RE: taxes

[dhenwood@xxxxxxxxx (Doug Henwood)]

At 8:53 AM 4/3/95, Alan G. Isaac wrote:

Since the income tax surcharge figures should show the same pattern as the
overall structure, that looks pretty steadily progressive to me. Not enough
for my tastes, but the effective income tax rate rises with each income
quintile. The Social Security tax reduces overall progressivity quite a
bit, however - but the federal tax system as a whole is still progressive,
which is more than you can say for state and local systems, which have
flatter rate structures for an income tax and rely heavily on sales and
property taxes.

>Doug, The figures you offer are interesting, but I'm not sure
>they would extrapolate to a change in tax system. Just for
>some context, the last time I looked (some years ago)
>federal revenues were roughly proportional to income--
>slightly progressive at the lower end, somewhat regressive
>toward the very top. Is this still a fair characterization?
>
>Some other questions. The basic goods exemption comes
>closest to what I've been describing. However, I've
>proposed exempting only rental housing with a cap on
>the amount. Does this match what the CBO considered?

As far as I can see, they only say they exempt "housing purchases except
for puchases of new homes." Rent, then, would be exempt. "This method,"
they note a few pages down, "taxes the services from newly constructed
housing but not the services from existing housing." The UK and Germany
both exempt house sales, new or existing.

>Also, while it may still be that my guess is wrong,
>as Bill Mitchell observed it is the system not the
>components that matter, and I did suggest including
>an earned income credit in the system. (Let me make
>another wild guess: I guess that this is the source
>of most of the progressivity, to the extent it
>exists,in the current structure.)

The EITC is phased out at a low income level. Its effects are largely gone
by the time you hit the second quintile.

Doug

--

Doug Henwood
[dhenwood@xxxxxxxxx]
Left Business Observer
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New York NY 10024-3217
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>
>On Sun, 2 Apr 1995 15:29:40 -0600 Doug Henwood said:
>>In a 1992 report, the Congressional Budget Office estimated the burden of
>>three possible versions of a VAT and compared it with an income-tax
>>surcharge. (The income tax in 1992 was significantly less progressive than
>>it is now.) The three versions were a broad-based tax; one that exempted
>>merit goods like health and education; and one that exempted food,
>>utilities, motor fuels, and housing. The merit good exemption reduced the
>>tax base to 61% of total consumption; the basic goods plus merit goods
>>version left only 38% of total consumption available for taxing. To raise
>>equal amounts of money, the VAT rates were 3.5%, 4.4%, and 6.9% for the
>>three versions, and the income tax surcharge was 16%.
>>
>>DISTRIBUTION OF IT SURCHARGE AND VAT BURDEN BY INCOME QUINTILE
>>
>>                                            VAT
>>                          inc tax  ---------------------
>>                         surcharge broad   merit   basic
>>percent of income
>>-----------------
>>poorest                    0.2%     4.8%    4.7%    3.9%
>>
>>second                     0.7      3.2     3.1     2.9
>>third                      1.2      2.8     2.7     2.8
>>fourth                     1.6      2.3     2.3     2.4
>>richest                    3.0      1.5     1.5     1.6
>>
>>all                        2.2      2.2     2.2     2.2
>>
>>percent of families with
>>smaller tax burden under
>>IT surcharge
>>--------------------------
>>poorest                             92%     90%     76%
>>second                              93      89      80
>>third                               87      84      79
>>fourth                              69      68      68
>>richest                             29      30      36
>>
>>all                                 72      70      66
>>
>>
>>source: Congressional Budget Office, "Effects of Adopting a Value-Added
>>Tax," February 1992, table 9.
>>

Doug

--

Doug Henwood
[dhenwood@xxxxxxxxx]
Left Business Observer
250 W 85 St
New York NY 10024-3217
USA
+1-212-874-4020 voice
+1-212-874-3137 fax