour for a job a US worker will do for $20. Reult? Chinese jobs get exported to the US. Not only are US jobs safe, but illegal aliens will leave US and go to China for jobs!
Strong dollar bad! Weak dollar good!
Having a strong dollar is like having a strong cancer. Muy malo.
Vote for Change
David Wright's claims above are flawed, but at least he's starting to make a serious argument here.
There are a couple of issues with his analysis. First, he's comparing 1995 to 2005, instead of comparing 2000 (the last year before Bush came into office). Second, the Bush tax cuts don't fully phase in until 2008-2010 (which is one reason I cited the 2009 Brookings numbers above).
Finally, though, the most important issue here is that David Wright's finding is completely driven by how CBO allocates corporate taxes, which leads to very deceptive conclusions about the recent changes in taxes. Actually I would argue that A) no one knows how to allocate corporate taxes to households, and B) CBO's attempt to do so makes their numbers on *total* effective tax rates very tricky to use for distributional discussions.
First, let's look at the CBO effective *individual income tax* rate estimates for 2000 and 2005, comparing the middle class to the wealthy. You can find them here: http://www.cbo.gov/ftpdocs/88xx/doc8885/Appendix_wtoc.pdf. The income tax includes most all the tax cuts we've been talking about here, income tax rates, the child credit, and also capital gains tax cuts. So --
2000 Middle Quintile: 5%
2005 Middle Quintile: 3%
2000 Top 1%: 24.2%
2005 Top 1%: 19.4%
Drop in tax rates for the top 1%: 4.8%
Drop in tax rates for the middle quintile: 2%
Now, what was driving Wright's finding is that if you look at the CBO numbers on effective corporate tax rates, you will see that the measured effective corporate tax rate on the top 1% according to CBO rises from 6.7% to 9.9% between 2000 and 2005, rising 3.2% and wiping out most of the individual tax rate drops. But corporate taxes were actually cut slightly between 2000 and 2005 (if you count depreciation rules). What's going on?
Well, corporate taxes aren't paid by individuals at all, they are paid by corporations. CBO has to allocate them to households (read: make a wild-ass guess as to which households end up paying them). The way they do that is to allocate corporate taxes paid in proportion to household corporate ownership. The more of your income comes from stock market gains and dividends, the more corporate tax payments CBO ascribes to your household. So a hedge fund manager who gets a whopping gain by sharing in the hedge fund appreciation is ascribed a big corporate tax bill. They're basically saying that the rich would be even richer without the corporate tax, and counting that as an income loss.
Now, I think the corporate tax falls on the less mobile factor, namely labor. I certainly don't think it all falls on the richest, most powerful corporate owners -- that is, it all comes out of profits. I know some do argue this, and it must have influenced CBO. But anyway, just from a common sense standpoint, the fact that the richest households got a huge windfall in cap gains and dividends, and those facts combined shouldn't lead to a big ascribed tax increase on the rich. I mean, corporate taxes actually dropped.
P.S. before someone starts going on about how the middle class only pays a 3% income tax rate, the rich pay absolutely all the taxes, etc. -- the middle quintile pays a 9.5% social insurance tax rate, while the top 1% pays 1.7%.
and that's all the wonking out I'll do on this thread...Megan was correct that the post is not basically about progressivity. But she knew what she was doing when she used the word.
MQ,
Two points which, being a wonk, you should already know:
1) The Medicare portion of the payroll tax is not capped.
2) The Social Security portion is, but so are the benefit payments, and the benefit payments are progressive.
Our tax system, any way you slice it, is very progressive.
MQ: that was pretty great. Learned a lot.
Now, to the main point of Megan's post: what do you think should be done about making federal revenues less volatile? Without making taxes less progressive?
ViolencetoSense,
"Sigh. Don't even try to make this into a matter of politics."
Politics? I didn't perceive either of us saying anything about that. Gender or class, perhaps, though the sample size is still too small.
Underestimating two people named Palin and McArdle, and therefore the validity/honesty of their arguments? So far the theory holds. My guess is that we have here several hares who have been passed by the McArdle tortoise. And, yes, now that you mention it, the Palin one too.
The how many progressive tax rates can fit on the head of a pin argument is silly. Income taxes, by impeding change in wealth, are by nature regressive. If the poor (or merit, or social mobility, or, you know, progress - take your pick) were one's true concern, one would advocate taxing almost anything else but income (try consumption or property, for starters).
But no. The oxygen here is instead stolen by a parade of pathetic nitpickers unsatisfied that one of the most capable and original commentators on the interwebs has been forced to concede nearly all their vapid premises, by power of numbers not truth, instead demanding penance by her for the arch-heresy: suggesting the the accursed Bush might have done anything remotely progressive, in name or in deed.
