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What Now for “Fiscal Responsibility?”

December 1st, 2011 . by economistmom

Although the “super committee” was by all accounts a “super failure,” the U.S. is fortunate that we are not yet in full blown “crisis” mode.  Our fiscal situation–namely, the large and economically unsustainable mismatch between spending and revenues–is still just a “problem” that can be solved.  Our deficits are still being “sustained” at the moment, and U.S. Treasury bonds still look like the world’s safest investment, thank goodness.

But we’re on the path to the end of the fiscal sustainability cliff, the edge of which we won’t see until we’re likely past it, given how full-speed-ahead we seem to be running toward that unknown edge.  (Think Wile E. Coyote chasing the Road Runner.)  So it’s time to at least change the momentum, even if we can’t so easily just change direction.

The super committee’s failure was a political one.  The super committee’s task was, and still is, a rather uncomplicated economic one.  Given the political constraints and what we’ve learned about what doesn’t work (putting decisions in the hands of politicians currently in office), slowing down the race to the edge of the fiscal cliff will require getting the public more involved.

Here’s how Concord Coalition’s Bob Bixby explained what has to be done in a recent CNN-Money column:

Under current law, $1.2 trillion in spending cuts triggered by the super committee’s failure would take effect and $4.7 trillion in tax cuts would expire, raising government revenue by significant amounts and lowering future interest costs. According to the Congressional Budget Office, this would bring the budget into “primary balance” — meaning that revenues would cover all spending except for interest payments — by 2014. The national debt would come down somewhat from 67% to 61% of the economy. More would need to be done, but that’s not a bad start.

There are problems with sticking to the exact policies and timing of current law, including legitimate short-term economic concerns. Nor should the brunt of any deficit reduction plan be placed on those who can least afford it.

To accommodate those circumstances, Congress could make some changes in the mix and timing of policies but still aim to keep the 10-year deficit-reduction total from current law on track.

Government projections assume the $1.2 trillion in savings Congress intended to back up the super committee, and financial markets are counting on them. Repealing the trigger or reducing its impact would further erode congressional credibility and possibly lead to another downgrade of the nation’s credit rating.

There is still time for Washington to get things right before expensive, deficit-financed policies are extended. A commitment to a process that enforces strict pay-as-you-go rules and guides policies toward the deficit reduction in current law would help.

And how the public’s involvement is needed:

The Concord Coalition’s deficit-reduction exercises and other public engagement efforts in cities across the country have consistently shown that people of all ages and varied ideologies are willing to make hard budget choices — as long as there is shared sacrifice, with everything on the table.

Members of Congress with differing viewpoints should pair up for “two-by-two” fiscal forums in which they present agreed-upon facts and engage with each other’s constituents about budget options. Such forums would broaden understanding of the key issues and promote civic discourse about solutions.

A good example was set earlier this year by Senators Mark Warner, a Democrat from Virginia, and Saxby Chambliss, a Republican from Georgia. The two held joint forums in Richmond and Atlanta.

Back in Washington, members should also pair up in co-sponsoring bipartisan plans to address the deficit, with or without the support of congressional leaders. Efforts such as the Senate’s “Gang of Six” should be revived and expanded. The logical place to start is with the recommendations of the Bowles-Simpson and Rivlin-Domenici commissions.

Congress is now debating the extension of both unemployment benefits and payroll tax cuts.  Both policies are typically deficit financed because they are intended as policies that will stimulate the demand for goods and services–lack of demand being the binding constraint in an economy with high unemployment and other idle resources.  The current debate is less over the desire of politicians to extend those policies (most on both sides say “yes”) and more about whether these policies can be and should be paid for–if their cost can be offset with spending cuts or revenue increases that take place more slowly over the next ten years and do not “neuter” the stimulative effect of the original policies.  Yes, this is indeed possible, with some offsets making more sense than others.  Of course, the Republicans would prefer the offsets be spending cuts, while the Democrats would prefer they be tax increases on the rich.  So here we are, right back to the same old debate–and the same old (mostly political) “sticking point.”

My colleague Josh Gordon and I briefly discuss the “what now” in the video above.  Bob appeared live on C-SPAN on Thanksgiving morning with this excellent call-in interview, as well.

I plan to write a bit more about the payroll tax cut and proposed offsets within the next few days, so please stay tuned.

And if you like what you read/watch here about the Concord Coalition’s initiatives, please make me happy and “like” us (and follow our activities and join us in our efforts) on Facebook, and become a member/get on our mailing list here on our website.  :)

47 Responses to “What Now for “Fiscal Responsibility?””

  1. comment number 1 by: Vivian Darkbloom

    “There are problems with sticking to the exact policies and timing of current law, including legitimate short-term economic concerns. Nor should the brunt of any deficit reduction plan be placed on those who can least afford it.

    To accommodate those circumstances, Congress could make some changes in the mix and timing of policies but still aim to keep the 10-year deficit-reduction total from current law on track.”

    Forgive me for being confused, because I’ve been reading a lot of stuff claiming that the “Bush tax cuts” were highly regressive. It would therefore stand to reason that if the “Bush Tax Cuts”simply expire, the effect would be “progressive”.

    For a small sample, here’s from a Tax Policy Institute paper containing a distributional analysis:

    “Because the Bush tax cuts were regressive, the largest increases will occur at the top of the income distribution and so the tax system will become more progressive in 2011 unless Congress acts.”

    http://www.urban.org/UploadedPDF/411943_distribution_federal.pdf

    And this, from the Economic Policy Institute which lists “Ten Facts One Should Know abut the Bush Tax Cuts”. The first two are:

    1. The Bush tax cuts were regressive;
    2. The Bush tax cuts disproportionately benefitted the wealthy;
    3. Etc (along similar lines).

    http://www.epi.org/publication/tenth_anniversary_of_the_bush-era_tax_cuts/

    So, I’m confused when Mr. Bixby writes that merely following current law (allowing the “Bush/Obama Tax Cuts” to expire), would result in the “brunt” of the tax increases falling on those who can least afford it.

  2. comment number 2 by: SteveinCH

    Vivian,

    Good point but let me put a few facts on the board. Whether the Bush tax cuts were progressive or regressive depends on what metric you want to use to define progressive or regressive.

    The TPC (and EPI) tend to use “change in after tax income” as the metric of progressivity. A change that has a greater negative percentage effect on the after tax income of the less well off than the more well off is define as regressive.

    I’ll argue that that metric is a pretty silly way to look at it. In general, people define progressive taxation as wealthier people paying a higher percentage of their income than poor people. If you use this metric, the appropriate measure of progressivity is the ratio between the taxes paid by the wealthy and those paid by the poor or the middle class.

    The Bush tax cuts did very little to alter this ratio although the Obama tax cuts (MWP and the payroll tax cut) have made the overall code more progressive by this approach.

    Thus, my view is that the Bush tax cuts did very little to tax progressivity of total Federal taxes. I base this off of looking at the CBO data for 2000 and 2006 and looking at the changes between the two.

    My only point is that the starting point for the discussion is what’s your definition of progressivity. The second question is “how much progressivity should be have?” Then you’d get to how far we are off of that ideal level of progressivity.

    What’s even more interesting to me is that by the ratio definition of progressivity, Federal income and payroll and imputed corporate taxes are arguably more progressive today than they were in 1970. Indeed the effective tax rate for these taxes paid by the people in the 60th to the 99th percentile of the income distribution is higher in 2006 than it was in 1970. It’s lower for everyone else, far lower for those in the 0 to 40th percentile and those in the top .1%.

  3. comment number 3 by: Vivian Darkbloom

    Steve,

    Thanks for the thoughtful comment.

