Recent History of Tax Progressivity in the USA
Following the release of the video of Romney denouncing (among other things) the fact that 47% of US households don’t pay positive US Federal Income Taxes many normally reliable commentators have argued that this is a break from the long Republican tradition of advocating tax cuts for the working poor to make work pay. I think this demonstrates incorrect recollection of the history of such tax cuts, although it is true of one important tax cut — the child tax credit which was part of the 2001 Bush tax cuts.
But there seems to be a widespread belief that the EITC was significantly expanded (or even created) by Republicans (OK Ford signed the bill). It was introduced in 1975 at at time when Democrats had huge majorities in both houses of Congress. It was massively expanded in 1993 by the Clinton tax bill which was supported by no (not one,zero,nessuno) Republican in Congress. Reagan and Clngress (including the Democratic majority in the house) increased the payroll tax. That is a tax which Romney tends to assert doesn’t exist, but a dollar of payroll taxes is as much of a disincentive to work as a dollar of income tax.
To try to understand the changes I turn to Piketty and Saez (warning pdf) and in particular Table A3 “Average Tax Rates by Income Groups 1960-2004.” I will mainly look at the sum of the individual income tax and the payroll tax. My claims
1)The sum of tax rates on low incomes increased under Reagan (the payroll tax increase outweighed income tax cuts)
2) That sum of rates was sharply cut from 1993 to 1995 (by the bill with no Republican support)
3) The average income tax rate on low incomes changed little from 1996 to 1998 — welfare reform did not include significant tax cuts for the poor.
4) the sum declined sharply from 2001 to 2004
The table is huge and I will try to cut out comprehensible parts after the jump
Robert
I agree with you about Romney the ridiculous.
But Social Security is not a tax.
YOU would do better by pointing out that the people who get Social Security PAID for it. Out of wages.
and while a dollar of any kind of tax is not a disincentive to work, a dollar of Social Security benefits is not enough of a disincentive to work that it is worthwhile for anyone to game the system.
That will all change when Romney means tests it, or the progressives succeed in turning it into Universal Welfare/
a dollar of payroll taxes is as much of a disincentive to work as a dollar of income tax.
To be clear, the value of each of these disincentives is 0.000 to an infinite number of decimal places.
JzB
@coberly I knew that comment was coming.
@JB I think you are overstating the tinyness of the effect (understating the magnitude). I’d guess elasticity (with no income effect that is replaving income or payroll taxes with lump sum taxes ) on the order of 0.1 (almost all due to labor force participation not the purely imaginary option to work 39.9 hours a week).
The 1993 EITC increase was followed by a Phillips curve anomaly of very low unemployment without accelerating inflation.
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Rocky Mountain Wealth Concepts
Robert
whenever i think about it am very glad i did not have an education in economics.
i am afraid i don’t understand your comment about EITC but as a first guess I can’t see how it shows that taxes are a disincentive to work. surely there are complicating variables?
i would agree that for a Ronald Reagan who needs a million dollars to make it worth his while to walk out the door, a tax that reduces his pay for a movie from a nominal 1.2 million to 0.9 million might destroy his work ethic.