[PEN-L:6731] Re: Marginal Tax Rates

["Max B. Sawicky" <maxsaw@xxxxxxxxx>]

Nathan Newman wrote:

> The EITC is part of the income tax and for working families making between
> $11,500 and $26,500 (a not inconsiderable number of families), the
> marginal tax rate for the income tax is around 35%---higher than for all
> but the richest families.
>
> Add in a payroll tax of 15.6% that is regressive (the rich don't pay it on
> their new income and the poor do--the definition of regressive),
> regressivity in the tax code is very real.

No, the definition of regressive, broadly speaking, is that the share
of income paid in taxes falls as income rises.  There is a difference
between tax RULES that are regressive on their face and the actual
distribution of the tax burden, which is an empirical question. We
could speak of a regressive rate structure in a specific tax, but
you equate the rate structure with the distribution of the actual
tax burden, which is an empirical question. You always refer to tax
rules and never to actual empirical analysis (which involves large
data sets and fairly complicated programming, but which results in
quite accessible studies from the Congressional Budget Office,
the Treasury, or Citizens for Tax Justice.

To take a simple example, suppose the tax rates on wages are 20 percent
for each dollar over $10,000, and 15 percent for the third bracket
(over $10,000).  This may look like a regressive tax system, but whether
it is or not is entirely dependent on the distribution of actual tax
liability, not simply on the rules.  For instance, suppose in our tax
system there are two families, one of whom gets $11,000 in wages, and
another who gets $15,000.  The first owes $200 in taxes, or 1.8 % of
income (200/11000), the second family owes $1,000, or 6.7% (1000/15000).

Now if you're sharp you'll say I stacked the example by choosing two
persons in a region where the rates are progressive (e.g., zero and
20 percent), but the point is that there are numerous exceptions in
the tax code which amount to zero rates in an assortment of cases.
Alongside the regressive statutory rate structure of the payroll tax
are hidden 'zero' rates of tax on other types of income.  When all are
taken into account in empirical research, the payroll tax and the
income tax are progressive (given the exception I noted about the
top decile and the payroll tax).

As I noted previously, an added mitigating feature of the payroll tax
is that an increase in wages that triggers an increase in payroll tax
liability also triggers an increase in future Social Security benefits,
so the tax impact is offset by benefits.  Moreover, OASDI benefits are
provided according to a progressive schedule, and Medicare is provided
on a super-progressive schedule (e.g., everybody gets the same program,
regardless of what they have paid in).

> I didn't even mention adding in state sales and local taxes which are even
> more regressive. A few years back, Citizens for Tax Justice estimated that
> in many states, the poorest 20% of families are paying as much as 15% of
> their income in such local and state taxes.

True, but that's not a knock on the Federal tax system.

> > By knocking the tax code, you appropriate the message of the Right
> > but only strengthen them politically.  It makes it possible for them
> > to play on the popular illusion that the income tax is regressive and
> > that under the flat tax, the rich would really pay their fair share.
>
> The Right doesn't play on an illusion in propounding the idea that a flat
> tax is better.  They play on the reality of people's experience where they
> pay heavy amounts of tax while knowing that the wealthy often  keep
> most of their income after loopholes and deductions.

Since the personal income tax is progressive in incidence, for every
rich family paying less than the average for their bracket, or even
less than lower-income families, there is another rich taxpayer paying a
higher rate.  The flat tax probably evens out the disparity in average
rates within income brackets, at the obvious cost of an enormous
shifting of the tax burden away from the rich as a whole.

> California passed Prop 13 largely because progressives sat back and denied
> the tax burden of rising property rates on small homeowners.  Rightwingers
> seized on that dissatisfaction and tied it to a massive tax protection for
> commerical property as well.

If the regressivity of state and local taxes were as noxious to the
public
as you suggest, we would expect shrinkage of such revenues, but since
the
great tax revolts it hasn't happened.  Relative to GDP the state-local
sector is no smaller now than it was 16 years ago.

> If we don't deal with the regressivity of the tax code, the Right wing
> will with a few simple ideas:
>
> Payroll tax: Privatize social security and everyone keeps the tax in their
> own retirement accounts.

This doesn't address regressivity at all.  The money lost to the trust
fund
could be replaced by more taxes, and the management of the individual
accounts will be a significant cost to beneficiaries.  We needn't be
afraid of this debate.

> EITC phaseout: abolish EITC in favor of non-refundable tax credits for
> families

This initiative has fallen flat and the GOP runs away from it
whenever Bill or Al bring it up.  It's one of our easiest issues--
tax relief for the working poor.

> Income tax: flat tax with high standard deductions

Once again, the GOP has dropped this like a hot potato,
not because of the Forbes campaign, but because their own
polls told them people didn't like the flat tax when they
found out a little bit more about it.

> Of course, these results will end up more regressive than problems in the
> present system, but they will be addressing real dissatisfactions out
> there.

The main thing we have to fight is simply anti-tax, anti-government
sentiment, and gratuitous attacks on the federal tax system are
probably more hurtful than helpful, besides being inaccurate.

> Denying there is a problem with a tax code that everyone hates and sees as
> irrational and unfair (in many cases for good reason) is a recipe for
> losing big just as we lost during the Prop 13 tax revolt.

There is no political sentiment for a reform of the tax code
which does not raise or lower revenues, depending on whether
you're left or right.  And there is no sentiment for raising
revenues until the postiive things government can do by
spending money are put forward and embraced by the public.
Talking about tax progressivity is nothing more than a
holding action -- it prevents the right from doing regressive
tax changes, but it doesn't move us forward either. Echoing
right-wing attacks on the system move us backward.

MS

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Max B. Sawicky			202-775-8810 (voice)
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