Could More Progressive Taxes Increase Income Inequality?

https://www.stlouisfed.org/on-the-economy/2020/may/could-more-progressive-taxes-increase-income-inequality

by danielam • 5 years ago

10 33 5 years ago

Taxes are unnecessary in any country with fiat currency. This is plainly evident by the complete lack of correlation between tax revenues and government spending. The government can simply create as much money as it needs. Taxes exist only to track and control the citizenry.

merpnderp2• 5 years ago

What you're talking about is inflation of the currency, and if you want people to continue using it as a currency you'll limit its inflation.

And taxes exist for a plethora of reasons, originally as a source of income for governments, and later as a social and economic tool of governments to control behavior and growth, amongst likely hundreds of other reasons.

dragonwriter4• 5 years ago

Taxes are unnecessary in any country with fiat currency.

No, taxes don’t pay for services in the simple way suggested by the metaphor of the fisc (a finite public purse filled by revenue and emptied by spending) in such a country.

That doesn't mean they aren't needed; they function as a tool managing and distributing monetary impacts of spending and for Pigovian internalization of social costs.

hhvn• 5 years ago

Progressive taxes harm the middle class whilst the rich figure out ways to avoid them. If you want the average person to do well, you should support a flat tax.

whack3• 5 years ago

The top 1% earned 21% of aggregate income, and paid 40% of income taxes. Clearly the rich are indeed being impacted by progressive taxes.

A flat tax would give them a huge tax break, which would either lead to higher taxes on everyone else, cutting of social services, or an increasingly large deficit

the_solenoid2• 5 years ago

No serious reputable anything has ever found a flat tax to be anything but a huge giveaway to the rich as well.

Just fund the IRS and stop letting the foxes run the hun house, ie. get money out of politics and stop letting a few people and their rich friends make all the rules to favor that small cadre.

merpnderp2• 5 years ago

You might as well tell people to make other people stop being corrupt. Humans are corruptible full stop. For a funny recent example see Russel Brand's last YouTube video on the US Congress's insider trading clown shows, and then ask yourself if there's any way possible to get this legislative body to "stop letting a few rich people and their rich friends make all the rules to favor that small cadre."

The only decent solution would be a vastly simpler system with enough transparency and accountability the average person could make sense of it.

seanmcdirmid2• 5 years ago

If you want the average person to do well, you should support a flat tax.

Regressive taxation has never not increased wealth gaps. Say you bothered with a flat tax of 9%, which would raise taxes significantly on most Americans. We already have this problem with payroll taxes that are essentially flat, which is why tax relief for the poor has always come in payroll tax decreases rather than income tax decreases.

settrans2• 5 years ago

Payroll taxes are not flat, they are in fact regressive (unlike a flat tax, which is by definition neither progressive nor regressive). Since social security tax is capped, the more you beyond the social security tax limit, the lower your effective payroll tax rate becomes.

brailsafe• 5 years ago

Wouldn't the rich figure out a way to try and avoid a flat tax as well?

variaga• 5 years ago

If you assume that the rich always figure out ways to avoid progressive taxes, why would you not also assume they would figure out ways to avoid paying a flat tax as well?

The thing that makes taxes complicated isn't the progressive tax table of 'pay X% on the first Y dollars you make, then pay Z% on the next W dollars, etc.', its the determination of what is and isn't taxable. That is where the rich game the tax system, and that's something that changing the rate schedule from progressive to flat will not fix.

If you want to close loopholes, eliminate deductions primarily used by the rich, put limitations on tax-exempt trusts, properly fund the IRS so they can actually audit rich people's tax returns again, etc., to actually capture more taxes from the rich... great! We should do that! But that all of that is completely orthogonal to changing the question of flat vs. progressive taxation.

Simply changing to a flat tax will lower the tax burden on the rich and increase the tax burden on the poor and middle class. All other things being equal, a change to a flat tax will hurt the average person, not help them.

hitpointdrew3• 5 years ago

If you assume that the rich always figure out ways to avoid progressive taxes, why would you not also assume they would figure out ways to avoid paying a flat tax as well?

