In tax policy, taxes are “progressive” if payers contribute more as a proportion of their income than they do lower income payers. Liberals like a progressive tax structure because they believe wealthier people (1) can afford the burden more, and (2) generally benefit more from the pubic goods that government supplies (like public universities and property right protections).
How progressive is the American tax system? Not very! Yes, federal taxes are fairly (albeit not highly) progressive, as this chart shows.
So, leftwing paradise? Wrong. First, note only some federal taxes are progressive (especially income and estate taxes). Payroll taxes for Social Security and Medicare burden working people the most because they don’t apply above a certain level of income. Payroll taxes comprise almost ½ of all federal taxes paid (not shown on chart).
More importantly, about 1/3 of all taxes are paid to state and local governments. When they are included – so, all taxes at all levels – the burden of paying for government in America is basically flat as a share of income. This is because state/local taxes like sales and sin (tobacco, alcohol) taxes are highly regressive, so much so that every one of the 50 states has a regressive overall tax burden. Even California. In seven states, the poorest 20% of people pay more than four times the rate the richest 1% pay!
This chart that includes all taxes at all levels shows the flatness.
It breaks Americans into five income groups, from the bottom-earning 20% to the top 20%. It also breaks the top 20% down into the top 10%, next 5%, next 4%, and finally the top 1%. For each quintile and very top, a pair of bars compares the share of total income each group earns to its share of total taxes paid at all levels. Note how closely what most groups pay is to what they, on average, earn. The richest pay a little more than their “fair share” when measured this way, and the bottom 40% pay a bit less.
There is more to tax fairness than what I have described. And, fairness is not the only thing that matters in a tax system. More on this stuff later.
I timed this topic in the expectation that the Republican Congress would have completed Obamacare repeal and be nearing completion of its first budget, with yet more large tax and spending cuts. Like everybody else I overestimated their competence. President Trump just announced that repeal is dead and it’s time to move on to…more tax cuts (aka tax reform.) Since by law the first major step in preparing the FY2018 federal budget must be completed by April 1 and the FY2018 budget is not even close to finished yet, now would be a good time for both the GOP and CivCon to focus on taxes and spending.
Radically altering who bears the burden of paying for the American government has been the GOP’s raison d’etre for 20+ years. Obamacare repeal itself would have been a big tax cut on the wealthy and a big cut in subsidies for low-income Americans. It also would have opened up room in the budget for the really huge tax cuts they were planning as the real centerpiece of GOP governance. (I will explain how on Monday, or just see the link below.) I guess creating such room is wasn’t worth walking the plank of taking away millions of people’s health insurance.
Anyway, even without all of this drama, a number of considerations would complicate our discussion of tax fairness. There is more than one way of defining what’s equitable, for instance. Beyond fairness, Public Finance 101 says that a good public finance system should have other features, like be as “efficient” as possible (minimally distorting to the private economy). It should be sustainable and stable, simple,; and politically acceptable. Oh, and no discussion of the costs of government makes any sense if it ignores the benefits of government. As I have mentioned 8 million times, informed citizens must have a rough idea of what and who our taxes are spent on.
For links, I’ll try something a little different this week. This post will stay at the top of the website all week. It has the usual meeting discussion questions and a few short, useful introductory articles.
But, below it I will do 2-3 short posts. Each one will have one or two simple charts that illustrate something important about how high the tax burden is in the United States and who bears it. The idea is we need to know what is before we meet to debate what should be.
DISCUSSION QUESTIONS –
- Tax level/burden: What is the level and distribution of the tax burden now? Federal v. state/local taxes. Which types of taxes (income, corporate, payroll, etc.) cost the most? Who pays which taxes?
- Spending: Biggest programs and who benefits? Biggest misconceptions?
- Loopholes like the mortgage interest deduction are equivalent to spending. How are these “reverse tax burdens” distributed?
- Fairness: Ways of defining it + how should it be defined?
- Short run: How and for whom does GOP plan to change tax burden?
- Long run: How should/will burden be shared?
- What changes to tax fairness would Americans accept?
SUGGESTED BACKGROUND READING –
- Principles: The 5 principles of a good tax system = Equity, adequacy, simplicity, exportability, and neutrality. Very short and recommended.
- Public opinion on taxes/spending is plain nuts:
- ACA repeal: Why GOP must repeal Obamacare’s taxes to make room for future tax cuts.
NEXT WEEK: Which moral standards should we use for judging historical figures?
I thought we had a good, if a bit unfocused, meeting on endangered species last night. We had seventeen people, including Dool (forgive spelling?), George, Moss, and Linda. It was nice to have a topic that got some of us talking a lot who sometimes don’t. I have no follow-up. But, since people seemed interested in the “taxpayer receipt” idea I mentioned, and in light of the latest poll showing that Americans have little idea what their tax money is spent on, here’s more info.