    My original comment was, in part (though not completely) facetious. I was being somewhat facetious because there seems to be a direct correlation between those who claim the Bush tax cuts were “regressive” and those who now argue that failing to extend those cuts (in toto) would suddently be regressive, too. In fairness to Bixby, though, I don’t know what, if anything, he may have said on this in the past.

  4. comment number 4 by: Vivian Darkbloom

    Steve,

    You wrote:

    “The TPC (and EPI) tend to use “change in after tax income” as the metric of progressivity. A change that has a greater negative percentage effect on the after tax income of the less well off than the more well off is define as regressive.

    I’ll argue that that metric is a pretty silly way to look at it. In general, people define progressive taxation as wealthier people paying a higher percentage of their income than poor people. If you use this metric, the appropriate measure of progressivity is the ratio between the taxes paid by the wealthy and those paid by the poor or the middle class.”

    If I understand this correctly, para 1 above refers to the effect of a tax *change* and para 2 refers to the nature of a tax system in toto (perhaps after the change, if any, has taken effect).

    If I’m right, this would mean, I think, that if one argues that every time a tax “change” is under consideration, it should be “progressive” (and that wish is granted) then the cumulative effect of all such changes would be to confiscate 100 percent of high-end income earners’ income. The escalating effect of this sort of reminds me of the effect of benchmarking CEO pay.

    Conversely, of course, the opposite would be true if every change would be “regressive” we would ultimately capture all the income of low-income earners.

    This is sort of reminiscent of the “baseline” issue which I don’t mean to reopen here in a slightly different context.

  5. comment number 5 by: SteveinCH

    Vivian,

    I think you are correct. If every tax change ever were progressive, the ultimate outcome would be all taxes paid by the highest income earners.

    It is very reminiscent of the baseline issue which is why, in my view, the starting point is to determine an appropriate level of progressivity and an appropriate level of analysis. For example, many who argue the tax code is not sufficiently progressive tend to lump state and local taxes into the conversation. The problem with this in my view is that it introduces hundreds of new taxing authorities into the conversation and asserts that net average outcomes are what matters.

    In point of fact Federal taxes are steeply progressive and state and local taxes are (on average) regressive at least with regard to income.

    Arguing that Federal tax progressivity should offset state and local tax regressivity seems a pretty odd argument to me.

    In any event, the information on the internet about tax progressivity is so bad that I have very low expectations for us making progress. We cannot even agree on where we are, much less where we would like to go from here.

  6. comment number 6 by: AMTbuff

    Under current law, $1.2 trillion in spending cuts triggered by the super committee’s failure would take effect and $4.7 trillion in tax cuts would expire, raising government revenue by significant amounts and lowering future interest costs.

    I have run the numbers. Expiration of AMT relief would, by itself, increase my federal tax liability by 30%. I would have to cut way back on my spending. Multiply that by 20 million or more upper middle class taxpayers and you have a recipe for economic contraction. This is not cost-free revenue. Not by a long shot.

    The second question is “how much progressivity should be have?”
    The answer is always “More”. You will never see any progressive writers criticize any tax proposal as “too progressive”. The very thought would make their heads explode.

    The facts are that governments which spend a high percentage of GDP necessarily extend heavy taxes deeply into the middle class, because that’s where the money is. Higher spending REQUIRES more regressive taxation. Progressives don’t seem to realize this.

  7. comment number 7 by: B Davis

    Vivian Darkbloom wrote:


    And this, from the Economic Policy Institute which lists “Ten Facts One Should Know abut the Bush Tax Cuts”. The first two are:

    1. The Bush tax cuts were regressive;
    2. The Bush tax cuts disproportionately benefitted the wealthy;
    3. Etc (along similar lines).

    :

    So, I’m confused when Mr. Bixby writes that merely following current law (allowing the “Bush/Obama Tax Cuts” to expire), would result in the “brunt” of the tax increases falling on those who can least afford it.

    If you look at the original quote, it’s not clear that Bixby is talking about the “Bush/Obama Tax Cuts”, at least not exclusively. In any case, it’s overly simplistic to talk of those tax cuts as having been simply regressive or progressive. If you look at the second graph at this link, you’ll see that the largest tax rate cut went to the very lowest taxable income with the creation of the new 10% marginal bracket out of the lower portion of the existing 15% bracket. However, the smallest rate cuts went to those at the top of the existing 15% bracket (singles with taxable incomes of $28,400 and married couples with taxable incomes of $47,450) because the rates on that portion of the bracket did not change. Also, as stated in the note below the tables, those graphs do not include the increase in the child tax credit or the reduction of the tax on dividends and capital gains. The tax cuts on dividends and capital gains, of course, were highly regressive since they greatly favor those with high incomes.

    You can find more on this topic in the analysis at this link. Following is the first part of the its conclusion:

    In conclusion, the 2001 and 2003 tax cuts are not generally skewed toward lower-income taxpayers as is suggested by the Treasury examples, at least not if the child tax credit and marriage penalty are properly excluded. Except for the those in the new 10 percent bracket, the percent reductions caused by the 2001 and 2003 rate reductions and changes in the tax brackets are flat or slightly skewed toward higher-income taxpayers. Looking at the 2003 tax cut alone, the percent reductions are, excepting the spikes caused by the change in the brackets, clearly skewed toward higher-income taxpayers.

  8. comment number 8 by: SteveinCH

    B Davis,

    Why is it proper to exclude the marriage penalty and the child tax credit changes? Do you mean to imply that “ending the Bush tax cuts” would keep those changes?

    If so, isn’t it the case that one is not concerned with “ending the Bush tax cuts” but rather “increasing marginal tax rates to what they were under Clinton?”

    But that can’t be right because marginal tax rates would be higher (under current law where the Bush tax cuts end) in 2014 than they were under Clinton. Remember the increase in taxes to finance the ACA?

    Your post indicates why the mantra of “repealing the Bush tax cuts” is silly on its face. Almost nobody who uses those words actually means them unless you add the proviso (that I don’t like) at the end of the sentence.

    As to the “tax cuts on dividends and capital gains being highly regressive”, it’s as easy to write, the creation of the new 10% marginal bracket was highly progressive. Any change in the tax code, taken in isolation is a bit irrelevant when looking at a broad change in the code.

    And that’s without pointing out that you entire argument is based on marginal rates, which is hardly a measure of a tax code’s progressivity. When looking at effective rate changes, the 2001 and 2003 tax code changes are arguably progressive but not much so.

    Take the effective Federal tax rate in 2000. In 2000, the bottom quintile had an effective rate of 6.4, the middle quintile 16.6, and the top 1% had a rate of 33.0. Thus, the top 1% paid 2.0 times as much as the middle and 5.1 times the bottom quintile.

    In 2004 (after the 2001 and 2003 tax cuts), the bottom quintile paid 4.3 percent, the middle 14.1 percent and the top 1% paid 31.4 percent. So the rate paid by the top 1% was now 2.2 times the middle and 7.3 times the bottom.

    By my math, that clearly shows a more progressive tax code when one looks at effective rates as one should in assessing progressivity.

  9. comment number 9 by: Vivian Darkbloom

    Mr. Davis,

    You are absoutely right about one thing: Mr. Bixby likely did not *only* have the “Bush tax cuts” in mind (this is an open forum; clearly he can come forward and explain it himself). He references $4.7 trillion in expiring tax cuts. That estimate was likely culled from the CBO estimate of the 10-year cost of expiring tax provisions, which you can find at the following link:

    http://www.cbo.gov/doc.cfm?index=12316

    Look at the right hand column for the excel file.

