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Yes, The Tax Code Is Progressive

April 14, 2010
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David Leonhardt has a column in today’s NYT basically summing what I’ve gathered as the liberal viewpoint on conservatives’ recent “47% of the population doesn’t pay taxes” meme that they’ve been peddling.  Leonhardt’s argument that rich people essentially want everybody else to pay for our out-of-control deficits basically centers on the argument that payroll taxes are not to be overlooked.  Well, okay, but there’s a certain caveat to that explanation, which he briefly addresses:

I realize that it’s possible to argue that payroll taxes should be excluded from the discussion because they pay for benefits — Social Security and Medicare — that people receive on the back end. But that argument doesn’t seem very persuasive.

Why? People do not receive benefits equal to the payroll taxes they paid. Those who die at age 70 will receive much less in Social Security and Medicare than they paid in taxes. Those who die at 95 will probably get much more.

Geez, if you’re going to write that an argument is unpersuasive, at least try to have a persuasive follow-up argument explaining why the initial argument wasn’t.  Here’s one from Andrew Biggs over at AEI’s blog (with a neat-o chart!):

This chart, which I calculated using the Policy Simulation Group’s GEMINI model, reports net tax rates for recent retirees, broken down by quintiles of lifetime earnings. What it shows is that the highest-earning 20 percent of individuals—the fifth quintile—pay a positive net tax rate of 3 percent of lifetime earnings.

The other 80 percent pay negative net tax rates, meaning that they tend to receive more in benefits than they pay in taxes. (For anyone looking forward to this in the future, just bear in mind that the program is insolvent.) The lowest-earning fifth of the population has a negative net tax rate of almost 27 percent, which implies that they receive far, far more from Social Security than they pay into the program.

So, those 47% that don’t pay federal income taxes also generally receive disproportionate amounts of benefits from the payroll tax, along with an additional 33% of the population that does actually pay income taxes.  Yeah, I know that these supposed “free-riders” pay at least some form of federal taxes (CBO suggests that only 10% of the populace doesn’t), but let’s just quit pretending that this tax system isn’t progressive.  It is.

Now, I don’t have any beef with the poorer portion of the population (say that three times fast)—after all, they weren’t the ones who constructed the tax code, that was the greasy politicians. (See how I boxed them all together like that?  I’m such a TP hound.)  The issue is, as Mark Steyn has noted a few times, that we can’t afford a situation wherein the majority of the population isn’t paying income tax and reaping a larger reward from the payroll tax than everybody else too.  If there were ever a cliff in the world of current affairs, the 50/50 line on income tax is its precipice.

What’s realistically going to happen is that the people who are already carrying a huge portion of the burden will be asked to shoulder even more.  Will it be unfair?  Well, yeah; it’s already unfair.  But historically speaking, tax rates are pretty low—they’ve been dropping for essentially the entire population since the end of World War II).  Besides the never-ending complexity of the tax code which prevents us from realizing our optimal tax revenues via the implementation of the Laffer Curve on federal income taxes, the consistent lowering of tax rates for the entire population probably has as much to do with our yawning deficits than anything except The Worst Two Thing the Feds Have Ever Done (that’s Social Security and Medicare).

Of course, you can’t win a campaign by promising to raise people’s taxes.  That’s why the deficit is going to have to be closed via entitlement reform, something that I believe conservatives tend to believe is a lot easier than it actually is (consider this post from Julian Sanchez over at Cato).  That’s, again, why I’m a big fan of Paul Ryan’s Roadmap—it propounds, over time, to virtually eliminate Medicare as we know it sans raising anybody’s taxes.  Additionally, I don’t think the Roadmap is as politically toxic as everybody seems to think it is.  Sure, seniors do love their Medicare, but everybody hates paying taxes, so an approach to deficit reduction that only “screws” one portion of the population while raising no taxes on everybody else seems a lot more viable now than it did before we were at risk of defaulting on our debt.

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