Monday, April 30, 2007

Big Tax Lies

[Posted by Neil H. Buchanan]

Last week, in a guest column on FindLaw, I discussed an argument that the Wall Street Journal's editorial page has been pushing recently. (The column to which I was directly referring was published under the byline of former Bush press secretary Ari Fleischer; but as a friend of mine says: "I always imagine (based on nothing at all) that they just have some guy locked in a little room churning this stuff out and they stick the names of different famous people on different versions of the argument on different days.") The argument boils down to this: We know that the U.S. tax system is excessively redistributive because the richest 10%, say, of all taxpayers pays some much larger percent of all taxes (by Fleischer's ghost writer's account, 71% in 2004 -- conveniently ignoring everything but federal personal income taxes). As with all such statistical distortions, the comparison has a wow factor, and it's not just wrong but based on a completely dishonest standard.

In particular, the only way to satisfy the implied measure of fairness -- a tax system that would NOT be excessively redistributive -- is if 10% of taxpayers pay 10% of taxes, if 40% of taxpayers pay 40% of taxes, etc. This, though, is only possible if every taxpayer pays the same number of dollars as every other taxpayer. Not the same percentage of their income in taxes, but the same number of dollars. If the government is going to collect $3 trillion in taxes from 300 million people, then each person's annual tax bill must be $10,000. No consideration of income or employment status. No retirees or disabled citizens excluded. No child left untaxed. (The last time a major government proposed even a modified version of such a system was in 1983 in the U.K. under Margaret Thatcher. Thatcher's idea to impose what the Brits call a "poll tax" was met with riots in the streets.) Even highly regressive tax systems do not satisfy the implied standard, so long as any person pays less than any other person in dollars paid in tax. Thus, conciliatory comments to the effect that "[w]e have an obligation to help the neediest among us and the wealthy should pay more" are meaningless.

This argument is merely the latest in a long line of dishonesties from the Journal's editorialists and an influential band of anti-tax ideologues. (The Wall Street Journal itself, for those who don't follow these things, is an excellent newspaper. The editorial page is an entirely separate operation, aggressively pushing a very particular brand of pro-Bush conservatism.) A few years ago, the Journal's editors opined that the people who are exempt from federal taxes because of their low incomes are "lucky duckies" because they live in the happy world that the Journal's editors would like to live in: a blissful land free of taxes -- never mind the inability to pay for necessities, and never mind that the duckies continue to pay sales taxes, excise taxes, payroll taxes, etc., and that they die much younger than richer people do. I guess it's a sign of progress that the argument is now being repackaged into something that is at least initially not laughable.

There are honest disagreements between conservatives and liberals about the appropriate size of government, about solving social problems with government programs or with private initiatives (or some combination), about how to deal with government waste (and how prevalent or unavoidable waste is in the first place), about the social and economic incentive effects of taxing and spending, etc. That's what tax policy scholars spend their lives thinking about. No policy analyst will ever be happy with the level of public discourse about the subject of their expertise, of course, but it is particularly disheartening to see major opinion leaders (and the politicians who echo them) defining fairness in taxation in so fundamentally dishonest a fashion.

27 comments:

Jamison Colburn said...

I wonder if the WSJ editorial page is as important to its readers as the NYT's? (I assume the NYT's is so important because of how they've led the "Times Select" service w/ that content.) If so, the good reporting (and I couldn't agree more on that) is a bit of a tragedy of the market . . . .

egarber said...

It seems to me that you have to choose the right baseline metric in the general discussion about taxes. Properly viewed, I think equating collection percentage with population ratios is rather arbitrary -- a little like paying every baseball player the same salary, regardless of performance. Under this model, A Rod would get paid the same as a Braves utility guy.

Therefore, I think that the context for taxation should be wealth / income. If 10% of taxpayers control 80% of the nation's total wealth, then it makes sense that they would absorb a like amount of tax burden. In fact, I've read that the real-world take basically mirrors this dynamic, a reflection that the basic system works, imo

Tam said...

