A Progressive Tax Cut? What Tax Cut?

Jane Galt takes Greg Mankiw to school on fiscal policy:

There are four ways that I can think of for the US to deal with its debt burden: 1) Raise taxes to pay it off.

Actually, she started off praising Dr. Mankiw’s discussion of an op-ed from Edward Lazear and Katherine Baicker where it was claimed:

The president’s tax cuts have made the tax code more progressive

Jane’s point was made by William G. Gale, Peter R. Orszag, and Isaac Shapiro who wrote:

Popular discussions about the advisability of recent tax cuts have frequently ignored a simple truism: someone, somewhere, at some time will have to pay for them. The payment may be in the form of increases in other taxes, reductions in government programs, or some combination of the two; the payment may occur now or later; it may be transparent or hidden. But iron laws of arithmetic and fiscal solvency tell us that the payment has to occur.

Jane continued:

This will be a burden on America’s relatively poorer members only to the extent that the tax burden falls on them. But while overall withholdings are only very mildly progressive in America (thanks to Social Security payments), income tax is extremely progressive; the effective federal tax burden on someone like Arnold Schwarzenegger is roughly 30%, while a median-income family of four pays less than 8% of its income to the federal tax

Dr Gale et al., however, wrote:

The tax cuts are often portrayed by their supporters as painless and simply “giving people their money back.” But the numbers presented above indicate that the substantial majority of American households ultimately will be made worse off by the tax cuts, because the tax cuts ultimately will have to be financed. Different methods of financing would generate variation in the particular results, but this basic finding that most households end up being worse off is likely to continue to hold unless a significant portion of the tax cuts themselves are repealed. The reason is that the tax cuts scale back (or even eliminate) many of the most progressive elements of the federal tax system, including the estate tax, the taxation of capital gains and dividends, the top income tax rates, and the phase-outs of certain exemptions and deductions for households with high incomes. It is unlikely that any method of financing those changes, other than repeal, will be as progressive as the tax provisions that have been scaled back.

While Dr. Gale et al. presented their assumptions and detailed reasoning, we will have to wait Jane’s more detailed analysis.