There’s been a lot of talk in the media recently about who would benefit from the Rubio taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. plan. While we clarified this issue last week, several media outlets seem confused about how to report the distributional effects of tax changes. Two days ago, Vox published a piece titled “Marco Rubio says he’d cut taxes on the poor more than the rich. Nonsense.” Since then, Mother Jones and the Huffington Post have followed suit with similar articles. However, these articles all rely on a flawed method of presenting the distributional effects of tax cuts.
Vox claims that the lowest 20 percent of taxpayers don’t benefit much from Rubio’s tax plan, because they only receive an average tax cut of $2,168, compared to the top 1%, who receive an average tax cut of $223,783. As Vox puts it, “The top 1 percent would, on average, get tax cuts more than 103 times larger than the poorest 20 percent would get.”
The problem with this method of analysis is that it displays the effects of tax cuts without any context. Measuring the distributional effects of tax changes in dollars leads to some wacky results: a tax cut that makes the federal tax system more progressive can look like a giveaway to the rich, while a regressive taxA regressive tax is one where the average tax burden decreases with income. Low-income taxpayers pay a disproportionate share of the tax burden, while middle- and high-income taxpayers shoulder a relatively small tax burden. hike can look relatively benign for the poor.
This is why it is standard practice among the tax policy community to present the distributional effects of tax changes as a percentage of adjusted gross incomeFor individuals, gross income is the total pre-tax earnings from wages, tips, investments, interest, and other forms of income and is also referred to as “gross pay.” For businesses, gross income is total revenue minus cost of goods sold and is also known as “gross profit” or “gross margin.” . The Tax Policy Center, defending this convention, writes, “TPC’s preferred measure is the percentage change in after-tax incomeAfter-tax income is the net amount of income available to invest, save, or consume after federal, state, and withholding taxes have been applied—your disposable income. Companies and, to a lesser extent, individuals, make economic decisions in light of how they can best maximize their earnings. . If a tax cut changes everyone’s after-tax income by the same percentage, the distribution of after-tax income remains the same as before.”
Here’s one example. Everyone knows that taxes on alcohol are regressive. So, eliminating taxes on alcohol would be great for the poor, right? Not under Vox’s preferred method for displaying the effects of tax cuts:
|
Distributional effects of eliminating alcohol excise taxes |
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|
Income Group |
Average Tax Cut, in Dollars |
Average Tax Cut, as Percent of Income |
|
0% to 10% |
$8.05 |
0.1419% |
|
10% to 20% |
$9.75 |
0.0651% |
|
20% to 30% |
$9.20 |
0.0404% |
|
30% to 40% |
$11.90 |
0.0380% |
|
40% to 50% |
$15.50 |
0.0376% |
|
50% to 60% |
$18.60 |
0.0351% |
|
60% to 70% |
$23.20 |
0.0345% |
|
70% to 80% |
$30.10 |
0.0346% |
|
80% to 90% |
$37.70 |
0.0324% |
|
90% to 100% |
$67.20 |
0.0292% |
In the above table, I’ve done a back-of-the-envelope calculation of the distributional effects of eliminating excise taxes on alcohol. In dollar terms, eliminating alcohol excise taxes would lower taxes for the richest income group by $67.20 and for the poorest by $8.05. If Vox were writing an article about a proposal to get rid of alcohol excise taxes, they might write, “The top 10 percent would, on average, get tax cuts more than 8 times larger than the poorest 10 percent would get.” But this analysis would fail to convey that eliminating taxes on alcohol would make the federal tax system more progressive and would shift a greater share of the federal tax burden on the rich.
Let’s take another example. On March 30, 2015, the same author wrote, “The problem with consumption taxA consumption tax is typically levied on the purchase of goods or services and is paid directly or indirectly by the consumer in the form of retail sales taxes, excise taxes, tariffs, value-added taxes (VAT), or an income tax where all savings is tax-deductible. es is that they’re usually regressive.” What if the U.S. imposed a new, flat, 10 percent tax on consumption? Under Vox’s preferred way of presenting tax statistics, there seems to be nothing wrong with this tax.
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Distributional effects of an additional 10% tax on consumption |
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|
Income Group |
Average Tax Hike, in Dollars |
Average Tax Hike, as Percent of Income |
|
0% to 10% |
$2,249 |
40% |
|
10% to 20% |
$2,494 |
17% |
|
20% to 30% |
$3,132 |
14% |
|
30% to 40% |
$3,577 |
11% |
|
40% to 50% |
$4,173 |
10% |
|
50% to 60% |
$4,906 |
9% |
|
60% to 70% |
$5,480 |
8% |
|
70% to 80% |
$6,611 |
8% |
|
80% to 90% |
$8,291 |
7% |
|
90% to 100% |
$12,589 |
5% |
Under this back-of-the-envelope consumption tax, the top 10 percent of Americans would pay over $12,589 in new taxes, and the bottom 10 percent would pay just $2,249 – which seems like a relatively good deal for the poor. It’s only when you put the tax hike in terms of percentages of income that it becomes clear that this new consumption tax would be regressive.
Vox argues that “who gets more money ‘numerically’ is actually what matters here.” In fact, who gets more money ‘numerically’ is a highly misleading figure, and one that ignores important context about how tax changes compare to taxpayers’ incomes. Instead, when the media reports about the effects of tax cuts, it should focus on the proportional effects of tax cuts on household incomes and how they shift the overall distribution of the federal tax burden.
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