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Sunday, April 19, 2009

Soak the Rich. Non lessons from Europe.

Lane Kenworthy too. Vance Maverick in comments told me about his post.

The claims, always based on the same few data points are
1) Differences across a few rich countries in the effect of policy on inequality have a lot to do with transfers, nothing to do with the progressivity of the tax system and a lot to do with total tax take.
2) The options open to the USA are described by outcomes in these countries.
3) therefore egalitarians should support increased taxes on the non rich.

update: Welcome Thomists. This post is here because I had already posted on the topic at Angry Bear. I have another thought. The distinction between progressive taxes and egalitarian transfers which is the focus of the posts which I criticize is often a distinction without a difference.

Let's imagine 2 hypothetical countries called the USA and Sweden. In the USA there is overwhelming popular support for progressive taxation and deep popular hostility for government transfers to the non elderly. Therefore, transfers are called something strange like "refundable tax credits." The national neurosis is clearly indicated by the fact that one party insists that such refundable tax credits are welfare -- which for some reason is not defined as what is good or even as something good but as something bad. Damned if I know why and damned if I care what we call it so long as we do it. The result is that in the offical statistics you see a highly progressive tax code and small transfers which have a small impact on inequality.

There is another country which has an equally strange idea that everyone should pay high taxes and which likes government transfers. Therefore they have a barely progressive tax code and large transfers with a large effect on inequality. However the two countries are really doing the same thing.

This littly hypothetical story is uhm false, because Sweden is, in fact, reducing inequality more (and from a more equal pre fiscal income distribution). So ? In 12 countries there is a positive correlation between the total egalitarian effect and a preference for call it a transfer not a refundable tax credit.

How can any sensible person conclude that we should to decide to fight a deeply fealt easily evaded attitude about words in the the USA for this reason ?

I totally disagree with this analysis in, for example, Lane Kenworthy's post. The important issues are first what is optimal policy and second what are political limits on policy. I think on both issues Obama is right and Lane is wrong.

First, the argument against Obama is that tax progressivity does not determine the effect of the fiscal system on inequality. It is not that, other things equal, a more progressive tax system is worse. Some have made that argument, basing their claim on the incentive effects of high marginal tax rates. However, the post does not make the argument (I'd say the evidence shows that distortionary effects of high taxes on the working poor are socially costly and not much on the sign of the effect on social welfare of high taxes on the rich). Rather from the claim that something is not "the key" follows the claim that it should not be an aim. This is the oldest rhetorical trick in the book.

Second, and more importantly, raising taxes on the rich is much easier politically than raising the taxes on the non rich. This isn't just electoral politics. Discussing optimal policy is a parlor game unless one asks how it will be enacted. There is no evidence at all to support the claim that the incorrect beleif among progressives that progressivity is "the key" to reducing inequality will cause reduced total tax revenues. There isn't even an argument.

The evidence presented is, I think, based on the assumption that Europe is perfect. If European taxes aren't very progressive, then taxes shouldn't be very progressive. Otherwise what is the point of noting that European taxes aren't very progressive. It sure doesn't show that taxes can't be progressive.

Importantly, different countries are, uhm different. The USA has an extremely unequal distribution of pre-tax income. Other things equal, that would mean that the US can raise an extremely high share of GNP as taxes by taxing the rich. In the USA a small fraction of workers are self employed. This makes it easier to collect income taxes. Many people receive huge compensation from large firms which keep track of everything. They can be taxed. The USA isn't Europe. Even if it were true that European policy is optimal for Europe, it would not necessarily be optimal for the USA.

The key policy relevant assertion in the post is "Moderate or high levels of tax revenue can’t come solely from higher rates or new taxes on the rich; the math simply doesn’t work." What math ? Where is that math ? It certainly isn't in the post.

There is now a fairly large blogoliterature all making the same argument based on the same few data points. If someone has addressed the question of what the math says about whether moderal or high levels of tax revenue can come solely from higher rates or new taxes on the rich in the USA, I would like a citation.

Evidence from Europe or the USA during the period of a much more equal income distribution does not count. The share of income going to the rich has an effect on the amount of revenue which can be raised by taxing the rich.


Neil' said...

Yeah, one of the phony aspects of right-wing arguments is that raising rates on the wealthy won't bring in much, but at the same time:
1. The amount by which the income of the top quintile etc. exceeds the average keeps going up, so each percentage point increase in top rates must (non-dynamically of course) bring in lots of revenue.
2. The RW-ers like to complain that the lower half or so don't pay "any taxes" (forgetting FICA of course) so raising the rates whatever on "the rich" should bring in almost all of the proportional increase in revenue.

That aside, the basic reason IMHO income is more distributed in Europe is not taxation. It's that their systems make it harder for speculators and CEOs etc. to skim off so much money to begin with. Am I right?

Vance Maverick said...

Thanks for rising to the bait. I'm persuaded, at least. I was a bit baffled -- why would it be that, given whatever his preferences are for total budget and patterns of spending, we couldn't make matters a little more progressive or egalitarian by pushing the tax rates and brackets around?

Roger Chittum said...

Good posts (including preceding and subsequent one).

I've been hearing for 30 years or so that higher marginal tax rates on higher incomes just can't raise much revenue because so relatively little income is in the top brackets. Well, if that was true then, it's much less true now, as Robert points out.

The supertanker of conventional wisdom takes at least a generation to turn onto a new course. If the gods had wanted to give Sisyphus real punishment, they would have given him the job of rooting out old unsupportable beliefs using only a blog.