11 ms·

Could More Progressive Taxes Increase Income Inequality?

10 points by danielam 5y ago

throwawayboise 5y 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.
- merpnderp 5y 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.
- dragonwriter 5y 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.
- deleted 5y ago
  [deleted]
hhvn 5y 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.
- whack 5y 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_solenoid 5y 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.
  - merpnderp 5y 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.
    - the_solenoid 5y ago
      We don't punish white collar crime for the same reasons. If you made it illegal to get outside money for politicians, and made the punishment significant, the rats would scurry and "normal" people could get involved in the process. The way it works now we just get rich people looking after rich people problems because theres no way to overcome all the money flowing around with any regular success. We can try to change government, but do a quick thought experiment: how many resources does it take to manage shared infrastructure and services for 20 people? 200? 2000? 20,000? 200,000? 2,000,000? Go on up to 350mil. It's not easy, and you can't just "tear it down". You can envision some ways to streamline some things, but the problem is just mind boggling gigantic.
pydry 5y 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.
- bko 5y 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-households-that-pay-no-income-tax-by-income-level/ https://www.statista.com/statistics/242138/percentages-of-us...
  - dragonwriter 5y 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 5y 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.
deleted 5y ago
[deleted]
pmdulaney 5y 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.
whack 5y 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 5y 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.
  - 5y ago
bko 5y 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 https://en.wikipedia.org/wiki/Hauser%27s_law

10 points by danielam 5y 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.

merpnderp 5y 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.
dragonwriter 5y 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.
deleted 5y ago
[deleted]

hhvn 5y 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.

whack 5y 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_solenoid 5y 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.
- merpnderp 5y 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.
  - the_solenoid 5y ago
    We don't punish white collar crime for the same reasons. If you made it illegal to get outside money for politicians, and made the punishment significant, the rats would scurry and "normal" people could get involved in the process. The way it works now we just get rich people looking after rich people problems because theres no way to overcome all the money flowing around with any regular success. We can try to change government, but do a quick thought experiment: how many resources does it take to manage shared infrastructure and services for 20 people? 200? 2000? 20,000? 200,000? 2,000,000? Go on up to 350mil. It's not easy, and you can't just "tear it down". You can envision some ways to streamline some things, but the problem is just mind boggling gigantic.

pydry 5y 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.

bko 5y 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-households-that-pay-no-income-tax-by-income-level/ https://www.statista.com/statistics/242138/percentages-of-us...
- dragonwriter 5y 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 5y 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.

deleted 5y ago

[deleted]

pmdulaney 5y 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.

whack 5y 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 5y 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.
- 5y ago

bko 5y 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 https://en.wikipedia.org/wiki/Hauser%27s_law