"Whatever your opinion of the Bush tax cuts, it is indisputable that they made our tax base more progressive: the rich and very rich now pay a higher percentage of the total tax take than they did before Bush took office.
Um, way to state something incredibly controversial as a non-contestable claim. What you said is only true if you base your definition of progressive on tax TAKE, not tax RATE. Kind of a big difference, and doesn't bode well for your intellectual honesty that you portray it as an uncontroversial claim.
I thought you weren't a right wing mouthpiece on taxes Megan, what gives?
MQ:
I definitely agree with your critique of using the total tax figures, precisely because it is so hard to accurately attribute corporate tax incidence, and the CBO system to doing so is particularly unsophisticated. I am perfectly happy to move to a pure income tax analysis. Indeed, as I mentioned above, looking just at income tax is going to amplify, not reduce, the level of progressivity. (This is precisely why the left is always agitating to take non-income taxes into account when arguing that our tax system is not progressive enough.)
I don't agree that 2000 vs. 2005 is a better comparison that 1995 vs. 2005. 2000 was an extremely unusual year: a lot of people were unwinding equity positions from the .COM bubble that caused big changes in their taxes. But for the purposes of discussion I'll accept your reference years.
I would also argue that a comparison of the top 1% rate to the middle quintile rate is not a very good metric. Looking at as small a segment as the top 1% is going to amplify the effects of income distribution far above the effects of the tax code. And progressivity is really about how tax is distributed over the entire income spectrum, so cutting the bottom two quintiles out of your metric is not very "progressive". But again, for the purposes of discussion I'll accept your metric.
So, if the metric is the ratio of the effective income tax rate of the top 1% to the middle 20%, then, using your figures, P(2000)=4.9 and P(2005)=6.5. So 2005 is more progressive than 2000.
I'm a bit surprised to see you cite these numbers as some sort of decrease in progressivity. Your own figures are showing that the income tax rates of the middle class nearly halved (!), while those for the very top merely dropped by a fifth.
Joeblow: Please look at the measures of "a priori" progressivity in my 05:22 post above. The Bush tax cuts did increase progressivity if you look purely at the RATES.
I wish we could abolish the payroll tax and just roll it into the income tax. It all goes into the same pot, don't pretend it's two different sources.
I'm a bit surprised to see you cite these numbers as some sort of decrease in progressivity.
David, I don't accept this odd "ratio" measure. It varies wildly depending on the size of the different numbers. For example, if you add back in social insurance taxes and use your "ratio" measure, then you'd conclude that Federal taxes got less progressive between 2000 and 2005.
Anyway, I do think our overall tax system is reasonably progressive. But the Bush tax cuts themselves were IMO indisputably regressive, they gave massively larger benefits to the rich than the middle class (one-third of total dollars refunded by the tax cuts went to the top 1%!). All of your arguments depend one way or another on saying that the rich "deserved" those benefits because they were paying a lot of taxes in the first place, I don't buy that. The top 1% have still been doing way better than everybody else.
Now, to the main point of Megan's post: what do you think should be done about making federal revenues less volatile? Without making taxes less progressive?
Year-to-year revenue volatility really doesn't matter a lot when you can borrow freely, and the Federal government can borrow freely and probably should be doing so during recessions. Budgetary balance should be measured over multi-year periods to account for the economic cycle.
The only place you see people really worrying about revenue volatility is at the state level, because most states must balance their annual budget. There, the answer is reserve funds, which basically let you borrow from yourself. Unfortunately political dysfunction makes those hard to manage right (there's where I get conservative and frustrated with government).
MQ: I appreciate your answering, but I'm afraid we are starting to veer from objectivity into rhetoric.
Yes, the top 1% have been doing way better than everybody else. But that isn't a statement about the progressivity, or change in progressivity, of our tax system.
Yes, the Bush tax cuts resulted in dollar decreases in taxes on the rich that were much larger than the dollar decreases in taxes on the poor. But that's just a consequence of that fact that our tax system, both before and after, is so very progressive. With such a progressive tax -- the effective rate is only 3% at the 50th percentile! -- it is practically impossible to have any significant tax cut that doesn't give more dollars to the rich than to the poor.
I am making no statement about whether the rich or the poor "deserved" the cuts they got. That's an entirely different question from what the cut did to the progressivity of the tax system.
You don't like the ratio metric, but it isn't clear to me what specific metric you are proposing -- I want some formula that will allow me to calculate P(year). With this veer off into rhetoric and unrelated facts, it's looking like the proposed metric is something like "how much progressives like it", which doesn't meet the reasonable and objective criteria. :-)
the metric for any change in the system is how much the change gives to who. How much does a given tax change affect the after-tax incomes of the middle class vs. the rich. Look at percentages rather than dollars. These cuts boosted the incomes of the rich by a greater percentage than the incomes of the poor.
the effective rate is only 3% at the 50th percentile!
income tax=rich peoples tax, payroll tax=poor peoples tax. Should look at both.
see your point, tho.
income tax=rich peoples tax, payroll tax=poor peoples tax.
income tax + payroll tax = my tax
The metric for any change in the system is how much the change gives to who. How much does a given tax change affect the after-tax incomes of the middle class vs. the rich.