I think it's a travesty that the wealthiest nation on earth has a general population for whom "but how much income does that 10% control?" is not an obvious response to the 10%/71% statistic. Of course, I'm not trying to shift focus away from the moral reprehensibility of those who exploit this fact. But with such extreme bad faith on their part, I wonder if it would be of any use to even engage on that front.

So that's why I'm wondering instead why the general public is so bad at understanding simple logic, and virtually immobilized when it comes to anything that remotely has to do with math? Is this uniquely American? What can be done about it? Is education reform the answer? (And even if it were, I'm sure diverting more funds into public education would be out of the question, since the working class already consume way too many public resources to which apparently contribute nothing.)

Tam said...

Obviously, the various grammatical mistakes in the previous comment lamenting about the general population's intellectual inadequacies were purposely committed as an illustration of irony. ;)

yonatan said...

What's particularly funny about the WSJ statistics this time around is that they have nothing to do with "progressiveness", and everything to do with inequality. Progressiveness is measured against share of taxes out of total income, and not out of total number of people; if, for instance, the 10% paying 71% of all taxes were also earning 71% of the national income, then taxes would not have been progressive at all, but rather neutral.

In fact, taxes are progressive, but only slightly so; the numbers the WSJ reports do not stem from over-progressiveness, but rather from very uneven distribution of income. The highest quintile in the U.S. makes over 51% of all income. To get a better idea about just how progressive the tax system is, one should look not to pre-tax income, but rather to post-tax, or "disposable" income. This shows that the tax system allows the lowest quintile, making a mere 3.5% of pre-tax income, to enjoy 4.5% of disposable income - hardly a real boost to their standard of living; the upper quintile, that the WSJ is so concerned with, still enjoys over 47% of all disposable income - another figure that the WSJ conveniently neglects to mention. Unless one believes that any progressive tax (or, for that matter, any tax as such) is wrong, there is nothing in the tax-burden statistics that would suggest over-progressiveness; perhaps the opposite.

yonatan said...

Ok - I have not seen egarber and tam while I was writing; I'll be quicker around next time.

Sobek said...

This isn't really on-topic, Neal, but have you read Neal Boortz' Fair Tax book? If so, what is you opinion of it?

Craig J. Albert said...

Like Neil, I think (or at least until the recent re--formatting of the paper, I thought) that the WSJ news portion is great, and its editorial page abysmal. I can rarely read the WSJ editorials or its op-eds without gagging, so I've pretty much given up.

To give Dow Jones & Co. credit where credit is due, though, you've got to admire the fact that the money guys who own the paper and run the editorial page seem to tolerate the news division and hasn't sought to eviscerate it. (Anyone who works at the WSJ is free to correct me here, anonymously if necessary.) That tolerance is what enables me to get past the editorial page. If you read any portion of the WSJ apart from the editorial page, and then read the editorial page, you will find yourselves wondering whether the editorial page editors actually read the rest of the paper as you did, because they seem to be in some kind of Bizarro world entirely divorced from reality.

Sobek said...

Also off-topic, but we have more proof of global warming here:

http://www.timesonline.co.uk/tol/news/uk/article1720024.ece

Looks like George W. Bush's Mars Rovers pollute more than expected.

Neil H. Buchanan said...

In response to Sobek's query re The Fair Tax Book, I have read reviews but not the book. I'll take this as a reason to look at the book and post a quasi-review sometime soon.

Neil H. Buchanan said...

Appropos of Craig's comment (re the disconnect between the news section of the WSJ and the editorials), the news section carried an excellent article about the now-infamous McDonalds' Hot Coffee case back in 1994. (Andrea Gerlin, “A Matter of Degree: How a Jury Decided That a Coffee Spill Is Worth $2.9 Million,” WSJ, Sep. 1, 1994.) To read that article, you would think (correctly) that this was a mildly interesting but unremarkable case involving a jury's finding of outrageous behavior justifying punitive damages. In the 12-and-a-half years since, though, the editorial page has seemingly never missed a chance to mention the case as proof positive that the legal system has run amok.

Neil H. Buchanan said...

Yonatan's statistics and analysis are right on target. Note, though, that these stats include all taxes, not just the federal personal income tax, to which the WSJ's hacks just happen to limit their analysis.

