Excessive Focus On Progressive Taxation Can Make It Hard To Curb Inequality

Eduardo Porter had a great and under-discussed column in the NYT about how excessive focus on progressive taxation can undermine egalitarian goals. The basic point is that the structure of most social spending programs is very strongly progressive, so a key aspect of redistribution is simply to have enough money:

Despite the progressivity of our taxes, according to a study of public finances across the industrial countries in the Organization for Economic Cooperation and Development, we also have one of the least effective governments at combating income inequality. There is one main reason: our tax code does not raise enough money.

Now a dollar raised from the rich is more redistributive than a dollar raised from the non-rich. But getting hung up on this can cause problems. For example, you could raise $1.3 trillion by capping itemized deductions at $25,000 a year. And this would be a strongly progressive tax hike that leaves the vast majority of middle class families unscathed while overwhelmingly raising money from high-income households. But the White House rejects this idea on the grounds that it doesn’t raise taxes on literally zero middle class households. Then Jason Furman and Gene Sperling go on to point out that if you structure the rate cap so as to raise no money on households with less than $250,000 AGI you can’t raise very much money.

The lesson they take from this is that we should reject the deduction cap approach. But the correct lesson to take is simply that dogmatism about the $250,000 point makes it impossible to tap a potentially rich vein of tax revenue.

From time to time the Obama administration has recognized this. The Affordable Care Act is financed in part with an “excise tax” on very expensive employer-provided health insurance plans. Since the basic bargaining dynamic that persuades your employer to buy you a very expensive health insurance plan is the same as the one that might persuade your employer to pay you a high salary, the incidence of this tax falls overwhelmingly on high-income people. But there are a few exceptions here and there due to the contingencies of life. So capping the tax deductibility of employer-provided health insurance is a very progressive tax measure, but not one that strictly excludes all middle class families. In the health care debate, the White House wisely chose to basically ignore their pledge—deploying the excise tax concept as a fig leaf of consistency.