Thursday, December 3

Sentences to ponder

This comes via MR:
Remember too that when you have a progressive tax system, especially when there are surcharges on people making seven-figure incomes, you also have a system where for any given level of national income, the greater the inequality, the greater the government’s tax revenues. And indeed federal revenues have been rising faster than median wages for decades now, thanks to the rich getting ever richer.

Given the government’s insatiable appetite for cash, it’s only natural that it would prefer to tax plutocrats, spending some of that money on poorer Americans, rather than move to a world where poorer Americans earn more (but still don’t pay that much in taxes), and the plutocrats earn less, depriving the national fisc of untold billions in revenue.

The government’s interests, then, are naturally aligned with those of the plutocrats — and when that happens, the chances of change naturally drop to zero.
Even yet another reason to support a flat tax.


  1. don't be so quick to jump on the bus, via sully:

    Felix Salmon’s counter intuitive thought regarding progressive tax rates is an interesting theory, but does nor correlate with the facts. In 1963, the top marginal tax rate in the US was 93%. Since then, it has been almost steadily lowered, till today where it stands at 35% (there was a brief period in the late 80s when it went down to 28%. Yet in this time frame, income inequality has consistently grown:

    “In 2005, the top 1 percent claimed 22 percent of the national income, while the top 10 percent took half of the total income, the largest share since 1928.”

    “The highest incomes come from executive pay at top corporations. In 2007, the ratio of CEO pay to the average paycheck was 344 to 1, lower than the record 525 to 1 ratio set in 2001, but substantial. …. In the '60s, '70s and '80s, the average ratio fluctuated between 30 and 40 to 1”

    So, it would appear that Salmon’s argument is exactly wrong. Lower marginal tax rates over the past 40 years have produced more income inequality.

  2. Sure if you want to ignore globalization's change of scale, and if you consider income inequality a problem in and of itself.

    Unlike you and Felix et. al., when I resent the government's interests being aligned with plutocrats, rising inequality is not at all my concern. The pie is not fixed.

    Corruption and economic inefficiencies are what concern me.

  3. another view, from drum:

    [T]he federal government doesn't have much of an incentive to maintain lots of income inequality. Not much fiscal incentive anyway. For the most part, the political incentives swamp the fiscal ones, and unfortunately they aren't very closely balanced. Pursue policies that raise middle class wages, and the effect is so diffuse and so slow that hardly anyone notices. Pursue policies that benefit the rich and you get immediately showered with oceans of campaign contributions. That's mostly what motivates our political economy, I think, not tiny changes in the total tax take based on changes in income inequality.

  4. and les economiste:

    The problem here is that there is actually quite a lot of money to be raised from increasing the tax base and adopting revenue raising measures that fall across most of the population. The Economist pointed this out in its recent examination of the American fiscal deficit. If the government is desperate for cash, it's hard to beat the $324 billion per year that would pour in from a 5% VAT.

    So if Congress needs all that money, then why doesn't it adopt a VAT, or something similar? Mr Salmon's logic would seem to suggest that it's because the rich understand that a government dependent on them for revenue will continue to enrich them. As such, the rich will actually fight to prevent a less progressive tax system. I'm not sure this is borne out by experience.

    Instead, I think that there are serious political difficulties in raising taxes broadly to fund social insurance programmes in a highly unequal society, because the social insurance is perceived as redistributing income over the population, rather than across time. Broad-based tax systems are how most European countries finance their social safety nets; nearly all of the redistributive effect of government programmes results from spending rather than tax policies.

  5. Of course the rich aren't going to fight a less progressive tax system, that's absurd.

    A progressive tax hurts them disproportionately. I read the Felix quote as saying that being the most significant source of revenue also increases plutocrats' power, incentive for corruption, and lobbying for economic inefficiencies like tax breaks.

    And of course there are "serious political difficulties in raising taxes broadly...". Those difficulties helped bring about our messy tax system. So far as I'm aware, only Reagan made significant progress in slashing the higher marginal rates and raising rates on a broadening base (i.e., flattening the tax code)


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