Every modern economy in the world has already solved this issue. VAT. A VAT is a consumption tax, there is no way to avoid a VAT, even with the resources of a super wealthy individual. A VAT is progressive because the more you spend the more you end up paying. A VAT can also be scaled on types of goods (so a higher VAT on Yacht's for example).

Income taxes, in general, flat or not, are abhorrent, hostile to freedom, and generally should be abolished.

ncphil• 5 years ago

Flat income tax schemes, like sales and use taxes, and user fees, are all regressive: striking the poor harder than the classes above them. The appeal of flat taxes (and the others mentioned) is their perceived simplicity in both assessment and collection. But that's an assumption that flies in the face of historical practice.

As you say, the rich always find a way to avoid taxes of all kinds. They pay accountants and politicians to ensure that. The middle class may not have many politicians on their payroll, but they do have accountants -- and have learned how to use them. Besides, the progressivity (a word that the tech giants still don't know how to spell) of our current tax structure is inconsistent and intentionally incoherent.

Just a note: the US tax system seems to have been at its fairest (a very relative term) during the late 1940s through to the Kennedy tax cuts in the early 60s when the highest rates were in the 90% range and when estate taxes still took a credible bite out of ultra wealthy generational wealth. Of course all that money collected didn't go to help eradicate poverty. It mostly went to build warships, bombers, missiles and the nukes they carried.

hitpointdrew3• 5 years ago

like sales and use taxes, and user fees, are all regressive

Under no circumstances are consumption taxes "regressive". Consumption taxes are the only tax any free people should tolerate. The poor will never pay more in outright dollars, or in percentage. It's only "regressive" if you you stupidly count money that isn't spent, which is entirely pointless because of course money not spent won't get hit with a consumption tax (it will once it DOES get spent, the more you spend the more you pay, which means consumption taxes are PROGRESSIVE). Furthermore, any good implementation of a consumption (VAT, etc.) tax is going to tax luxury goods at much higher rate than consumer staples.

tablespoon• 5 years ago

Progressive taxes harm the middle class whilst the rich figure out ways to avoid them. If you want the average person to do well, you should support a flat tax.

If the concern is "the rich figure out ways to avoid" taxes, there's no reason why you need a flat tax to address that. A progressive tax can abolish deductions, etc. just like some flat tax proposals do.

gremlinsinc• 5 years ago

Land/Value tax is the best.

Poor people, hell half of middle class don't own land or property.

Land and the resources on them should be taxed for the value they give whoever owns them. This could essentially pay for Basic Income, and it's not something you can 'offshore', and it even makes foreign investors pay nice taxes, (we could even tax them more).

pydry• 5 years ago

Our measure of income inequality is the difference between the 50th and 99th percentiles of the income distribution. We used this as our measure of income inequality as opposed to the more standard Gini coefficient2 because the tax incidence on very low-income quantiles is typically small.

Or is it because if they don't restrict the data to 50th percentile and above, the data doesn't fit the story they want to tell?

It's also weird that they treat spending as intrinsically dependent on taxes when for all intents and purposes, it's independent.

Many of those variables are easily tweaked (e.g. government spending) and many of them vary enough that performing the experiment over a different time period could very well mean getting the exact opposite result.

bko2• 5 years ago

I think they restricted it to 50% because it's looking at federal taxation (payroll, local and state level gets much more complicated), and ~43% of Americans don't pay any federal tax or receive a rebate. Many of these people are elderly, low income with children, unemployed, etc. But including them when looking at the impact federal taxes have would be incorrect.

[0] https://www.statista.com/statistics/242138/percentages-of-us...

dragonwriter4• 5 years ago

think they restricted it to 50% because it's looking at federal taxation (payroll, local and state level gets much more complicated),

Federal payroll tax is part of federal tax (as are federal excise and consumption taxes).

and ~43% of Americans don't pay any federal tax

As well as being kind of dated and thus quite likely not accurate, this number os for federal income tax, not the more general category of federal tax (or even “federal taxes on income”, which includes payroll tax.)

briefcomment• 5 years ago

The solution then, based on their final conclusion, would be to distribute ownership of the capital instead of having it be concentrated to a small number of people. Sounds a bit like both the stock market and communism.