MQ,
You seem to be assuming that there is some fixed pie of income out there and how much after tax income you make depends solely on your effective tax rate. You are ignoring the other big variable: how much you earn. As David Wright irrefutably demonstrated, any way you slice it, the tax system is more progressive now than it was when Bush came into office.
All it needs is a little bold leadership willing to make a few Changes and Obama's plan can come true!!
It's a little hard to make the tired old "Obama is a socialist" charge stick at the same time you're sarcastically excoriating him for not being socialist enough.
David, you said you'd respond to 'reasonable definitions'; what's wrong with this one, which I repost:
Talking about rate changes of rate changes in the language you're using is nonsensical, and for pretty much the same reason you can't take the average of a set of averages and arrive at a meaningful figure.
No, it's more like looking at something that's numerically consistent as a rate or ratio, whatever the income level. As an example, if rates go from 2% to 1% on, say, $50,000, then the taxes paid go from $1,000 to to $500, and the after tax income goes from $49,000 to $49,500. Now look at rates that are again halved, but dropping from 20% to 10% In this case, the taxes paid go from $10,000 to %5,000 , but now after tax income increases from $40,000 to $45,000.
This is the important part: in the first case, the change in income is 49.5/49 which is an approximately 1.2 percent increase, but 45/40 is a 12.5% increase!
And this is why we look at changes of after-tax income; keeping the ratio of rates constant while changing the rates themselves makes a difference that is not captured by saying 'both had a rate reduction of fifty percent'.
This is elementary arithmetic, and frankly, I'm surprised you don't know this.
Is this what you are claiming? That you did not know that constant ratios of percentages of a given quantity will give different results depending upon the exact percentage itself?
It occurs to me that there was a posting here that was approvingly noting a similar observation concerning ratios and proportions.
Which option will save more gas: Getting rid of that twenty-five-year-old clunker that's getting 15 mpg and getting something that's only twenty years old and gets 18 mpg? Or selling yesteryear's toy that gets 50 mpg for the upgrade that gets 100 mpg? Either way, a no-brainer, right? 18/15=1.2, which is lower than 100/50=2. Or you're going from 15 to 18, an improvement of 3 mpg vs an improvement of 50 mpg when going from 50 to 100. Either way, the latter option is preferable in terms of saving gas, any idiot knows that.
Wrong. Dead wrong. If you drive 1800 miles, it will take 1800/18=100 gallons of gas versus 1800/15=120 gallons of gas, a savings of 20 gallons. Otoh, 1800/100=18 versus 1800/50=36 a savings of only 18 gallons.
So David is in a similar position (though in this case we're dealing with inverses, rather than a straight multiplication); he's effectively trying to claim that because 100/50=2, it saves more money than 18/15=1.2.
Not true, as we have just calculated.
But this is a red herring, as we have just demonstrated (and in any case, I don't think anyone has made that particular claim.) The argument is that _as_a_percentage_ of earned income (we're not talking absolute dollars here), the higher income brackets got a better (more progressive) break. And it has nothing, zero, nada to do with absolute dollar amounts.
You _did_ say you were involved with numbers, did you not? This sort of innumeracy is odd, if such is the case.
SoV,
If you start with a progressive tax system (as Bush did) any cuts to the upper income earners will be larger in absolute dollars than cuts to lower income earners -- that just demonstrates how progressive the system was to begin with. Bottom line, if the top 1% is paying ~30% of its income in taxes and the bottom 40% is paying ~5%, there's no way to say that that's not progressive. You could argue that it should be even more progressive, but that's a different issue.
It's time for the lower half to pay its fair share.
Fred, why don't you try working a few numerical examples? Then you could post them.
SoV,
Why waste my time, when you'd still find a way to convince yourself that that the tax code didn't get more progressive under Bush?
Getting back for a moment fo Megan's comment:
"Meanwhile, of course, the bailout is going to cost us. How much? No idea. Not, as some economically illiterate commentators are saying, the full amount of the loans--most of that money will probably be paid back. It's not unlikely that the Fed will actually make money in the long run."
...the Dread Krugman, source of all evil, agrees -- with some common-sense reservations ( http://www.nytimes.com/2008/09/19/opinion/19krugman.html ):
"Sure enough, Thursday night Ben Bernanke and Mr. Paulson met with Congressional leaders to discuss a “comprehensive approach” to the problem.
