Repeat After Me: The American Tax System is Hardly Progressive at All
The latest numbers on 2014 taxes as share of income are out, and they’re saying pretty the same thing as last year:
Above about $80K a year in income, the American tax system is not really progressive. Like, at all:
The people making $100K a year pay about the same share of income at people making $10 million a year.
This is because — while federal income taxes are reasonably progressive — payroll, state, and local taxes are horribly regressive — particularly in (blush) my home state:
Read it and weep.
Cross-posted at Asymptosis.
payroll taxes are PROgressive. which you would understand if you read the whole description. look at the payout structure.
and when you understand that Social Security is INSURANCE and not welfare…. because FDR insisted on that… he was smarter than the average leftist college professor… you will understand why someone making a 100k, or even 10k is better off paying for it themselves than begging the rich to pay it for them.
not to be misunderstood… i am a bit of a leftist myself. but smarter than the average college professor. i didn’t have an education that taught me to stop thinking after i learned a few good formulas.
Additional tax brackets at the high end (say, 1 mil, 5mil, 10 mil) and taxing capital gains and dividends as income would help.
Coberly: High TAXES on the rich mostly won’t go for welfare, if any. The majority will go for defense first (as always) and infrastructure next.
I don’t know where anyone would get the idea that America would suddenly love the poor over a TAX INCREASE.
Also, historically, The Government has ALWAYS taken money from Social Security. Other than initial start up costs, has never given away any funding to Social Security. The day SS starts to cost the Government anything IS the day SS disappears. ITS A TAX.
I think I am saying the same as coberly in a slightly different way.
Although the payroll tax is a larger percentage impact on lower earners, it does not make sense to count it the same as other taxes. It comes back to the same people (if they live to need it) who paid it. While taxes that go to protecting what we have has a society should be progressive because we have set up a society that benefits people who manage to become rich, SS does not need a progressive tax because it has a progressive payback. It is purposely set up apart from government budget and government revenue. Any analysis that combines it in is bound to draw poor conclusions.
Arne, it strikes me that these two statements are contradictory:
“[SS] comes back to the same people … who paid it.”
“[SS] has a progressive payback.”
??
Steve,
That’s what happens to you when you edit out part of what I said.
Steve
gosh, i got it. but then i understood calculus.
the people who paid the tax get their money back plus an effective interest. much of the effective interest that would go to the richest instead goes to the poorest. hence progressive.
the people who pay the payroll tax get their money back plus an effective interest (comes from pay as you go with wage indexing in a growing economy). much of the interest that high earners… and high tax payers… would get goes instead to boost the benefits of the lowest earners. hence progressive. up to a point the “lost interest” to the richest is justifiable as a cost of insurance. push it too far and it becomes welfare and we know what happens to welfare in this country. that’s why peter peterson always talks about it as if it were welfare.
the people calling for “scrap the cap” are calling for the destruction of Social Security. they seem to think that because Social Security is successful they can load it down with every other good cause they can think of. it’s hard enough to get people to think straight about what Social Security IS (what it DOES) without having it’s “supporters” calling for turning it into general welfare.
I suppose you have a point. I do think I made it clear I was not talking about a one for one correspondence. The immediate value you receive from SS is as insurance. The payback on any insurance depends on how you treat it as a pool.
Like the checks and balances that our forefathers were able to put in place when they had a common enemy, the setup of SS is a compromise that many people choose to interpret in their own way. I can understand the tax interpretation, but I still don’t think combining it with other taxes in a meta analysis makes sense.
SS is best understood as insurance. The benefits to lower income workers are higher relative to their contributions than are the benefits to higher income workers. The fact that most people have difficulty assigning value to insurance until it pays out does not mean it does not have immediate value. It is not simply the present value at some arbitrary discount rate of whatever that individual actually receives thirty years later.
what coberly and arne said. Any analysis of tax progressivity that includes payroll taxes is either intended to mislead or designed by naive analysts.
All of what you all say is true. But if we just call it what it it looks like on its face — a pay-as-you-go insurance/retirement program– and call FICA contributions what everyone calls them — payroll taxes — then those taxes are regressive. I’ve said this a million times — this is a question of rhetorical framing, and politics. And it’s no less important (arguably more so) for all that.
http://www.asymptosis.com/is-the-social-security-trust-fund-a-liberal-own-goal.html
But just for this post: you don’t judge the progressivity of income taxes based on the progressivity of their disbursement. Framing it like this is strong, convincing progressive rhetorical positioning.
Would be interesting to see what that graph looks like if we removed FICA, did all other state, local, federal taxes.
“Framing it like this is strong, convincing progressive rhetorical positioning.”
If you need to depend on the ignorance, incompetency, naivety, or stupidity to maintain the support of your supporters and/or weaken the support of your opposition to advance your political agenda, I understand the satisfaction you may derive from the certainty that you must have that your cause is more just than that of your opposition’s, but it certainly doesn’t bode well for the sustainability of that political agenda.
At least, as an example, coberly and Bruce Webb are honest and decent enough to argue on the merits of the programs they vociferously support.
@M.Jed:
It doesn’t strike me that calling the payroll tax regressive is depending on “ignorance, incompetency, naivety, or stupidity.”
And doing so is not for the purposes of personal satisfaction.
I think coberly said this once and if he didn’t he should have – “calling the payroll tax regressive is akin to assuming a coin has only one side to it”
The payroll tax is, or at least was until Clinton lifted the cap on Medicare – so the OASDI component, which is the higher rate of the two – is payment for services rendered.
One could certainly look at the simple fact that those with high incomes pay less as a percent of their income for the service and those with low incomes pay more as a percent of their income and call it regressive – and the ignorant, incompetent, naive, and stupid would accept this as gospel.
If you folks understood Monetary Sovereignty (http://mythfighter.com/2010/08/13/monetarily-sovereign-the-key-to-understanding-economics/) you would realize that FICA does not pay for Social Security.
In fact, federal taxes do not pay for any federal spending. If federal taxes fell ton $0, the government could continue to spend as always.
Yes, it’s counter-intuitive, but you can look it up at the above link.
Rodger:
You have a good blog for teaching monetary sovereignty. I have often sent some who do not understand it your way to read.
Does anyone know what measure of total income is being used? I cannot seem to find out.
Is it gross income, AGI, Medicare income, etc.?
@E Michael:
http://www.itep.org/about/itep_tax_model_full.php
counterintuitive – thesaurus entry
adjective
opposite to what seems obvious or natural
American English synonyms or related words for this sense of counterintuitive
Not sensible or reasonable: unreasonable, wrong, extreme, absurd, childish, irrational, irresponsible, perverse, hysterical, ridiculous… more
“Counterintuitive” can cut many directions…
http://econlog.econlib.org/archives/2014/04/larry_summers_s.html
Steve,
Thanks(at least I thinks so).
I’d have to come out of retirement to figure that out.