Progressive Taxation Is Alive and Well in The U.S. of A.


Will Wilkinson, in the course of a good post about Obama’s big lie, writes:

I’d like to thank my colleague [a blogger who goes by D.R.] for helping me see how to make my case stronger. Of the comprehensive American tax system, he writes:

The fact of the matter is that the American tax code as a whole is almost perfectly flat. The bottom 20% of earners make 3% of the income and pay 2% of the taxes; the middle 20% make 11% and pay 10%; and the top 1% make 21% and pay 22%. Steve Forbes couldn’t have drawn it up any better.

I happen to agree with Steve Forbes that a flat tax best reflects our intuitions about proportionality and fairness, so I’m tickled to see that our system is so fair!

The link attached to “almost perfectly flat” leads to this:

The source is a “sister organization” of the union-dominated lobbying organization, Citizens for Tax Justice, which is responsible for a graph that I reproduced in “Elizabeth Warren Is All Wet“:

As I said in “Elizabeth Warren…,” Citizens for Justice

acknowledges (backhandedly) that “the rich” pay their “fair share” of all taxes — federal, State, and local….

[G]iven the source, this [graph] can be taken as a “worst case” depiction of the distribution of the total tax burden. “The rich” are paying their “fair share,” and then some, unless you believe (as leftists seem to believe) that  “the rich” are supposed to take care of everyone else.

Not surprisingly, the statistics for 2011 yield a graph that looks much like the one just above:

What puzzled me, briefly, is why the Citizens for Tax Justice and Institute for Taxation and Economic Policy split the top quintile into chunks. Then it occurred to me that those left-wing outfits are trying to suppress the fact that taxpayers in the top quintile pay a disproportionate share of all taxes. Thus:

Further, the effective tax rate isn’t quite as flat as the left-wing outfits would like gullible readers to believe. Thus:

If that isn’t the picture of a progressive tax structure, I’ll eat my external hard drive.

The innumerate reader might say something like “Gee willikers, people who make more ought to pay more in taxes.” Think about it for a minute. If someone earning $100,000 pays taxes at the same rate as someone earning $10,000, the person earning $100,000 does pay more in taxes. For example: $100,000 times a tax rate of 15 percent is greater than $10,000 times a tax rate of 15 percent — 10 times greater, to be precise. Raise to 30 percent the tax rate on the person making $100,000 and, voila, his tax bill is 20 times greater than that of the person making $10,000.

A progressive tax structure penalizes success, which inhibits economic growth, which means fewer jobs and lower incomes for the low-income persons who are the supposed beneficiaries of progressive taxation. I say “supposed” because the “house” (high-paid office holders and bureaucrats, all with cushy health insurance and pension plans) takes its very large cut before any of the money extorted from those who earn it trickles down to those who don’t earn it.

Related reading:
Greg Mankiw, “The Progressivity of Taxes and Transfers
Steve Landsburg, “Charting the Tax Plans

Related posts:
A True Flat Tax
Taxing the Rich
More about Taxing the Rich
In Defense of the 1%
The Burden of Government
Economic Growth Since World War II
Economics: A Survey
The Barbarians Within and the State of the Union
Why Are Interest Rates So Low?
Estimating the Rahn Curve: Or, How Government Spending Inhibits Economic Growth
America’s Financial Crisis Is Now

Say’s Law, Government, and Unemployment

“Supply creates its own demand,” or so goes the popular interpretation of Say’s law. (More about that, below.) But if what you have on offer is not in demand by others, you are out of luck.

That is the point of Megan McArdle’s post, “The New New New Economy.” McArdle writes:

One of my first jobs out of school, way back in 1994, was as a secretary.  I’d be shocked to find that any of the executives at that organization still have secretaries–maybe the executive director, but maybe not even him.  Already at the time there wasn’t really enough for me to do; my boss had a secretary because, well, people in his position did.  That’s not because the work was being outsourced to Bangalore, but because computers and the internet were eliminating much of the coolie labor that secretaries used to take care of.  And of course, the recession is accelerating the pace of change–and leaving the people who are displaced fewer options to transition.

Government interventions that destroy jobs — the minimum wage, capital gains taxes, progressive taxation, etc. — exacerbate the problem because they prevent low-skilled workers (teenagers, mainly) from stepping onto the bottom rung of the employment ladder and eventually acquiring skills (or the money with which to acquire skills) that enable them to compete in an increasingly cyber-mated economy.

Which brings me back to Say’s law, explained succinctly by Steven Horwitz in “Understanding Say’s Law of Markets“:

Say was making the claim that production is the source of demand. One’s ability to demand goods and services from others derives from the income produced by one’s own acts of production. Wealth is created by production not by consumption. My ability to demand food, clothing, and shelter derives from the productivity of my labor or my nonlabor assets. The higher (lower) that productivity, the higher (lower) is my power to demand.

