Debate Over Progressive Taxation

Readers comment on a post at Mark Thoma's blog: What’s the Best Way to Overcome Rising Economic Inequality?

A debate over the use of progressive taxation and redistribution as a means of solving the problem of rising inequality erupted in the last week or so. The debate began with three publications, one from Edward Kleinbard, one from Nezih Guner, Martin Lopez-Daneri, and Gustavo Ventura, and one from Cathie Jo Martin and Alexander Hertel-Fernandez. They argue in turn that “progressive fiscal outcomes do not require particularly progressive tax systems,” “making taxes more progressive taxes won’t raise much revenue,” and “The way a tax system fights inequality isn't just redistribution. It's by generating enough revenue to fund programs and benefits that help middle class, working class, and poor people participate and succeed in the economy. While talk of taxing top earners may make for good political rhetoric on the left, relying on such taxes cannot pay the bills.” This brought responses from Jared Bernstein, Matt Bruenig, and Mike Konczal the three of whom, as Steve Waldman says in a nice summary of this debate, “offer responses that examine what ‘progressivity’ really means and offer support for taxing the rich more heavily than the poor.” This debate brings up an important question: what is the best way to fight economic inequality?

(* Editor's Note: Below are a few excerpted comments from the readers with my 2 cents at the end.)

Darrell in Phoenix said:

Highly progressing income taxes, with deductions for most consumption and capital investment. This tax code is NOT designed to generate government revenue, but rather to get high income individuals to spend most of their income.

Spending = demand for goods and services.

Demand for goods and services = jobs to produce them.

Jobs for poor and middle class combined with high income spending most of their income = falling inequality.

Another way to think about it: A bucket of water with holes in the bottom. The bucket represents money in active circulation and the holes are international trade imbalance and cash/cash-equivalent savings. To keep the bucket full, we have to pour water into the bucket. Water pouring in is spending down savings, and money being put back into circulation via debt (money if borrowed from a bank, near-money if borrowed form a non-bank... money and near-money transformed into the other when banks buy or sell near-money).

The faster we allow money to flow out, the faster we have to pour it back into the top.

When we moved away from the tax code of the late-1930 to 1960s (that created the Middle Class) by lowering top income tax rates, we drastically increased the rate at which money flowed out of the bottom of the bucket. To counter this, we have had to constantly loosen lending and lower rates, to keep new debt generation going, to pour the money back into the bucket. See Fed Reserve Z.1, D3 for the data. I suspect there are 2 groups of people that don't get it.

1) Those with very high incomes that don't want to have to spend their high incomes. They want to just keep getting richer and richer, and if you're not rich like them, it must be a character flaw on your part (even though the math dictates for one person to be spending less than they earn, someone has to be spending more than they earn).

2) People that have been conned into thinking that lower taxes on the rich magically means lower taxes for all. The Laffer Curve was such a great scam. It assumed a flat tax, and no deductions... I can't believe the number of people that fell for that lame model (and for a decade, I was one of them).

3) People that do not understand that a progressive income tax is NOT socialist. There is no income tax in a socialist economy, since there is effectively a 100% sales tax. Progressive income tax does not mean more revenue to hand out to lazy people that won't get a job. It can mean people with high incomes spending to get deductions, creating the jobs, reducing the need for government handouts.

New Deal Democrat said...

Inequality of income alone does not give rise to the pernicious state of affairs we presently have in the US. It is inequality of wealth, particularly of inherited wealth, that is at the heart of the emerging plutocracy. Neither education nor investment will do anything about the ability of obscenely inherited wealth to buy legislation. Nor will progressive income taxation make a significant dent in such inherited inequality for decades! And that assumes the GOP does not return to control and immediately roll back those gains for several generations.

The first and most important step is a steeply progressive estate tax, beginning at about the top 5% of wealth, with no loopholes — particularly past the first generation. You can have all the reforms you want with regard to income, but unless you address inequality of inherited wealth, you are doomed to failure.