The idea that every taxpayer should get a “receipt” in the mail showing them what their money paid for was proposed by a think tank called The Third Way. Here’s a 4-pager explaining the idea. Your Federal Tax Receipt is quite simple. Just type in the amount of federal taxes you pay, or an estimate, and it immediately calculates what it went for, based on which activities comprise which shares of federal spending. EXAMPLE: If you paid $10,000 in federal taxes (a nice round number to show percentages easily) you contributed about $2,050 to Social Security, $2,020 to national defense (inc. $330 to Iraq and Afghan war operations) $1,300 to Medicare, $900 to low-income assistance, etc. Click on each label (“National Defense”) and it breaks it down further.
You can do the same thing here for your CA taxes paid (just enter the amount you paid in the box at the very bottom of the page).
Here are 33 questions on basic civics – government, the Constitution, and American history, mainly. See how much you really know about this stuff. I wonder how members of our group would do on this quiz.
And, yeah, I got them all right, but they’re not that hard and it was my professional field, after all. How did you do? The 2,500 people who have taken the quiz averaged 49%.
I want to start posting some items that will help people understand the upcoming election and predicted route of the Democrats. It won’t be all apologia, I assure you.
Later I’ll do a Civics 101 post (turns out they take more time to write than I have.) on how the electorate differs from the public more broadly. Voters are older, Whiter, richer, etc. than the public as a whole, especially in low-turnout elections like this one . That difference alone does more to explain what’s going to happen in November than anything else except the trashed economy (incumbents ALWAYS getted creamed in recessions, no matter what).
In the meantime, there was an amazing article in the Boston Globe yesterday about a topic near and dear to this group’s heart and that sheds light on November, too. Written by a social psychologist, it argues that facts don’t really matter to voters much at all when those facts contradict what they already believe!. In fact, the opposite is true. Hearing facts that challenge their beliefs tends to cause people to dig in their opinionated heels even more. Excerpt:
“Recently, a few political scientists have begun to discover a human tendency deeply discouraging to anyone with faith in the power of information. It’s this: Facts don’t necessarily have the power to change our minds. In fact, quite the opposite. In a series of studies in 2005 and 2006, researchers at the University of Michigan found that when misinformed people, particularly political partisans, were exposed to corrected facts in news stories, they rarely changed their minds. In fact, they often became even more strongly set in their beliefs. Facts, they found, were not curing misinformation. Like an underpowered antibiotic, facts could actually make misinformation even stronger.”
…And rather than facts driving beliefs, our beliefs can dictate the facts we chose to accept. They can cause us to twist facts so they fit better with our preconceived notions. Worst of all, they can lead us to uncritically accept bad information just because it reinforces our beliefs. This reinforcement makes us more confident we’re right, and even less likely to listen to any new information. And then we vote.”
The whole, depressing thing is here.
No, it turns out. This notion keeps coming up, including in a colloquy between Lace and Gary last week.
Today I came across this study that explains why govt salaries are typically higher than private sector salaries. It’s because they are apples to oranges comparisons. According to the study:
Jobs in the public sector typically require more education than private sector positions. Thus, state and local employees are twice as likely to hold a college degree or higher as compared to private sector employees. Only 23% of private sector employees have completed college as compared to about 48% in the public sector. Wages and salaries of state and local employees are lower than those for private sector employees with comparable earnings determinants such as education and work experience. State workers typically earn 11% less and local workers 12% less. During the last 15 years, the pay gap has grown – earnings for state and local workers have generally declined relative to comparable private sector employees. Benefits make up a slightly larger share of compensation for the state and local sector. But even after accounting for the value of retirement, healthcare, and other benefits, state and local employees earn less than private sector counterparts. On average, total compensation is 6.8% lower for state employees and 7.4% lower for local employees than for comparable private sector employees.”
In California, state workers make 10% less than their private sector counterparts when adjusted for job type, and local govt workers make 6% less. (see table at link.)
To be sure, one blogger who I respect a lot said this might be a faulty study. At the least, he wondered, much of the difference could be just that govt workers at the highest salary levels (doctors, lawyers) make much less than their private sector counterparts. Still, this provides at least some useful evidence on the subject.
Is it really true that in America the rich are getting richer and the poor are getting poorer? Yeah, basically. Here’s some information that paints a grim (but not hopeless) picture.
Income Inequality: We now have the worst income ineaquality since 1929, and average wages have not increased in 50 years. (All charts sourced here. See Chart 6 for avg wage growth.)
Wealth Inequality: The difference in wealth (house values, stocks, other investments) between the rich and everyone else is soaring. This matters a lot, because families with a lot of wealth use it to give their kids a leg up on the basic building blocks of a middle class life, like money for college or a house downpayment, Poor and, increasingly, middle class families, can’t do this and the American dream of class mobility is at a standstill.