When a firm adopts a more productive technology — one that enables it to reduce the price of a product or service and/or offer a better product or service for the same price — the firm benefits and its customers and potential customers benefit. The firm can reap higher profits (if it is in a competitive position to do so) by “sharing” the productivity gains with customers through its pricing strategy. Customers and potential customers, by the same token reap the benefit of a better and/or less expensive product or service.

Who is made worse off? The workers whose skills are such that they cannot produce things that are valued by consumers. Or, if they can produce them, they cannot produce them as cheaply as, say, an automated system. And that system may well have been introduced because government policies of the kind mentioned above make it less profitable for firms to employ labor.

Whose “fault” is that? In a free-market economy, it would be no one’s fault; it would be what it is: an unfortunate subset of the populace lacking the wherewithal to produce what others want. It follows that governmental interventions have created a large (and growing) additional subset of the populace who could — and should — blame their fate upon the minimum wage; capital gains taxes; progressive taxation; regulations that restrict inputs, processes, and outputs; and all other government policies that discourage employment, saving, capital formation, and business expansion.

Related posts:
The Causes of Economic Growth
Economic Growth since WWII
A Short Course in Economics
Addendum to a Short Course in Economics
The Price of Government
Gains from Trade
Does the Minimum Wage Increase Unemployment?
The Commandeered Economy
The Price of Government Redux
The Mega-Depression
The Real Burden of Government
Toward a Risk-Free Economy
The Rahn Curve at Work
The Illusion of Prosperity and Stability
Estimating the Rahn Curve: Or, How Government Inhibits Economic Growth
Competition Shouldn’t Be a Dirty Word
The Stagnation Thesis
America’s Financial Crisis Is Now
Money, Credit, and Economic Fluctuations
A Keynesian Fantasy Land
The Keynesian Fallacy and Regime Uncertainty
Creative Destruction, Reification, and Social Welfare
Why the “Stimulus” Failed to Stimulate
The “Jobs Speech” That Obama Should Have Given

The Land of Sunshine: A Parable

This parable is meant to be disrespectful of many things, not the least of them being our rulers and the rules they foist upon us in their disrespect for us and our liberty. It is not meant to be disrespectful of women or persons of color, except for those among them — and their political champions — who believe that past wrongs justify the multiplication of wrongs into the future.

Once upon at time — not so long ago or far away — there was a land ruled by a wise, young king. Well, he was thought wise because he orated in the unctuous, condescending tones, and he was younger than most of the kings who had preceded him. Let’s just call him “the man.”

Now, the man was known for his unbounded compassion. He would do anything for his subjects, as long as it wasn’t at his own expense or the expense of his large, raucous council of advisers. (More about them, anon.) His preferred method of paying for his acts of beneficence was to pretend that they cost nothing — a ruse that he was able to sustain by taking money from his subjects and promising to repay the debt to their descendants. (This scheme had worked well for the man’s predecessors, and so he adopted it as his own — with a vengeance.)

The man’s pseudo-compassionate heart was troubled by the inequality he found in the land. It was upsetting to him was that not all of his subjects were equal in all respects. Some of the man’s subjects were more capable than others, and therefore had higher incomes than others. Although the man was not troubled about the high incomes of lawyers, movie stars, and basketball players, he nevertheless proposed the imposition of higher taxes on high-income persons, just to get even with them.

Other of the man’s subjects were women who could not do everything that men could do, which the man deemed unfair. Although he did not bemoan the fact that men were inferior to women in many respects, he nevertheless proposed forcing employers to hire women for jobs that men could do better.

And there were those of the man’s subjects who went about with pale, sickly white skin, whereas others sported glowing, healthy-looking shades of gold. And so the man proposed to his council of advisers that all pale persons should be made darker (and thus healthier) by allowing them to spend more time in the sun, and by giving them regular doses of a rare, expensive, and effective elixir.

The council of advisers debated the man’s proposals for months on end. The council had no problem with penalizing capable persons and males, for such practices had been accepted for decades, in the name of equality. Nor did the council object to the practice of sending pale persons to work in the sun, as long as it resulted in more indoor work for the golden ones.

The council’s main objection had to do with the elixir, and whether more of it could be produced so that its new consumers could enjoy it without depriving others of its health-giving powers. In the end, the council agreed with the man that it was more important to create the impression of equality than to worry about such trivial matters as the supply of a health-giving elixir. “Trust us, it will all work out,” were the reassuring words of the council’s leaders.

And thus it came to pass that this not-so-distant land was blessed with less freedom, declining prosperity, ill-bred children, more illness, and equality — but one out of five isn’t bad for government work. The only disappointment came when the pale persons acquired red necks instead of turning golden brown.