"We don’t know yet what that 'comprehensive approach' will look like. There have been hopeful comparisons to the financial rescue the Swedish government carried out in the early 1990s, a rescue that involved a temporary public takeover of a large part of the country’s financial system. It’s not clear, however, whether policy makers in Washington are prepared to exert a comparable degree of control. And if they aren’t, this could turn into the wrong kind of rescue — a bailout of stockholders as well as the market, in effect rescuing the financial industry from the consequences of its own greed.
"Furthermore, even a well-designed rescue would cost a lot of money. The Swedish government laid out 4 percent of G.D.P., which in our case would be a cool $600 billion — although the final burden to Swedish taxpayers was much less, because the government was eventually able to sell off the assets it had acquired, in some cases at a handsome profit.
"But it’s no use whining (sorry, Senator Gramm) about the prospect of a financial rescue plan. Today’s U.S. political system isn’t going to follow Andrew Mellon’s infamous advice to Herbert Hoover: 'Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.' The big buyout is coming; the only question is whether it will be done right."
As for her qualms about the "revenue volatility" resulting from increasing taxes on the rich, MQ's 3:04 PM statement is the obvious response: "Year-to-year revenue volatility really doesn't matter a lot when you can borrow freely, and the Federal government can borrow freely and probably should be doing so during recessions. Budgetary balance should be measured over multi-year periods to account for the economic cycle."
But then, I'm not even sure whether or not Megan herself regards that "revenue volatility" as an adequate argument against further raising taxes on the rich. After all, if you extend that objection to its ultimate limit, you'll come out for a REGRESSIVE-rate income tax -- which she most definitely doesn't support.
As for Bush "making the tax code more progressive": let's not forget, shall we, the tiny fact that the poor -- while they pay no income tax -- DO pay payroll taxes? Kevin Drum printed a graph a few years ago showing the TOTAL national taxation percentages on different income levels (also including state sales taxes and the like; and lo, the total taxation rate was very close to being flat from the poor to the very rich. Anyone want to defend that? Or argue that we shouldn't at least remove the income cap on payroll taxes?
As for Fred's comment:
"if the top 1% is paying ~30% of its income in taxes and the bottom 40% is paying ~5%, there's no way to say that that's not progressive. You could argue that it should be even more progressive, but that's a different issue.
"It's time for the lower half to pay its fair share."
...I see that it's "Lucky Ducky" time again. (No rotten idea ever becomes obsolete.)
Iow, you either can't do it, or you've done it and realized I was right. If two people are making the same amount, say $50,000/yr but one is taxed at 2% and the other at 20%, then halving their tax rates is exactly the same in terms of progressiveness - at least according to you. Yet the first one sees his taxes go down by only $1,000, the second, by $10,000.
Note - I've said this at least four times now - that the difference has nothing to do with differing amounts of income. This is a matter of simple arithmetic on proportions, nothing more.
Note also that no one is arguing that the rates 'should' be more progressive, or less. It's merely being factually reported that Megan is wrong - dead wrong - in her characterization of the Bush cuts of being progressive. They weren't. Quite the opposite. So to try to link them to the 'tax base' becoming more progressive is not only not only indisputable, it's either rank idiocy or malicious innumeracy. I'll do Megan the courtesy of assuming that the problem is that she's no good with numbers.
I hadn't really appreciated just how hallucinatory Megan's statement is that "the Bush tax cuts made our tax base more progressive" because "the rich and very rich now pay a higher percentage of the total tax take than they did before Bush took office" -- despite the fact that he considerably lowered tax rates on them compared to the rest of the country.
The real reason that they "pay a higher percentage of the total tax take" is, of course, simply because they rake in a higher fraction of the total national income than they did before Bush. And the total national income has not, to put it mildly, increased dramatically under Bush (which -- officially -- was what the 2001 tax cut was supposed to be about, although Joe Stiglitz is hardly alone as describing it in reality as "not designed to stimulate the economy but to give a largesse to the wealthy -- the group that had been doing so well over the last quarter-century." Remember the public comment by Dick Armey over this in 2002: "To the victors belong the spoils"? Now, THAT'S a noble philosophy for an economist to adopt.)
Oh, and Fred? Scent of Violets never said that the current system "is not [still] progressive" (at least if you ignore all those other taxes besides the income tax). He said that Bush has made it LESS progressive, which he obviously has.
Megan ( ): "What is relevant is that the overall shift is towards taking more of the tax burden from the rich--even if the income distribution had remained the same, the rich would be paying a higher share."
Pfui. The Bush tax cuts provided vastly greater cuts in the ACTUAL AMOUNT of tax dollars paid by a rich person than in the ACTUAL AMOUNT of tax dollars paid by a nonrich person. In what meaningful way is that "progressive" or "taking more of the tax burden from the rich"? Which, of course, is the point made by Joseph Stiglitz, Kevin Drum and an army of others when they say that the Bush tax cuts were "nonprogressive" or (to quote Stiglitz) "an act of largesse toward the wealthy".