You’ve read that right. The top 10% of housseholds hold 2/3 of total wealth, and the bottom 50% hold less than 3%!
Government: But, our liberal welfare state corrects most of that, right? Wrong. Just a little bit. Here’s how taxes have changed recently for people at different income levels.
Yeah, yeah. The rich still pay about 80% of federal income taxes, but the income taxes we’ve spent this month fretting over is only one tax at one level of government. Overall, the top 1% pay about 30% of total taxes (federal, state, and local). And their share of pretax income has been rising sharply in the last decade, so they can afford it more even as their income tax rates have been slashed. (See source various charts for details)
Overall, the United States redistributes income from rich to poor by only a little — and by far less than any other industialized country.
Whether this a good thing or a bad thing: Well, that depends on one’s point of view, I guess. But the growth in inequality is very real, is today’s Civics 101 lesson.
Update: You’re not going to believe this. In California, the poor pay higher taxes than the rich. The poorest fifth of the state’s non-elderly families, with an average income of $13,200, spent 11.1 percent of their income on state taxes. The wealthiest one percent, with an average income of $2.2 million, spent 7.8 percent of their income on state taxes.
No. Really. They don’t. Sure, in the latest poll, 65% of Americans say the budget should be balanced by “cuts in spending,” while only 5% favored tax increases. But, as always, if you make respondents list which programs specifically they want to see cut, Americans reveal themselves to be ignorant children who run home to momma when asked to make real choices.
To wit. Here’s a chart that shows what percentage of people would want to see specific USG programs cut.
Notice none gets even 30% support, except for (cue scary music) foreign aid. Less than 10% want to cut Social Security, Medicare, or Medicaid.
You know what’s coming next. Here are the same results compared to what percentage of the federal budget each of those programs represents, arranged from smallest to largest program.
Obviously, the public has no idea what government actually does. Nearly half of voters think the deficit can be reduced without real cost to entitlements, and that there is enough waste and inefficiency in government spending for the deficit to be reduced through spending cuts while keeping health care, Social Security, unemployment benefits and other services from being hurt.
In reality, it’s either
- Raise taxes;
- Control health care costs (Obama trying but it’s tough because he’s also helping 32 million more americans get health insurance)
- Reduce government support for health care (the GOP solution no one wants);
- Deeply slash popular discretionary programs, including defense; or
- Shut up.
About 25% of federal taxpayer dollars is spent on national security–when you include everything, like the VA and homeland security. This is a bit more than is spent on Social Security (I’ll do SS later). It’s a lot, but we get a lot for it. Here’s some information on how much we spend on defense, what it’s spent on, and a little bit about why.
Defense Spending —
- About $900 billion annually on national defense and international affairs. About three-quarters ($700B) of this is spent by the Defense Department; 15% ($125B) by the VA, and the rest is for homeland security, the intelligence agencies (said to be about $30B), and other activities. FYI, foreign aid is less than 3% of the total. [source: Tables 3.1, 3.2]
- Most of the Pentagon’s budget goes to personnel and operations and maintainence, not to weapons procurement. They spend about equally on the Army, Air force, and Navy/Marines. [source: same.]
- About 1.5 million people are in the active duty military, down from 2.1m in the early 1980s. Another 800,000 civilians work for DOD. [source: see table 7-5] And, of course, many, many civilian jobs depend directly or indirectly on defense spending (since it’s roughly 6% of GDP).
- Obama has increased defense spending, by about 6% in 2010 I think, and 3% in 2011.
Defense Spending In Perspective
- We spend more on the military than all other countries in the world combined. We spend more than twice as much as potential enemies China, Russia, North Korea, Iran, and Venezuela combined. [source: see chart 9] And this doesn’t include our allies’ spending or account for our huge qualitative edge (part of what makes it so expensive).
- We also spend more on defense now than ever before — More than at any time in the cold war, including the Reagan buildup and at the height of the Vietnam War. [Source, charts 1, 2]
Purpose of Defense Spending
- Official goals, says DOD, are to: (1) prevail in today’s wars; (2) deter future wars by preparing to prevail in them; and (3) preserve and improve the forces we have. [source: see fact sheets]
- Shorter answer: We are the dominant power and need a huge global reach to protect our interests and those of our allies and to keep the peace on our terms. Having both quantity and quality costs a lot of money.
- Can we afford this level of spending indefinitely, now that budget deficits are so large?
- Do we need to? At least for the moment, our main enemy lives in caves and bombs airplanes, But, the future’s uncertain and new enemies may arise quickly.
- Does defense spending need to be radically rebalanced in some way for the 21st century; e.g., reoriented towards counterinsurgency and away from big hardware and land armies?
- How could we do any of this without weakening capability that we need or might need suddenly?
- How could this be done politically, given the opposition to it?
What do you think?