Soak the Rich: A non lesson from Europe.

Robert Waldmann

This is getting alarming. Two very smart bloggers — Matthew Yglesias and Ezra Klein argue (using the term broadly) against soaking the rich. The bizarre thing is that they don’t present an argument that it would be bad policy and they certainly don’t present the argument that it is politically impossible. My good faith effort to detect a pragmatic argument in their posts is that they assume that not enough revenue can be raised by raising taxes on the rich. Note the word assume. They don’t say anything specific about the amount of revenue they think should be raised by taxes or the definition of “the rich” or how much money can be raised by this or that tax increase on the rich or anything.

I think the motivation of both posts is the observation that European taxes are, if anything, slightly less progressive than US taxes, but the European tax and transfer system is much much more equalizing than the US tax and transfer system (even if you don’t count services provided in kind like free medical care in income). Thus the argument seems to be: The USA should turn into Europe. Europe doesn’t have extremely progressive taxes. We shouldn’t soak the rich.

Support for my accusation that this is the argument and a counterargument after the jump.

Partly Klein and Yglesias are presenting a valid simple mathimatical (arithmetical really) point — progressivity is not a measure of the effect of the fiscal system on the distribution of income.

In fact, the point of both posts is that a tax and transfer system can reduce inequality even if the tax is not progressive. Obviously so long as the transfers (or publicly provided services) are directly more equally than pre-tax income. You don’t have to give more to the poor than the non poor, you don’t even have to give as much to the poor as the non poor, you just need that the poor’s share of the benefits is higher than the poor’s share of income (and so on up the distribution). Since the standard redistributive policy considered by economists is a flat tax used to fund equal grants to everyone, this is not news to me.

This is correct arithmetic but it is not of any practical interest to people in the USA. Increased transfers funded by increased taxes on the upper middle class might be good for the USA, but they are probably politically impossible. Increased taxes on the rich have overwhelming popular support. Klein and Yglesias don’t ever argue that it is better to tax the upper middle class than the rich, they just argue that it would be good too. So what ? It’s politically impossible and not (according to their arguments) as good as something that is politically possible).

The only quantitative argument in either post is an observation about taxes in the USA and Europe (hence my claim that their argument amounts to saying Europe is perfect).

“You could easily imagine a somewhat more regressive tax structure that leads to a more progressive country.”

Look Ezra imagining something and even observing it on the other side of the Atlantic is very different from finding 60 votes for it in the senate. And one could also imagine a somewhat more progressive tax structure that leads to a more progressive country *and* maybe make it happen.

“That’s the case in Europe where more regressive taxes fund a much more progressive welfare state. The middle class pays more in health care taxes but gets much more in services.”

Yet Klein doesn’t investigate the origens of European tax policy *or* European outcomes at all. Surely he knows that Europe has had low employment growth compared to the USA. Has he heard of people who argue that the key issue is that European taxes are too regressive ? One, Romano Prodi, was prime minister of Italy until recently.

I’m another. When I present the argument to students, I have to laugh at myself for saying something so kackneyed. I mean Italians have been making the case for decades and they don’t have to pay me a salary to explain it to them.

Also why don’t Europeans soak the rich ? To a great extent it’s because they can’t. In Italy the rich are mostly self employed. It is just not possible to enforce high tax rates on them. In the USA the vaster majority of people are employees including the vast majority of the super rich. Plain old tax evasion is very difficult in the USA. This makes the optimal tax rate different there than here (in Italy)

Look at taxes in European countries where a similar fraction of people are self employed. Otherwise you are comparing apples and oranges which is silly totally aside from the fact that Klein assumes that oranges are perfect by definition.

Posted by: Robert Waldmann | April 13, 2009 11:48 PM