    When we talk about “those bearing the “brunt” of expiring tax provisions, one naturally thinks of expiring tax provisions affecting individuals and this is predominately, but not exclusively, the 2001 and 2003 Act provisions (as extended in 2010 and hence the reference to 2010 in the CBO excel file).

    But, if you please, let’s take a closer look at *all* those expiring provisions. When you add them up, (expiring Subpart F exclusion for active financing income, AMT relief, etc., etc:,) the case that letting *everything* expire would result in those who “can least afford it” bearing the *brunt* of the cost is much; much more tenous than simply letting the 2001 and 2003 provisions expire so to avoid that there is absolutely no need to “change the mix”. If anything, I did Mr. BIxby a favor by excluding all those other tax provisions most of which, I’m sure, have nothing to do with his likely perception of “those who can least afford it”.

    One could also entertain the possibility that Mr. Bixby had in mind the expiring payroll tax holiday which was originally *sold* as a temporary “stimulus” measure and not a tax policy measure. The 2001 and 2003 measures were “temporary” as well (but not so obviously so) and sold, in part (but not so exclusively so), on stimulus arguments.

    So, I think there are two major lessons here:

    First, the idea that we need to “change the mix” is not at all about the deficit, but about a desire to make the tax code more progressive than it now is. Second, this should be a real object lesson on the dangers of “temporary” tax provisions, particularly those that are sold as “stimulus”. Most often, there is a much different agenda lurking beneath the surface (never let a crisis go to waste?).

    We can carve out any number of expiring tax provisions and then triumphantly claim the net effect is “progressive” or “regressive” (such as the effect of the 10 percent bracket, to add to SteveinCH’s list) but that would be mere sophistry. The real point here was: if we do *nothing*, who will “bear the brunt?”. Reasonable people can (and do) differ as to what “progressivity” means and, even, where to draw the line on “who can least afford it”, but looking to the expiring individual tax cuts, much less *all* the expiring tax cuts, I do not see that any reasonable case can be made that “those who can least afford it” will “bear the brunt” if we do nothing and do not “change the mix”.

  10. comment number 10 by: AMTbuff

    I can think of one tool available to tax analysts who aim to deceive readers: AMT relief expires in 4 weeks. The other tax cuts expire in at the end of 2012. If you assume current law is not modified, the AMT will slam the upper middle class in 2012. Very progressive! Then in 2013 increased regular tax rates will slam the middle class, with no effect on upper middle class taxpayers who were pushed deeply into the AMT a year earlier. If you measure the 2013 wave of expiration and ignore the 2012 wave, then you can call the expiration regressive.

    If you actually explain your reasoning, the reader will plainly see the deception. So you have to state just the conclusion with the least possible explanation.

    I don’t know if anyone has used this trick, but if Krugman tries it next year, the Internet will expose him as having stolen the idea from me!

  11. comment number 11 by: Jim Glass

    at least not if the child tax credit and marriage penalty are properly excluded

    How is the child tax credit “properly excluded” from the Bush tax cuts, to make them non-progressive?

    If there were an equal sized — that is *large* — “millionaires’ tax credit”, would that be excluded too?

  12. comment number 12 by: AMTbuff

    It’s properly excluded if and only if exclusion leads to the preferred result.

    For example, Republicans can properly exclude the cost of Medicare Part D from Bush’s expansion of the deficit because Democrats were pushing Bush for a prescription drug benefit and they would have enacted something even more expensive if not preempted by Part D. See how easy that was?

  13. comment number 13 by: B Davis

    SteveinCH wrote:

    Why is it proper to exclude the marriage penalty and the child tax credit changes? Do you mean to imply that “ending the Bush tax cuts” would keep those changes?

    Jim Glass wrote:

    How is the child tax credit “properly excluded” from the Bush tax cuts, to make them non-progressive?

    If there were an equal sized - that is *large* - “millionaires’ tax credit”, would that be excluded too?

    AMTbuff wrote:

    It’s properly excluded if and only if exclusion leads to the preferred result.

    Investopedia.com defines a progressive tax as “A tax that takes a larger percentage from the income of high-income earners than it does from low-income individuals”. Hence, it’s proper to exclude the marriage penalty and the child tax credit changes because they are not based on income. Regarding the child tax credit, following is an excerpt from my prior post titled Examples and Distribution of the 2003 Tax Cut:

    Examples 2 through 4 all gain $800 dollars from the increase in the child tax credit. Now some may feel that the lower income couple should get a higher child credit because they need it more. Others may feel that the higher income couple should get a higher child credit because they will spend more on the child. Still, the general consensus and practice has long been that all couples should get the same child credit. Any set increase in this credit will obviously appear as a higher percentage cut in the taxes of the lower-income couple. For this reason, the credit should not be included in the calculation of tax cut percentage for the purpose of measuring the distribution of taxes, at least not if the distribution is being used to judge the fairness of the tax cut. The size of the child credit is a valid issue in measuring the distribution of taxes between those who get the credit and those who do not. But it is not a valid issue in judging the fairness between people of different incomes, all of whom qualify for the same credit.

    Now if the Bush tax cut had added or increased a tax credit that applied to ALL taxpayers, it could be argued that it should be included in measuring the change in progressivity. Likewise, it could be argued that one should include changes that are closely correlated to income such as the tax cut on capital gains and dividends (since those with higher incomes tend to have higher capital gains and dividends). But it doesn’t make sense to include tax changes that have little relation to income like the child tax credit and change in the so-called marriage penalty.

  14. comment number 14 by: B Davis

    Vivian Darkbloom wrote:

    First, the idea that we need to “change the mix” is not at all about the deficit, but about a desire to make the tax code more progressive than it now is. Second, this should be a real object lesson on the dangers of “temporary” tax provisions, particularly those that are sold as “stimulus”. Most often, there is a much different agenda lurking beneath the surface (never let a crisis go to waste?).

    I agree that it is “temporary” tax cuts are dangerous in that they are very difficult to end. However, the same applies to the Bush tax cuts which were passed as “temporary” tax cuts. They have turned out into the bad policy that just keeps giving. They have confused the budget discussion during the past ten years in that they created two baselines: current law under which the tax cuts expire and the likely alternative under which they are extended. During public discussions of these baselines, most of the public likely did not understand which baseline is being referenced. This allowed politicians on both sides of the aisle to word games with the public arguments that they put forth.

    Secondly, as I said, “temporary” tax cuts are very difficult to end. It does seem that we have been able to end certain narrowly-targeted temporary tax cuts such as those for business. But it’s very difficult to end a tax cut given to the public at large as politicians on both sides will demogogue the expiration of a temporary tax cut as a tax HIKE.

    Reasonable people can (and do) differ as to what “progressivity” means and, even, where to draw the line on “who can least afford it”, but looking to the expiring individual tax cuts, much less *all* the expiring tax cuts, I do not see that any reasonable case can be made that “those who can least afford it” will “bear the brunt” if we do nothing and do not “change the mix”.

    Following is an excerpt from my prior post titled Examples and Distribution of the 2003 Tax Cut:

    In conclusion, the 2001 and 2003 tax cuts are not generally skewed toward lower-income taxpayers as is suggested by the Treasury examples, at least not if the child tax credit and marriage penalty are properly excluded. Except for the those in the new 10 percent bracket, the percent reductions caused by the 2001 and 2003 rate reductions and changes in the tax brackets are flat or slightly skewed toward higher-income taxpayers. Looking at the 2003 tax cut alone, the percent reductions are, excepting the spikes caused by the change in the brackets, clearly skewed toward higher-income taxpayers.