Darrell in Phoenix said in reply to New Deal Democrat...

I agree completely. Whether it is effort, skill, luck or capital investment, high income is usually a direct result of production of goods and services that people are willing to pay for. The fatal flaw of socialism is that by detaching effort and success from income, people don't work particularly hard and not inventively, meaning there is little to nothing to buy with your income.

I prefer to focus on what people with high income do with that income. If you produce 100x the average person, then good for you. Now spend that money consuming the goods and services of the other people OR invest it in capital to improve future production. The one thing I DO NOT want you to do is stuff it in the bank, buy bonds, stuff it in your mattress as green foldy cash, or in other ways increase the debt on the economy needed to maintain liquidity.

Money is the life blood of an economy, permitting the transfer of value between the various actors in the economy, and it only works when it is moving. Widening cash/cash-equivalent wealth inequality has doomed us into a cycle of unsustainable debt growth.

Pinak said...

We need to rethink the whole premise that everyone has to work 40 hours a week, no matter what advances we make in automation and productivity. There is no rule that says as we produce more with less labor we need to invent new jobs that aren't needed. This is not only difficult, it is pushing environmental limits. A more rational approach would be to work less and enjoy the fruits of technological progress. Provide a universal basic income funded with progressive taxation.

Yuan said...

Socialism.

Darrell in Phoenix said in reply to Yuan...

Income tax rate in a socialist economy is 0%. Socialism relies on what amounts to a 100% sales tax, since government owns all the businesses. A steeply progressive income tax does not even have to be about taking from the rich. It can have deductions for most spending, allowing those with high incomes to spend to avoid taxes. That spending creates demand, and demand creates jobs. No need for government handouts when there are more jobs than people who need a job. Progressive income tax rates, with deductions for spending, is not about taking from the rich to give to the poor. It is about getting the rich to spend, employing the poor.

Yuan said in reply to Darrell in Phoenix...

"Socialism relies on what amounts to a 100% sales tax, since government owns all the businesses."

That word does not mean what you think it means --a socialist.

PGL said in reply to Jesse...

Conservatives want to end loopholes in order to lower tax rates for the rich. I want to end loopholes so as to have more tax revenues to push forward a progressive agenda. And let's end these government induced monopoly privileges, which make no economic sense at all.

Darrell in Phoenix said in reply to Jesse...\

I'd love to see corporate income tax deductions for dividends paid, eliminating the argument about double taxation, then treat capital gains as regular income. Deductions from income when you buy a stock, count the full sale price as income (unless you get to deduct because you bought more stock). NO deductions for debt based assets, and full interest or price gain is treated as regular income.

E Michael said...

Increase minimum wage and strengthen labor laws to make unionization easier. I certainly have no problem with successful people making a lot of money. I have a big problem with gene pool winners being successful people.

Peter K. said...

A full employment economy with rising wages where wages share in productivity gains. How do we get there? The best way is via government spending. Another way is via a fair exchange rate and export jobs. You don't want to be too unfair or your trading partners won't be able to buy your exports.

Finally there is monetary policy which even works at the zero lower bound. When I think of progressive taxation I think of Piketty's K21. Tax away the one percent's spending money or they'll buy Congress with it, buy academic supporters, set up think tanks, etc. They'll all conspire so we'll have rising inequality.

Bud Meyers said...

Corporations move from state to state for the best tax deals and the most government incentives (much like in a bidding war) to get a businesses to relocate to their state to create jobs. According to the Los Angeles Times, Tesla Motors' move to Nevada will cost the taxpayers $400,000 for every job they create. Just as we're aware of similar tactics used by companies like Boeing (etc.) to escape taxes and labor unions. And if these businesses' strong-arm tactics don't work locally, they'll offshore overseas. If you raise their taxes, they'll move production, and/or relocate their headquarters, and/or renounce their citizenships to avoid taxes. How can we counter that?

* Final Note: Tax capital gains the same way we "progressively" tax regular wages — according to one's income bracket. The more they earn, the higher the tax rate.