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> We found that an increase in tax progressivity actually increases income inequality. It seems odd that they are making a general and unbounded statement, whe

by 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.
- allemagne 5y ago
  >You could only do this until you run out of tax dollars being paid by poor people. Or you could start paying them more and more money to trickle up, i.e. progressive negative taxes.
  - __s 5y ago
    I think the trick of this trickle up is that giving money from the 90th percentile (read: affords saving for retirement) to the <50th percentile (read: doesn't afford saving for retirement) effectively gives money to the >99th percentile (read: affords saving into the blackhole of offshore accounts)
- whack 5y ago
  I've read the summary and it does not change anything. > These benefits are actually larger than the initial increase in tax burden in step 1 This isn't clear at all. I suspect this is only true in a specific set of circumstances, not as a universal rule. > You could only do this until you run out of tax dollars being paid by poor people The article is talking about the 50th and 99th percentiles. If what you're saying is true, the government should reduce taxes on the 50th percentile household all the way to 0%, and fund this tax cut entirely by increasing taxes on those who are more wealthy. And if what you're saying is true, such a change in tax policy would increase disposable income for the 99th percentile. There isn't a single serious economist who believes the above. Even people like Sanders who would advocate for such a tax policy, are arguing for it from a fairness perspective. Not a "this will make the rich even richer" argument, which is what you're implying.

by whack 5y ago

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.

allemagne 5y ago
>You could only do this until you run out of tax dollars being paid by poor people. Or you could start paying them more and more money to trickle up, i.e. progressive negative taxes.
- __s 5y ago
  I think the trick of this trickle up is that giving money from the 90th percentile (read: affords saving for retirement) to the <50th percentile (read: doesn't afford saving for retirement) effectively gives money to the >99th percentile (read: affords saving into the blackhole of offshore accounts)
whack 5y ago
I've read the summary and it does not change anything. > These benefits are actually larger than the initial increase in tax burden in step 1 This isn't clear at all. I suspect this is only true in a specific set of circumstances, not as a universal rule. > You could only do this until you run out of tax dollars being paid by poor people The article is talking about the 50th and 99th percentiles. If what you're saying is true, the government should reduce taxes on the 50th percentile household all the way to 0%, and fund this tax cut entirely by increasing taxes on those who are more wealthy. And if what you're saying is true, such a change in tax policy would increase disposable income for the 99th percentile. There isn't a single serious economist who believes the above. Even people like Sanders who would advocate for such a tax policy, are arguing for it from a fairness perspective. Not a "this will make the rich even richer" argument, which is what you're implying.