    Even if one chooses not to exclude the child credit and reduction in the marriage penalty from the distribution study, one has to address the fact that, for those who do not benefit from these changes, the distribution is very much different than it is for those who do benefit. As the prior modified examples show, the distribution for childless taxpayers is very much skewed toward those with higher incomes. This is especially the case for single taxpayers. This skewing is likely made much greater by the reduction in taxes on dividends and capital gains. However, since there is no precise link between the level of income and the level of dividends and capital gains, this would best be studied via a distribution table.

    Regarding who will “pay the brunt”, I think you also have to consider who will pay the brunt of any changes that are required to pay for these tax cuts. If the costs are paid chiefly by cuts to programs that benefit low-wage workers, then that needs to be considered.

  15. comment number 15 by: SteveinCH

    B Davis,

    Your logic is off in my view. If a tax that isn’t based on income should be excluded, then, by extension, all sales taxes have no distributional effects. A VAT, by your definition could be neither progressive nor regressive, regardless of how structured.

    It would be nice if you understood that effective tax rates are what matter, not marginal rates because the thing that matters is what you pay as a percentage of your income, not the way in which that payment is arrived at.

    Also, you are confusing vertical equity with horizontal equity but no point in debating that until we get you off of the marginal rate discussion.

  16. comment number 16 by: Vivian Darkbloom

    B. Davis,

    I had exactly the same reaction to your logic exlcuding the child credit and marriage penalty as did SteveinCH.

    But, let me put it slightly differently: It is completely irrelevant whether these tax provisions are *based on* income; what is relevant is what the *effect* is. That is, unless, you believe that form should prevail over substance.

    Suppose we were to change the mortgage interest deduction such that mortgage interest is only deductible over amounts paid on mortgages in *excess* of $1.2 million instead of law which limits the deduction of interest on mortgages *less* than $1.2 million. Such a change would have nothing, per se, to do with a taxpayer’s *income*. Do you think such a change would tend to make the Code more progressive or less progressive?

    And, why *should* we look at the 2003 tax cuts *alone*, much less any of the other bits and pieces *alone* if the discussion is about letting current law lapse?

  17. comment number 17 by: B Davis

    SteveinCH wrote:

    Your logic is off in my view. If a tax that isn’t based on income should be excluded, then, by extension, all sales taxes have no distributional effects. A VAT, by your definition could be neither progressive nor regressive, regardless of how structured.

    Please reread what I said in comment number 13 above. Once again, I said:

    Now if the Bush tax cut had added or increased a tax credit that applied to ALL taxpayers, it could be argued that it should be included in measuring the change in progressivity. Likewise, it could be argued that one should include changes that are closely correlated to income such as the tax cut on capital gains and dividends (since those with higher incomes tend to have higher capital gains and dividends).

    A sales tax applies to all taxpayers though it’s progressivity would depend on it’s exact structure and any items that were excluded. The same would presumedly apply to a VAT. The benefits of the child tax credit and elimination of the marriage penalty, however, apply to only very distinct groups.

    It would be nice if you understood that effective tax rates are what matter, not marginal rates because the thing that matters is what you pay as a percentage of your income, not the way in which that payment is arrived at.

    Yes, and it “would be nice” if you were a little less condescending. I’m very familiar with effective tax rates as you can see from the data I’ve posted at this link. From the second graph, it appears that the effective income tax rate reductions were greater for the upper quintile. From the first graph, it appears that the total effective tax reductions were much more evenly distributed. In addition, I go on to describe the usefulness of the effective tax rate at this link where I state the following:

    In any event, I would contend that the biggest problem with the Journal’s chart is the use of the top marginal rate. This rate tells you absolutely nothing about the levels of the other tax brackets or other changes in the tax code. A much better measure is the effective tax rate. A brief definition of effective tax rate is given here as “actual income tax paid divided by net taxable income before taxes, expressed as a percentage”.

    Also, you are confusing vertical equity with horizontal equity but no point in debating that until we get you off of the marginal rate discussion.

    And I see no point in debating until we get you off the simple idea that all tax measures are either progressive or regressive. I will concede that the child tax credit is looked at by many as being “progressive”. If you google “progressivity child care tax credit” (without the quotes), you’ll find a number of articles that discuss the progressivity of the child care tax credit. However, this progressivity is only on average. For a married couple with several children, the Bush tax cuts may have been effectively progressive. But for single person with no children who was at the top of the then 15% tax bracket, they were highly regressive.

  18. comment number 18 by: SteveinCH

    You frist two points are in conflict. If effective tax rates matter then tax changes that effect only some taxpayer matter because they change those people’s effective tax rates.

    Use the example Vivian used on the mortgage interest deduction. It changes the taxpayers affected, is not driven by income directly (rather by housing cost) and it would affect the effective tax rates of some taxpayers. It therefore changes the progressivity of the entire tax table.

    Every tax change is “on average” progressive, regressive or neutral. But to argue that a change can only be progressive or regressive if it affects all taxpayers similarly is to say that every tax policy must be perfectly horizontally equitable with income…that is that all people of the same income should pay the same tax rate. It’s a nice theory and one I agree with but it’s never going to happen.

    Thus, you have two choices. You can argue that any change that doesn’t have horizontal equity should be excluded from vertical analysis (progressivity) or you can use on average outcomes. The latter is preferable because the alternative is to simply say that we can only assess the rate table and the rest of the code doesn’t matter.

    As to your contention about effective tax rate reductions being greatest at the top, I don’t think that’s right if you go from 2000 to 2004 (encompassing the 2001 and 2003 changes). Furthermore, the relationship between the rates is what matters.

    Imagine a world with two people. John pays 50% of his income and Sally pays 25%. If the rates decline to 45% and 20%, is the rate table more or less progressive? In my view, the latter rate table is more progressive because John now pays 2.25 times the rate of Sally rather than 2 times.

    In a similar fashion, as I posted above, the rate table in 2004 was slightly more progressive than the rate table in 2000 on an effective rate basis.

  19. comment number 19 by: AMTbuff

    If the rates decline to 45% and 20%, is the rate table more or less progressive? In my view, the latter rate table is more progressive because John now pays 2.25 times the rate of Sally rather than 2 times.

    Economists use the net after-tax ratios, which for your example are 0.5 to 0.55, a 10% increase in after-tax income, and 0.75 to 0.8, a 6.7% increase. So your example is regressive.

  20. comment number 20 by: SteveinCH

    In my view, economists are incorrect. A progressive tax code is about what you pay, not what you are left with.

    It’s one of the places I think people like the TPC are making a large mistake definitionally.

  21. comment number 21 by: B Davis

    SteveinCH wrote:

    You frist two points are in conflict. If effective tax rates matter then tax changes that effect only some taxpayer matter because they change those people’s effective tax rates.

    I didn’t say that tax changes that effect only some people don’t matter. However, you can’t make broad statements about the progressivity of taxes if you include those changes. If you do, you need to be clear that you are simply looking at the average. If you really want to get clear picture of how the child tax credit effects progressivity for individuals, you need to divide taxpayers up according to the number of child tax credits they are claiming. If Warren Buffett were to move to a poor neighborhood, you wouldn’t simply say that the neighborhood had become rich, on average, at least if you were trying to convey useful information. Just as Buffett’s wealth has no direct effect on the wealth of others, child tax credits have no effect on those taxpayers who have no children.

    In a similar fashion, as I posted above, the rate table in 2004 was slightly more progressive than the rate table in 2000 on an effective rate basis.

    Do you have a source for that statement and/or can you present the math for it? There is a danger in accepting statements without evidence (enter Vivian Darkbloom).

  22. comment number 22 by: SteveinCH

    In post 8 supra, I quoted the numbers. The source for the data is the CBO report on effective tax rates.

    http://www.cbo.gov/publications/collections/tax/2009/effective_rates.pdf

    As to your point on averages, absent a code with complete horizontal equity (which we will never have), it is the only analytical choice available.

