Some facts about taxes and inequality in the US that may surprise you (from Lane Kenworthy)

I have been thinking again about a set of interconnected pieces addressing this subject that Lane Kenworthy posted back in January and April of 2009, in part because I am continually reminded of the ways in which most people's assumptions about these matters are misleading. I have intermittently thought about writing something at least semi-systematic on the issues involved, but I keep putting that off.

So, in the meantime, here are some appetizers offered as food for thought. I will just quote a few selections from Lane Kenworthy's discussions, but if they pique your interest you should go read the pieces they come from in full.

=> Here is the key starting-point, from Lane Kenworthy's "Reducing inequality: how to pay for it" (April 18, 2009):

[I]n the United States and other rich countries the tax system overall, including taxes of all types and at all levels of government, is essentially flat; households throughout the income distribution pay roughly similar shares of their market income in taxes.

A few points are worth noting here. In terms of federal taxes, noticing this pattern requires avoiding the usual right-trick of counting only what are officially called "income taxes" and including the so-called "payroll taxes" (allegedly earmarked for Social Security and Medicare, but which in practice have been getting spent to cover general expenses) that make up a larger proportion of the taxes that many people pay to the US government. It also involves going beyond nominal tax rates to take into account deductions, tax loopholes, and other standard forms of tax avoidance. But the main point is that federal taxes are not the only taxes in the system, and it appears that the overall rates of taxation at other levels (state and local taxes add up to about 30% of the total) tend to be flatter or even regressive.

Another point worth emphasizing is that for these calculations Kenworthy is counting only market income--i.e., "income from employment, investments, and a few other sources, but not including government transfers".

He presents the figures that way, keeping market income separate from non-market income, to lay the groundwork for drawing the following conclusions.

[We] should increase the tax rate on high-end incomes (beyond simply letting the Bush reductions expire). Two other progressive tax reforms are worth pursuing, though they would affect some in the bottom 95%. [....]

But should the focus be confined to steps that make the tax system more progressive? Many on the left view heightened progressivity as the key to inequality reduction.

However, if one examines the direct effects of government taxation and expenditure on income inequality, the pattern running across all affluent western societies is that

inequality reduction is achieved not through taxation but with government transfers (and services).

Some implications:

Taxes help to reduce inequality mainly via their quantity rather than their progressivity. The greater the tax revenues, the more government is able to boost incomes and living standards of those in the lower half of the distribution with transfers and services.

For example (quoting from this previous post:

In my view, raising and indexing the minimum wage, enhancing the Earned Income Tax Credit, and expanding and improving public services ought to be our top priorities for boosting the incomes and living standards of Americans in the lower half of the income distribution.

Therefore,

while it may be smart electoral politics, committing not to increase taxes’ share of GDP, as Blair did, or to lower taxes for most of the population, as Obama has done, makes it difficult for a government to make much headway in addressing income inequality.

And, perhaps a little more controversially:

One way to do this would be via a federal consumption tax, such as a value-added tax (VAT). We have state and local consumption (sales) taxes, but we raise less money from consumption taxes than any other rich country. Consumption taxes are regressive, and for that reason they’re often dismissed by the American left. But they can be tweaked to limit the degree of regressivity. And if the money is put to progressive use, the benefits may outweigh this drawback.

=> For many readers, the most startling (and potentially controversial) point here will be that basic claim that in

the United States and other rich countries the tax system overall, including taxes of all types and at all levels of government, is essentially flat; households throughout the income distribution pay roughly similar shares of their market income in taxes.

For two previous posts in which Lane Kenworthy explained and justified the analysis behind that claim, see:

"How Progressive Are Our Taxes?" (January 5, 2009)
"How progressive are our taxes? Follow-up" (January 8, 2009)

=> And to flesh out some of the arguments further, here are some other posts from spring 2009:

"Reducing inequality: boosting incomes in the bottom half" (April 16, 2009)
"Reducing inequality: expand and improve public services" (April 17, 2009)

--Jeff Weintraub