Tax system remains progressive

By John Hood
Posted 10/21/19

RALEIGH — If you think very rich people pay a lower share of their income in taxes than you do, you are very likely to vote for Democrats.

You are also very likely to be wrong. Although special …

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Tax system remains progressive

Posted

RALEIGH — If you think very rich people pay a lower share of their income in taxes than you do, you are very likely to vote for Democrats.

You are also very likely to be wrong. Although special circumstances may temporarily yield atypical results, in general the effective tax rate — annual taxes paid divided by annual income — rises as income rises.

Right-leaning and left-leaning tax scholars don’t agree on much. But most agree that our tax system is progressive. Consider the latest estimates from the Institute on Taxation and Economic Policy. In 2019, the poorest fifth of Americans will pay about 20 percent of their income in federal, state, and local taxes. Most of them will pay little to no federal income taxes, to be sure, but they’ll pay sales and other taxes, directly or indirectly.

The next quintile of Americans, call them lower-middle income, have a tax burden of 22 percent. The next quintile, middle-income Americans, pay 25 percent. The upper-middle-income quintile pay 27.5 percent. And the wealthiest fifth of Americans pay 30 percent.

Some progressives are now claiming that the consensus position is wrong, that in reality rich people have a lower tax burden than everyone else and should thus be subjected to presidential candidate Elizabeth Warren’s proposed wealth tax. The economists behind the claim, Emmanuel Saez and Gabriel Zucman of the University of California at Berkeley, have been roundly criticized by analysts across the spectrum for their odd methodological choices — leaving out the Earned Income Tax Credit, for instance, which was originally instituted explicitly to offset the effects of federal payroll taxes on lower-income households.

At the very least, when presented with a new assertion about tax-burden equity that was markedly dissimilar from the standard view, progressive activists in North Carolina and elsewhere should have looked before they leapt. But leap they did, repeating the Saez/Zucman claims unquestioningly across broadcast, online, and social media.

The temptation to place political utility above empirical validity is hardly limited to the Left. Conservatives promote questionable tax statistics, too. So say, for example, that lowering tax rates will “pay for itself” by inducing so much growth that the government will receive at least as much revenue than it would have in the absence of the tax cut.

Such an outcome is possible in some circumstances. But most of the time, the supply-side effect of tax changes isn’t large enough to convert a plus into a minus, or vice versa. That doesn’t mean the supply-side effect is inconsequential. A new paper from Stanford University’s Joshua Rauh and Ryan Shyu estimates that a stiff 2012 increase in California’s income tax motivated so many affluent residents to relocate outside the state that its net revenue gain from the tax hike was about half of what it looked like on paper.

In other words, California did succeed in soaking its rich a bit more. But fewer rich people stayed around to get soaked. We can have a productive debate about whether the tradeoff was good or bad — as long as we stick to facts rather than concocting fictions.

John Hood (@JohnHoodNC) is chairman of the John Locke Foundation and appears on “NC SPIN,” broadcast statewide Fridays at 7:30 p.m. and Sundays at 12:30 p.m. on UNC-TV.

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