Is the Tax System Progressive or Not?

June 15, 2009

Today on the New York Times Economix Blog, contributor and economist Nancy Folbre discusses a frequent type of overreaction or panic among the general public on some tax issues, as evidenced by public opinion surveys. Her observations are probably correct.

But then she delves into the issue of how labor is taxed more heavily than capital (the Warren Buffett critique) and contradicts herself in back-to-back paragraphs when it comes to Tax Freedom Day and the Center on Budget and Policy Priorities’ (CBPP) critique of it.

Here’s what she said:

Misreporting of tax issues is widespread. The watchdog group Media Matters documents a major error on ABC News last March, when commentators mistakenly implied that a proposed increase in marginal tax rates (applying only to income over $250,000) would apply to all income.

The Center on Budget and Policy Priorities points to superficial reporting on Tax Freedom Day, a term copyrighted by the Tax Foundation to describe the day by which the average taxpayer has earned enough money to cover his or her tax liability for the year. About 80 percent of Americans pay less than the average, which is pulled up by a relatively small number of very high payers. As a result Tax Freedom Day comes earlier in the year for most Americans than for the average.

Differences in federal income tax rates are greater in theory than in practice. Warren Buffett famously observed that he paid a lower percentage of his income in federal taxes than his office staff in 2007, largely because income from capital in the form of dividends and capital gains is taxed at a lower rate than income from labor in the form of earnings.

In order for Tax Freedom Day to misrepresent the tax burden for most of the population, the tax system (aggregated at all levels of government) must be highly progressive because Tax Freedom Day is calculated with the formula “aggregate taxes divided by aggregate income.” And the only significant progressive tax in the United States is the federal individual income tax (and possibly the corporate income tax if you assume that it is borne mostly by owners of capital as opposed to labor). So everyone should agree that in order for the CBPP critique of Tax Freedom Day to be even close to the truth, the progressivity of the federal individual income tax must be large enough to offset the regressivity of most other taxes (especially state and local).

But what is the rest of Folbre’s article about? It’s about how the federal individual income tax isn’t really that progressive. Her next sentence is this: “Differences in federal income tax rates are greater in theory than in practice.” You can’t make this stuff up.

Earlier in her post, she cited the progressive group Citizens for Tax Justice. Maybe she should pull out their April study that argued the overall tax system in the United States is pretty much flat (i.e. not progressive). That would support her general thesis, except for the evidence she uses to basically contradict her own thesis, which is the CBPP critique of Tax Freedom Day.

Folbre’s blog post is something that belongs in the bin of misreporting on tax issues.

(Note: She misquotes even CBPP whose 80 percent example only applies to federal taxes, not all taxes.)

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