Edit: Seems like some people think otherwise. Would love to hear your thoughts.

pmdulaney• 5 years ago

Jackson and Owyang,

Please respond here if Biden Administration puts pressure on you to not publish findings like this in the future. No, I'm not into conspiracy theories, but this finding does impress me as something the Democratic party would like to suppress.

whack3• 5 years ago

We found that an increase in tax progressivity actually increases income inequality.

It seems odd that they are making a general and unbounded statement, when it is provably nonsensical.

Consider what would happen if the government tomorrow reduced taxes on the middle class and increased taxes on the wealthy to compensate. The middle class would see a rise in their disposable income. According to this paper, because taxes are now slightly more progressive, income inequality would rise. Which means that the wealthy must see an even larger rise in their disposable income. Meanwhile, government revenues remain neutral. Literally everyone wins.

We have now found a perpetual motion engine for creating wealth. We can now repeat the above process over and over again, until middle class taxes hit 0%. And literally everyone would keep getting richer in the process, without any impact on government revenues.

Clearly the above is nonsensical. There must be significant constraints on the statement that "an increase in tax progressivity actually increases income inequality"

lbarrow• 5 years ago

I don't think you read the summary. The mechanism is pretty clear:

1. Compared with a flat tax, a progressive tax regime expands the economy because poor people spend more of their money than rich people.

2. This expansionary effect gets multiplied because this spending recirculates around and around (the "standard fiscal multiplier" in the summary).

3. Rich people accrue most of the benefits of the expansionary effect.

4. These benefits are actually larger than the initial increase in tax burden in step 1), so while everyone ends up better off, rich people end up _more_ better off than poor people. Therefore the progressive tax scheme has the net effect of boosting income inequality.

It's not a perpetual motion machine, the gain starts because rich and poor people having different consumption rates. You could only do this until you run out of tax dollars being paid by poor people.

Really, though, what the paper is proposing is saying is that rich people benefit quite a lot from expansionary policies, so much so that they can even afford to pay to get them started. I don't think this is very controversial or even counterintuitive. The thing to realize is that the paper starts with the claim that _progressive taxation makes the economy bigger_. If you accept that, it makes sense that the rich would benefit the most from it.

allemagne• 5 years ago

You could only do this until you run out of tax dollars being paid by poor people.

Or you could start paying them more and more money to trickle up, i.e. progressive negative taxes.

whack3• 5 years ago

I've read the summary and it does not change anything.

These benefits are actually larger than the initial increase in tax burden in step 1

This isn't clear at all. I suspect this is only true in a specific set of circumstances, not as a universal rule.

You could only do this until you run out of tax dollars being paid by poor people

The article is talking about the 50th and 99th percentiles. If what you're saying is true, the government should reduce taxes on the 50th percentile household all the way to 0%, and fund this tax cut entirely by increasing taxes on those who are more wealthy. And if what you're saying is true, such a change in tax policy would increase disposable income for the 99th percentile.

There isn't a single serious economist who believes the above. Even people like Sanders who would advocate for such a tax policy, are arguing for it from a fairness perspective. Not a "this will make the rich even richer" argument, which is what you're implying.

bko2• 5 years ago

Despite having a wide range of top marginal tax rates in the US (from 90%+ in the 50s to mid 30s today), tax revenue as a percentage of GDP has stayed remarkably constant since post-WW2 (~19%) [0].

It's not as simple as looking at the top rate, but you have to look at deductions, the caps, lower rates, etc. But I don't think there is a clear line between tax rates and taxes paid. There's likely an equilibrium rate that people will pay at which point tax aversion strategies make more sense. For instance, as I hit a higher tax bracket, I've invested more in pre-tax retirement, education and health savings accounts. Wealthier individuals have even more options.

So looking at marginal tax rates is a kind of red-herring.

[0] https://en.wikipedia.org/wiki/Hauser%27s_law

Could More Progressive Taxes Increase Income Inequality?

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