  23. comment number 23 by: Vivian Darkbloom

    B. Davis,

    So, in conclusion, would you say that if we let “current law expire” that that would make the tax code more or less progressive, as measured by:

    1. The 2001 and 2003 tax provisions alone (the “Bush tax cuts”); or

    2. Letting everything lapse (i.e. the full $4.7 trillion as referenced by Mr. Bixby and as cross-referenced by my link to the CBO summary)?

    I don’t mind if you make a “broad statement” or merely resort to “averages”, but please make clear which measure you are using.

  24. comment number 24 by: B Davis

    SteveinCH wrote:

    In post 8 supra, I quoted the numbers. The source for the data is the CBO report on effective tax rates.

    http://www.cbo.gov/publications/collections/tax/2009/effective_rates.pdf

    Thanks for providing a link to your source.

    As to your point on averages, absent a code with complete horizontal equity (which we will never have), it is the only analytical choice available.

    I don’t know why you say that complete horizontal equity is the only other alternative for measuring progressivity. In my view, a tax cut in which all marginal rates are reduced by the same percentage would not change the progressivity of the tax rates. This would cause all taxes to fall by the same percentage. Of course, this ignores any changes in deductions or credits such as the child tax credit. I would suggest that these need to be analyzed separately since they don’t apply to all taxpayers. The same applies to changes in items not directly tied to income such as the cut in dividends and capital gains. These might best be analyzed via distribution tables.

    Getting back to the tax rates, following are the cuts to the marginal rates provided by the 2001 and 2003 Bush tax cuts:

    Old rate New rate Percent reduction
    ——– ——– —————–
    lower 15 10 33.3
    upper 15 15 0.0
    28 25 10.7
    31 28 9.7
    36 33 8.3
    39.6 35 11.6

    As you can see, the percent reductions in the marginal tax rates were anything but equitable. Most glaring is the bizarre decision to give the lower portion of the existing 15% tax bracket a 33.3% reduction and absolutely no reduction to the upper portion of that 15% tax bracket. A cynic might say that this was done so that defenders of the tax cut could truthfully say that the largest tax rate reductions went to the lowest bracket. In any event, it makes no sense to say that the tax rate reductions as a whole were progressive or regressive. The second graph at this link shows the reduction to the effective tax due to the changes in the marginal tax rates. As you can see, the smallest percent reductions were at the top of the existing 15% bracket.

  25. comment number 25 by: B Davis

    Hopefully, this is will be a more readable version of the table in my prior post:

    Old rate New rate Percent reduction
    ________ ________ _________________
    lower 15 ____10__ _____33.3
    upper 15 ____15__ ______0.0
    ___28___ ____25__ _____10.7
    ___31___ ____28__ ______9.7
    ___36___ ____33__ ______8.3
    ___39.6_ ____35__ _____11.6

  26. comment number 26 by: AMTbuff

    As you can see, the percent reductions in the marginal tax rates were anything but equitable.
    This is the problem with baselines. They assign far too much importance to maintaining the precise shape of the baseline’s status quo, where what really matters is achieving a reasonable result. Any baseline is probably defective in many ways, so why perpetuate those defects blindly?

  27. comment number 27 by: SteveinCH

    Your point on rates is incorrect.

    As an example, let’s say we took the marginal rate down across the tax code by 10 percentage points. Some people would now be paying zero whereas others would still be paying something (ignoring everything but the rate table). As you actually saying that such a change would not affect equity.

    Also, once again, by focusing only on the rates, you wind up ignoring many of the other changes that were made that affected effective tax rates. This is the fundamental challenge with your mode of analysis.

    You claim to accept effective rates but continue to resort to the marginal rate table analysis. Even your “effective rate analysis” ignores everything but the marginal rates.

  28. comment number 28 by: Vivian Darkbloom

    “As you can see, the percent reductions in the marginal tax rates were anything but equitable. Most glaring is the bizarre decision to give the lower portion of the existing 15% tax bracket a 33.3% reduction and absolutely no reduction to the upper portion of that 15% tax bracket. A cynic might say that this was done so that defenders of the tax cut could truthfully say that the largest tax rate reductions went to the lowest bracket.”

    I’m not sure merely looking at the change in “marginal rates” makes complete sense in the discussion of what is “equitable” or “non-equitable” as opposed to effective rates. If I was one of those sitting before the tax cuts in the 15 percent bracket (and remained there immediately after the cut), I would have experienced the *full* benefit of the reduction in the first tax bracket, even though it is not my “marginal rate”. If one were to assign to the 15 percent bracket the tax benefits they derived from the reduction of the marginal rate in the lower bracket, one would see a much more linear progression of benefits (and regeression in percentage of effective rate reduction) except at the very top. This makes much more sense in any discussion of “equity”.

    The main economic importance of marginal rates is their incentive effect. One might say that it is “inequitable” to provide some taxpayers with greater marginal incentives than others (in which case those in the highest bracket are really getting the short end) , but here again, simply stating that the 15 percent bracket was not changed is not solely relevant. Those sitting in the 15 percent bracket not only got the benefit of the tax reduction in the lower brackets, but their incentive to move up in brackets also increased). Stated differently, their *potential* marginal rate decreased from 28 percent to 25 percent. That’s a benefit, too.

    B. Davis has written above (and quoted himself again) to the effect that we should look to *effective rates* as to whether the tax code is *progressive*. That’s right, but I’m therefore puzzled as to why B. Davis is now suddenly reverting to looking solely at marginal rates to determine what is, or is not, “equitable”, unless “progressivity” has nothing to do with the concept of “equity”.

    I’m of two minds with respect to the point raised by AMTBuff. *In theory* if we were to agree on what type of tax system is equitable as regards progressivity, etc., then an understanding among voters and politicians that any deviation from this “ideal” baseline should be pro rata would have significant benefits. It would mean, ideally, that if a decision would need to be made to raise taxes (e.g. to support additional spending) all stakeholders would have the same amount (pro rata) of skin in the game. Decision-making by voters and policy makers would then more likely be based on an appropriate “cost-benefit” analysis. In the ideal world, this would be the benefit of a “baseline”. The problem is that regardless of whether a baseline is “defective” it will always be perceived to be so by many, if not most. Removing this type of endless bickering is likely one of the main reasons many promote a truly flat tax where everyone’s marginal *and* effective rates are the same and where changes to that flat rate affect everyone in the same proportion to their incomes.

  29. comment number 29 by: B Davis

    AMTbuff wrote:

    This is the problem with baselines. They assign far too much importance to maintaining the precise shape of the baseline’s status quo, where what really matters is achieving a reasonable result. Any baseline is probably defective in many ways, so why perpetuate those defects blindly?

    I agree that there is nothing sacred about baselines. However, the topic that we were discussing was the change in progressivity, not whether or not the prior progressivity was flawed. Also, I very much doubt that someone looked at the prior tax structure and decided that the lower portion of the 15% bracket desperately needed tax relief and rated the highest tax rate reduction but that the upper portion of the 15% bracket was “sitting pretty” and required no tax rate reduction at all. I think it more likely that defenders of the tax cuts wished to be able to truthfully claim that the highest reduction went to those in the new lowest bracket without losing too much revenue. Dividing the 15% bracket may have also given politicians a better rationale for sending out the $300 checks that everyone got, being 5% (15% - 10%) of the initial $6000 upper limit for the new bracket (see the first table at this link. That made sure that all potential voters were aware that they were getting something back from the politicians!

