Academics Find Tax Progressivity Makes for More Debt and Higher Entitlement Spending

March 06, 2012

In the latest volume of the Independent Review, Jody W. Lipford and Bruce Yandle present both a theoretical and empirical case for why the increased tilting of the federal tax burden to higher-income earners makes for unstable governance. Yandle is associated with of the "Public Choice" school of economics, which argues that actors in the political sphere are much like actors in the market in that they respond to incentives.

The new article, Taxpayers and Tax Spenders (which can be found in an earlier publication here), takes this seemingly simple observation and applies it to tax policy. The authors argue that a tax system where the bottom 40 percent of income-earners contribute just 5 percent of total federal tax revenue creates an incentive for many to vote for government services which they do not have to pay full price for. In theory, this dilemma where many voters do not have "skin in the game" could fuel the segmenting of the country into two political classes—Taxpayers and Tax Spenders. Political theorist John C. Calhoun foresaw this problem in 1810:

"The necessary result, then, of the unequal fiscal action of the government is, to divide the community into two great classes; one consisting of those who, in reality, pay the taxes, and, of course, bear exclusively the burthen of supporting the government; and the other, of those who are the recipients of their proceeds, through disbursements, and who are, in fact, supported by the government; or, in fewer words, to divide it into tax-payers and tax-consumers."

Using regression analysis, Lipford and Yandle test this theoretical hypothesis and find that yes, in fact, during the period 1979-2007, the increasing progressivity of the federal tax code is associated with greater government debt and entitlement spending. As a note, the authors do caution that the time series used in their analysis is "too short for us to draw strong inferences from them," but still, the theoretical case and this data set seem to point in a convincing direction to me.

In the end, they conclude that "fundamental restructuring of the tax code is essential if the government is to bring down its debt and curb entitlement spending."

For a detailed breakdown of federal income taxes by income percentile, click here.

See also Yandle's well-known 1983 article, "Bootleggers and Baptists."

Follow Scott Drenkard on Twitter @ScottDrenkard.

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