Fair Taxation

Mark Thoma reads a NYTimes oped by Greg Mankiw and has this comment:

Greg’s use of the word “only” in the sentence “The poorest fifth of the population, with average annual income of $15,400, pays only 4.5 percent” makes it seem as though he does not consider that amount to be much of a burden to the poor, not like a rich taxpayer who “forks-over” 31.1 percent of their income which seems to imply much more hardship. But remember, “Fairness is not an economic concept.”

Mark continues by reminding us of his essay from a couple of years ago. But I have a couple of other objections to what Greg wrote:

The C.B.O.’s most recent calculations of federal tax rates show a highly progressive system. (The numbers are based on 2004 data, but the tax code has not changed much since then.) … A question for any political candidate today is whether he or she agrees with the Bush tax ceiling. If not, how high above a third is he or she willing to go?

It seems Greg left out two important items. By focusing on Federal taxes, he has omitted state and local taxes. Most people do pay these. And by looking at 2004, he is forgetting that the budget is not exactly in balance. Yes, the General Fund deficit was rather large so current tax obligations do not capture the cost of government as in all those deferred tax bills thanks to the Bush tax “cuts”.

But one might try Greg did that the unified deficit is not that large:

At 1.5% of GDP, this year’s deficit is well below the 40-year average of 2.4% of GDP … Of course, there is still a looming long-run fiscal gap. The short-run fiscal picture, however, does not look historically anomalous.

Greg leaves out the fact that we have a large Social Security surplus, which is the reason why he can argue that the “deficit” is not that large. Implicit in the use of this figure is the proposition that those payroll “contributions” we are making are NOT to become our retirement benefits down the road. As long as we are posing questions for political candidates, let’s pose this one for Mitt Romney (as Greg is one of his advisors): do you intend to slash Social Security benefits in the future as you continue to impose these employment taxes? After all, you want to maintain the Bush tax “cuts” and still have a large defense department.