  30. comment number 30 by: B Davis

    I’m not sure merely looking at the change in “marginal rates” makes complete sense in the discussion of what is “equitable” or “non-equitable” as opposed to effective rates. If I was one of those sitting before the tax cuts in the 15 percent bracket (and remained there immediately after the cut), I would have experienced the *full* benefit of the reduction in the first tax bracket, even though it is not my “marginal rate”. If one were to assign to the 15 percent bracket the tax benefits they derived from the reduction of the marginal rate in the lower bracket, one would see a much more linear progression of benefits (and regeression in percentage of effective rate reduction) except at the very top. This makes much more sense in any discussion of “equity”.

    That is exactly what I did in the graphs and tables at this link. As you can see from the second graph and fourth table, those at the top of the 15% bracket received a reduction in their effective rate of 8.6%, 9.2%, and 10.3% for single, head of household, and married-joint filing, respectively. That’s above the marginal reduction of 0% because it includes the $300 ($350 in 2003) reduction from the lowest bracket. In fact, I notice from the notes at the bottom of that page that I included the change in the so-called marriage penalty that was based on income. That is the reason for the big spike up in the rate reductions for married-joint filing.

    B. Davis has written above (and quoted himself again) to the effect that we should look to *effective rates* as to whether the tax code is *progressive*. That’s right, but I’m therefore puzzled as to why B. Davis is now suddenly reverting to looking solely at marginal rates to determine what is, or is not, “equitable”, unless “progressivity” has nothing to do with the concept of “equity”.

    Please provide the exact quote where I said that “effective rates” were best for measuring progressivity. Following is my quote in comment number 17 about the “usefulness of the effective tax rate” (taken from my prior blog post:

    In any event, I would contend that the biggest problem with the Journal’s chart is the use of the top marginal rate. This rate tells you absolutely nothing about the levels of the other tax brackets or other changes in the tax code. A much better measure is the effective tax rate. A brief definition of effective tax rate is given here as “actual income tax paid divided by net taxable income before taxes, expressed as a percentage”.

    So what I am saying is that the effective tax rate is a better measure than the top marginal rate for the revenue that is expected to result. Being a broad, average measure, it’s not better than all other measures for determining the progressivity over all groups of taxpayers. I never said that it was. If you think otherwise, please provide the exact quote where I did say that “effective rates” were best for measuring progressivity.

  31. comment number 31 by: B Davis

    SteveinCH wrote:

    Your point on rates is incorrect.

    As an example, let’s say we took the marginal rate down across the tax code by 10 percentage points. Some people would now be paying zero whereas others would still be paying something (ignoring everything but the rate table). As you actually saying that such a change would not affect equity.

    As I explain to Vivian Darkbloom above, I see no evidence that the effective tax rate is the “holy grail” for measuring progressivity. It does have the advantage of including other factors like the child credit. However, it has the disadvantage of averaging all taxpayers in each income group together, discerning no difference between those who benefit from a deduction and those who do not.

    The fact that many taxpayers pay a zero or negative effective tax suggests that the effective tax rates also includes the personal deduction as well as earned income credit. That’s fine for predicting the revenues but arguably not so great for measuring progressivity. Many people see progressivity as differences in taxes due strictly to income. The personal exemptions and child credits, on the other hand, are seen by many as a credit to cover the basic cost of living. In a sense, it’s similar to the deductions by businesses for the cost of doing business. I have heard no one suggest that these business deductions increase the progressivity of the corporate tax. The point, as I said, is that the effective rate is not the “holy grail” for measuring progressivity. You need to also look at other measures if you want to measure the effect on individuals and groups of individuals. You also need to look carefully at exactly what your version of the effective rate is measuring.

    You claim to accept effective rates but continue to resort to the marginal rate table analysis. Even your “effective rate analysis” ignores everything but the marginal rates.

    As I explain to Vivian Darkbloom above, I also included the portion of the so-called marriage penalty that depended on income. That said, it’s not clear that this should be included in a measure of progressivity since it supposedly a fix to a flaw in the tax code. That’s another reason for carefully studying and thinking about everything that is included in the effective tax rate to determine if it is appropriate for measuring progressivity.

  32. comment number 32 by: Vivian Darkbloom

    B. Davis,

    So, why are you *now* arguing that the failure to provide a marginal rate cut to the upper end of the 15 percent bracket is “inequitable”? You wrote:

    “As you can see, the percent reductions in the marginal tax rates were anything but equitable. Most glaring is the bizarre decision to give the lower portion of the existing 15% tax bracket a 33.3% reduction and absolutely no reduction to the upper portion of that 15% tax bracket.”

    So, what is *your* measure of equity, after all? I’m not looking to you for a “holy grail”; I’m merely looking for consistency. As you may recall from Comment 1, lack of consistency was my foremost objection.

    And, although I don’t normally read Ezra Klein, as to the earlier point about the progressivity or lack thereof, of letting current law expire, I rather accidently ran across the following from his blog via Mickey Kaus. Klein was writing about the failure of the “Super Committee” to reach agreement:

    ““So now there are two triggers. One is an extremely progressive spending trigger worth $1.2 trillion that goes off on January 1, 2013. The other is an extremely progressive tax trigger worth $3.8 trillion that goes off on…January 1, 2013. If you count reduced interest payments, the two policies alone would reduce future deficits by about $6 trillion. That’s far more than anything the supercommittee came close to discussing. It’s distributed far more progressively than anything the Democrats have even considered proposing. And all that needs to happen for it to pass is, well, nothing.”

    http://www.washingtonpost.com/blogs/ezra-klein/post/wonkbook-the-gops-dual-trigger-nightmare/2011/11/23/gIQA1BmxnN_blog.html

  33. comment number 33 by: Jim Glass

    Many people see progressivity as differences in taxes due strictly to income. The personal exemptions and child credits, on the other hand, are seen by many as a credit to cover the basic cost of living. In a sense, it’s similar to the deductions by businesses for the cost of doing business

    Not at all. The two are totally dissimilar on principle.

    “Deductions by businesses for the cost of doing business” are used to *determine* income. They are subtracted from revenue to calculate income, to which the income tax rate is applied. If a business’s expenses exceed its revenue it has no income at all, but a loss, so how much income tax should it pay?

    Child credits and personal exemptions OTOH are allowed after income is determined. They may be “seen” as covering basic cost of living but this is a total fiction. There is no connetion between them at all.

    Their amount has never been calculated/adjusted in relation to any measure of actual living expenses. They come and go, rise and fall, in response to interest groups politics — exactly like the “marriage penalty” (which constantly shifts with voter demographics, with no relation to any principle), the home mortgage deduction (a sop to homeowners), deduction for medical expenses, and all such else. The creation of the child credit was a pure political play. In this regard these items are like the tax sops to business interest groups that are applied *after* taxable income is determined — investment credits, research credits, accelerated depreciation, equipment expensing, etc. They all “seem” to have some fundamental justification, which is how they get sold, but in fact it is all interest group tax politics.

    In contrast, Congress really isn’t supposed to apply “income tax” to what is not income (there is even a constitutional issue there) so deductions and adjustments used to determine income operate on another plane.

    To put it all together in one package: I am self employed. From my business revenue I subtract my cost-of- doing business expenses to determine my business income. The courts protect my right to do that, they don’t want the Congress and the IRS applying income tax to income I don’t have. Beyond that, I claim equipment expensing (for the cost of the new computer I buy myself before each Christmas, etc.) and all the other business tax goodies I pay my lobbiests to get me. My net from that is my personal income. I pay the income tax bracket rates on it and bitch and moan about that — but also deduct my mortgage interest and claim my child credit and all the other personal tax breaks the my politicians know they had better give me to cover my basic cost of living, or else!

    I have heard no one suggest that these business deductions increase the progressivity of the corporate tax.