Note also that egarber's point is NOT that the income tax should be proportional, because he is saying that ownership of wealth should be the tax base, not receipt of annual income. Because the ownership of wealth (esp. non-housing wealth) is even more skewed than the income distribution, having a tax on wealth of the sort that egarber describes would require either a direct tax on wealth (e.g., a much better inheritance tax) or a genuinely progressive income tax system.

egarber said...

Because the ownership of wealth (esp. non-housing wealth) is even more skewed than the income distribution, having a tax on wealth of the sort that egarber describes would require either a direct tax on wealth (e.g., a much better inheritance tax) or a genuinely progressive income tax system.


I'm not actually proposing a direct tax on wealth. I'm merely saying that because so much wealth / income is concentrated at the top, it makes sense that overall collection would basically mimic those ratios, however taxes are levied.

Also, as I understand it, a federal direct tax on wealth (outside of inheritance) would trigger the apportionment rule (proportional collection among the states) under the constitution, no? The 16th amendment was passed in part because of the logistical difficulty that comes with apportionment on a national scale.

Sobek said...

Neil, it's really short and a very easy read, even for taxophobic people like myself. But because I'm not in the habit of reading up on tax policy, I've never seen anyone really critique the argument.

Neil H. Buchanan said...

There is a fairly good argument that we should tax consumption lightly and wealth heavily, not income itself. That argument, though, is only convincing if we were starting from a blank slate. Starting from where we are, cleaning up and increasing the progressivity of the current system (in particular by increasing wealth taxes)is my preferred approach.

Interesting question re the constitutional hurdle. Most current scholars think that Pollack (the Supreme Court case that necessitated the 16th Amd.) was wrongly decided. There is no claim that I am aware of against the estate tax on constitutional grounds. The barrier to taxing wealth is the political power of the wealthy.

egarber said...

Thanks Neil.

There is no claim that I am aware of against the estate tax on constitutional grounds.

Don't people argue that the estate tax isn't a direct tax on property, but a levy on the TRANSFER of it to an heir?

That would indicate to me that there's a difference between it and say, an ad valorem type tax assessed every year.

Neil H. Buchanan said...

The distinction between direct taxes and other taxes has never made sense to me. I understand that some courts might continue to find a difference, but there really isn't one that holds up to even the most basic scrutiny.

The distinction between taxing property directly and taxing the transfer of property, for example, means nothing. If you're taxing the transfer of property as a percentage of the value of the property (as an estate tax does), you're taxing the property both in the sense that you're determining the amount of the tax based on the value of the property and by diminishing the amount of property that remains to be transferred to the recipient.

Again, one never knows what nonsense the current Supreme Court might read into the term "direct" with respect to taxation. I only know that any such distinction would be arbitrary in the extreme.

egarber said...

Properly viewed, I think equating collection percentage with population ratios is rather arbitrary -- a little like paying every baseball player the same salary, regardless of performance.


I'm gonna throw out a different analogy. Expecting concentrated wealth / income growth to drive heavier tax collection is roughly tantamount to a shrimp fisherman who naturally would catch more in densely populated waters, compared to a guy fishing in a swimming pool.

Carl said...

"I'm gonna throw out a different analogy. Expecting concentrated wealth / income growth to drive heavier tax collection is roughly tantamount to a shrimp fisherman who naturally would catch more in densely populated waters, compared to a guy fishing in a swimming pool."

Or a thief targeting a wealthy suburb rather than an impovershed farming community....

(not that I interpret it this way)

Sobek said...

"The distinction between taxing property directly and taxing the transfer of property, for example, means nothing."

Except that (a) the property owner can determine the circumstances under which she will be taxed, by choosing to sell or not, and (b) private parties determine the taxable value of the property through free-market competition rather than requiring some third party appraisal.

egarber said...

Sobek,

I agree. There definitely is a distinction there somewhere. It certainly mattered philosophically to our framers; they feared too much direct taxing power over individuals by the federal government.

Income taxes -- indirect taxes, in constitutional terms -- are within federal power to levy. But as I understand it, the framers added the apportionment rule on DIRECT taxes to counter over-extended federal power with federalism principles.

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