    Has anyone ever been concerned about progressivity in the corporate income tax?

  34. comment number 34 by: Jim Glass

    “Progressivity” regarding the tax code is an *extremely* subjective issue, which is why political interest groups can argue each side of it going back and forth as is convenient at the moment forever. Everybody has their own idea of what the word should mean, so argument can go on eternally without achieving anything.

    The only way to make progress in discussion is to agree on a definition to use first, and work from there.

    A long time ago Bill James said the endless arguments about wheter Mickey Mantle or Willie Mays was the best center fielder could be resolved only by defining “best”. If “best” meant highest peak performance than the clear answer was Mantle, if “best” meant total career value then the clear answer was Mays.

    It’s very much like that with this. For example, take the simple notion of slashing taxes for the lower-income part of the popualtion by not only sharply reducing tax rates on those incomes but also giving generous means-tested benefits and tax credits for housing, education, health care, transportation, etc.

    1) It sharply reduces the tax take from the lower-income group and increases transfers to them.

    That’s Progressive!

    2) It sharply *increases* the marginal tax rates the lower-income group must pay as it tries to work its way up into the higher-income part of society. Not only do their normal tax bracket rates rise sharply, but they also lose all their means-tested benefits and credits. This can cause them to pay effective marginal tax rates *far* higher than the statutory rates. (In real life cases, over 100%).

    Slapping punitively high marginal tax rates on the lower-income strongly stymies and deters them from improving themselves. They run into a tax wall that eats up what should be the return from their effors Any economist will tell you that it is *marginal* tax rates that are critical for behavior and welfare.

    Slapping the *highest* marginal tax rates on the poorest is socially destructive and Regressive!

    Both 1) and 2) are true.

  35. comment number 35 by: Vivian Darkbloom

    “I have heard no one suggest that these business deductions increase the progressivity of the corporate tax.”

    Nor have I. Why would they? I would have thought that, if anything, these “corporate deductions” would *reduce* the progressivity of the corporate income tax. Or, do corporations with lower gross income take proportionately higher deductions?

    “Has anyone ever been concerned about progressivity in the corporate income tax?”

    Heck, no. Why should they? Corporations are not people, after all. :-)

  36. comment number 36 by: Vivian Darkbloom

    “A long time ago Bill James said the endless arguments about wheter Mickey Mantle or Willie Mays was the best center fielder could be resolved only by defining “best”. If “best” meant highest peak performance than the clear answer was Mantle, if “best” meant total career value then the clear answer was Mays.”

    And, Bill James also did not know of what he was talking. What about Joe Dimaggio or Ty Cobb?

  37. comment number 37 by: B Davis

    =================================================
    Vivian Darkbloom wrote:

    So, what is *your* measure of equity, after all? I’m not looking to you for a “holy grail”; I’m merely looking for consistency. As you may recall from Comment 1, lack of consistency was my foremost objection.

    And lack of accuracy is my foremost objection. In comment number 28 above you said “B. Davis has written above (and quoted himself again) to the effect that we should look to *effective rates* as to whether the tax code is *progressive*”. I replied in comment number 30 that I never said that and asked you for the exact quote where I did. You ignored that request.

    I have been consistent in saying that the Bush tax cuts were not uniformly progressive or regressive. As the graphs and tables at this link show, taxpayers at the top of the old 15% bracket got less of a tax rate reduction than those in the bottom of that bracket but also less of a tax rate reduction than those in higher brackets. Hence, their tax rate reduction was progressive compared to lower-income taxpayers but regressive compared to higher-income taxpayers.

    If you insist on looking at some broad, overall average, the general consensus that I have seen was that the Bush tax cuts were somewhat regressive but not overly so. But as I said, they were not uniformly regressive or progressive.

    One thing that I do think is very clear is that they were not progressive in the way that some of its proponents were claiming at the time. For example, this link shows that the example put out by the Treasury made the cuts appear to be progressive. However, if you looked at the same examples for single people without children, they made the cuts appear to be generally regressive. In any case, I would suggest that we just agree to disagree on this topic.

  38. comment number 38 by: SteveinCH

    Effective rates ARE a better measure of progressivity. I’ve shown the data B Davis, you’ve chosen to ignore it.

    Agreeing to disagree on a matter of fact is not a place one can do so.

  39. comment number 39 by: B Davis

    SteveinCH wrote:

    Effective rates ARE a better measure of progressivity. I’ve shown the data B Davis, you’ve chosen to ignore it.

    Agreeing to disagree on a matter of fact is not a place one can do so.

    I did not ignore your “facts” but neither did I limit my research to only those facts (as you seemed to do). When I come across apparently disparate facts that seem to contradict each other, I don’t simply accept the facts that please me the most and dismiss the rest. I search for some conclusion that encompasses all of the facts or as many as possible. And I don’t then declare my conclusions to be “facts” and that nobody can henceforth disagree with them.

    First of all, I don’t recall that you presented evidence, much less proved, that effective rates are the best measure of progressivity. You took that as an assumption in the following data and conclusion that you presented in comment number 8:

    Take the effective Federal tax rate in 2000. In 2000, the bottom quintile had an effective rate of 6.4, the middle quintile 16.6, and the top 1% had a rate of 33.0. Thus, the top 1% paid 2.0 times as much as the middle and 5.1 times the bottom quintile.

    In 2004 (after the 2001 and 2003 tax cuts), the bottom quintile paid 4.3 percent, the middle 14.1 percent and the top 1% paid 31.4 percent. So the rate paid by the top 1% was now 2.2 times the middle and 7.3 times the bottom.

    By my math, that clearly shows a more progressive tax code when one looks at effective rates as one should in assessing progressivity.

    Now, that’s all well and good but then I ran into a conflicting conclusion in an article titled Were the Bush Tax Cuts Worse for Progressivity or for Revenues?. Following is an excerpt:

    The Bush tax cuts of the early 2000s reduced the progressivity of federal taxes, but not that much. The chart below shows the effective federal tax rate for each quintile of households and for the top 1% in the business-cycle peak years of 2000 and 2007. The tax rate dropped by a similar amount for each quintile, and only slightly more for the top 1%. (For more discussion and analysis, see pages 24-31 of this CBO report.)

    It appears that this conclusion is similarly based on effective rates from the CBO and yet it came to the opposite conclusion. What was the difference? The main difference that I see is that this article is looking at the “business-cycle peak years of 2000 and 2007″ whereas you’re looking at 2000 and 2004. Your years do more closely encapsulate the Bush tax cut but it is usually very important to look at entire business cycles in economics. In this case, it’s very important and here’s why:

    As you can see from looking at a graph of the S&P, stocks soared during the 90s, especially the latter half, reaching nearly 1500 at the beginning of 2000. They then plummeted and were just a bit above 1100 by the beginning of 2004. By the beginning of 2007, they were approaching another peak and were a bit above 1400. Because of this, high-income taxpayers tended to have much higher capital gains in 2000. This meant that a larger percentage of their income was capital gains on which they paid the lower capital gains tax rate of about 20% (on long-term capital gains). Being less than their top marginal rate, this lowered their effective tax rate.

    In 2004, the capital gains being claimed were obviously much lower than they were in 2000. This meant that a much higher percentage of high-income taxpayer’s income was taxed at the higher top marginal rate and their effective tax was therefore higher. This increase offset the large drops in the effective rates caused by the Bush tax cuts. This offset affect was much less in 2007 when the market had nearly risen back to its 2000 peak. However, even then the percentage of high-income taxpayer’s income that came from capital gains was likely far smaller than it was in 2000. Hence, even looking at full business cycles doesn’t guarantee that effective rates will give a totally accurate picture of progressivity.

    Did you choose the CBO numbers listed in your comment number 8 or did you take them from another source? I am curious to know if there are any economists and/or major publications making this argument.

  40. comment number 40 by: SteveinCH

    B Davis,

    I picked the years. But let me repeat the analysis for 2007 as you’ve quoted 2000 in my comment above. The effective rate for the top 1%, middle quintile and bottom quintile were 29.5%, 14.3% and 4.0%.

    The ratios therefore were 2.1 and 7.4 respectively, still higher in both cases than in 2000.

    The mistake the author you quote makes in arguing that the cuts decreases progressivity is that he looks at reduction in rates in percentage points. Again to take a simple example. If taxpayer A pays 5 percent of his income and taxpayer B pays 50 percent, would a reduction in both tax rates of 5 percentage points increase or decrease progressivity? In your view and that of the author you quoted, it would have no impact. In my view, by taking the ratio from 10 to infinity, it increases progressivity.

    But taking 2007 “as a similar point in the business cycle” is a bit of a ridiculous approach since such a determination is arbitrary.

    As to whether “any economists or major publications are making this argument”, that is nothing more than a form of appeal to authority. The data says what the data says.

    It’s similar to the argument that “a return to the tax rates of the past” would raise a lot more revenue. Many maker his argument but it conflicts with the data. I’ll go with the data.

  41. comment number 41 by: SteveinCH

    One more point, your S&P analysis is a bit off in my view. The S&P is a weak measure of unrealized capital gains. Since only realized gains are taxed, net outflows from mutual funds would be a better proxy.

  42. comment number 42 by: Arne

    Steve,

    Take your 5 percent - 50 percent example. Double both rates. According to your metric taking all of the latters income would not be more progressive. Yes, the example is silly, but it shows that your ratio metric is at least as flawed as the one B Davis uses.

  43. comment number 43 by: SteveinCH

    That’s a good point Arne. Thanks for making it. I still think progressivity is a relative measure, not an absolute one but obviously I need to think harder about the math.

  44. comment number 44 by: AMTbuff

    If you used the net after tax ratio that economists used, you wouldn’t have these problems. Just sayin’.

  45. comment number 45 by: B Davis

    SteveinCH wrote:

    But taking 2007 “as a similar point in the business cycle” is a bit of a ridiculous approach since such a determination is arbitrary.

    What would be truly ridiculous would be to ignore the dynamic caused by falling capital gains that I explained in my last post. Following is a repeat of that explanation:

    In 2004, the capital gains being claimed were obviously much lower than they were in 2000. This meant that a much higher percentage of high-income taxpayer’s income was taxed at the higher top marginal rate and their effective tax was therefore higher. This increase offset the large drops in the effective rates caused by the Bush tax cuts. This offset affect was much less in 2007 when the market had nearly risen back to its 2000 peak. However, even then the percentage of high-income taxpayer’s income that came from capital gains was likely far smaller than it was in 2000. Hence, even looking at full business cycles doesn’t guarantee that effective rates will give a totally accurate picture of progressivity.

    Do you admit that this dynamic is possible and that the effective rates that you are looking at need to be investigated more closely to estimate and/or eliminate it?

    One more point, your S&P analysis is a bit off in my view. The S&P is a weak measure of unrealized capital gains. Since only realized gains are taxed, net outflows from mutual funds would be a better proxy.

    I concede that the S&P does not tell you exactly how much capital gains as a percent of total income differed in 2000, 2004, and 2007. However, net outflows from mutual funds would likewise be flawed in that it misses all of the capital gains realized from selling individual stocks. In fact, I have taken an initial look the actual IRS numbers from this link. Following are some quick calculations from those worksheets:

    Long-term capital gain as a percent of Adjusted gross income

    2000 2004 2007

    10.1 7.1 10.1 All returns, total
    -15.0 -11.3 -12.5 No adjusted gross income
    3.7 2.2 2.5 $1 under $5,000
    2.7 1.4 1.7 $5,000 under $10,000
    1.7 1.0 1.2 $10,000 under $15,000
    1.5 0.8 1.2 $15,000 under $20,000
    1.4 0.8 1.0 $20,000 under $25,000
    1.4 0.8 1.0 $25,000 under $30,000
    1.5 0.7 0.9 $30,000 under $40,000
    1.7 0.8 1.0 $40,000 under $50,000
    2.2 1.2 1.5 $50,000 under $75,000
    3.2 1.8 2.1 $75,000 under $100,000
    6.3 3.8 4.0 $100,000 under $200,000
    13.8 10.0 10.2 $200,000 under $500,000
    21.6 17.0 18.2 $500,000 under $1,000,000
    26.9 22.3 23.2 $1,000,000 under $1,500,000
    29.8 24.1 26.5 $1,500,000 under $2,000,000
    35.0 29.5 30.9 $2,000,000 under $5,000,000
    41.4 35.4 39.0 $5,000,000 under $10,000,000
    56.3 46.7 52.1 $10,000,000 or more

    Now, I was just looking at the column labelled “Long-term capital gain” and its accuracy might be improved by adding or deleting some of the other sources of income listed. But, as can be seen from these calculations, capital gains was a larger percentage of income in 2000 than either 2004 or 2007. As I predicted, 2004 was by far the worst of the three years. This data also shows how much more high-income taxpayers benefit from capital gains.

    So do you concede that, without making any adjustments for the effect of the lower capital gains, the effective rates may be too flawed to estimate progressivity?

  46. comment number 46 by: Vivian Darkbloom

    “So do you concede that, without making any adjustments for the effect of the lower capital gains, the effective rates may be too flawed to estimate progressivity?”

    You have made a valid point about the business cycle and the mix of income and its effect on “effective tax rates”. Nevertheless, in doing so, you do not rebut the contention that effective tax rates are the most appropriate measure of “progressivity”. Your argument is shifting as we go along.

    You now seem to be arguing that, after all, effective tax rates are the correct measure, but that we should average those effective rates over some period of time. That is fine with me, but it is a quite different argument than simply saying effective tax rates cannot be used at all as the best measure of progressivity.

    Also,

    “In 2004, the capital gains being claimed were obviously much lower than they were in 2000. This meant that a much higher percentage of high-income taxpayer’s income was taxed at the higher top marginal rate and their effective tax was therefore higher. This increase offset the large drops in the effective rates caused by the Bush tax cuts.”

    How so? I suppose you are aware that most economists when trying to measure “effective tax rates” and “progressivity” would include in their calculations the implicit cost of corporate income tax underlying those capital gains. If this were to be taken into account, the effect of this cycle on “effective rates” would be minimal, if not the opposite of what you are contending.

    One could argue that in imputing corporate income tax to shareholders, one should do so at the time the corporate income tax is realized rather than when the taxpayer realizes a capital gain. But, corporate profits (and income tax) also follow the business cycle.

    If you really want an accurate measure of progressivity without all the noise, I would suggest that you take the 2000 income etc and recompute effective tax rates using the law in effect in 2005. To do this, you need to take into account the PEP and Pease changes, etc., etc., which have nothing to do with marginal rates, but everything to do with effective rates. Unfortunately, tax rates are not the only thing the tax code dictates.

  47. comment number 47 by: SteveinCH

    Actually B Davis, if you read the cite I linked above, you’ll find the CBO does a Vivian describes including imputed corporate taxes as well as taxes on realized capital gains in its calculations.

    One can quibble with the method of imputation but it’s in the numbers.

    To AMT, it wouldn’t end my problem because the after tax income method doesn’t measure contribution relative to contribution, it measures the remainder after contribution relative to the remainder after contribution. Sadly, that’s not the same thing if you believe, as I do, that the change relative contribution is the definition of progressivity.