Meme Watch: Tax Rates Are Already Flat

The tax-the-poor movement absorbs another data blow.

“The increasing reliance on taxing higher-income households and targeted social preferences at lower incomes stands in the way of moving to a simpler, flatter tax system.”

R. Glenn Hubbard, chairman of the White House Council of Economic Advisers, at a Dec. 10 conference sponsored by the American Enterprise Institute.

R. Glenn Hubbard wants a flat, or at least flatter, tax system than the one we’ve got now. But according to the Jan. 21 New York Times, we already have a flat tax. The relevant data can be found in a piece by Times reporter Daniel Altman. The story’s main thrust is that dividends aren’t the only thing in our economy to get taxed twice and that most other double taxation is more regressive. That’s an excellent point, but Chatterbox is more interested in an accompanying chart that (drawing on data from the Bureau of Labor Statistics’ Consumer Expenditures Survey) attempts to tally up all taxes paid at the federal, state, and local levels. As Chatterbox has observed many times, the progressivity of the income tax is reversed somewhat by the regressive payroll tax, and even more so by regressive state and local taxes—so much so that, as Chatterbox pointed out earlier, “the [overall] tax bite is probably higher for many poor people, percentagewise, than it is for the rich.” Now the Times has provided a more precise accounting that shows that those in the bottom quintile (people earning on average $7,946) pay almost exactly the same percentage of their income in taxes as people in the top quintile (people earning on average $116,666). The bottom fifth pays 18 percent, the top fifth pays 19 percent, and the three groups in between pay between 14 percent and 17 percent—which is to say, roughly the same. Obviously there’s some individual variation, but on average Americans pay approximately 17 percent of their income in taxes, no matter what income they earn.

“Well sure,” Chatterbox can hear the Wall StreetJournal’s tax-the-poor editorialists grumble. “That’s what the liberal New York Times says. And who’s going to trust a back-of-the-envelope calculation by some unschooled hack?” But Altman is neither liberal nor unschooled; he’s a disciple of supply-side guru Martin Feldstein, who was Altman’s Ph.D. adviser at Harvard. (Click here for an abstract of a paper the two co-authored about privatizing unemployment insurance.) When Altman landed a job two years ago on the Times editorial page, the (liberal) American Prospect griped, “On the big issues of political economy, it certainly looks as though Dan Altman, the Times’ latest wunderkind, will keep the paper of record safely conservative.”

Altman points out that the universal tax-distribution picture does change somewhat when we shift from a current-day snapshot to a more longitudinal analysis. Citing a study by Laurence Kotlikoff, a Boston University economist, Altman writes that over a lifetime, couples whose annual income averages out to the minimum wage receive 32 cents in government benefits for every dollar they earn, while households whose annual income averages out to $1 million pay 51 cents on every dollar earned. (All calculations are in constant, present-day dollars.) This analysis shows the tax system to be more progressive than Altman’s chart does because a person’s tax bite relative to income tends to rise precipitously during retirement. (You stop earning a salary but keep paying taxes.) Also, these two examples are pretty extreme: To have your lifetime earnings average out to the minimum wage is to be very poor indeed, while to have your lifetime earnings average out to $1 million a year (after inflation!) is to be very rich indeed. Even by Kotlikoff’s reckoning, tax rates rise pretty steeply at the low end of the income scale; by the time a couple is earning just one-and-a-half times the minimum wage (an average lifetime annual income of $32,100), they’re paying 14 cents on every dollar earned. What the Journal’s editorial page has labeled the “lucky ducky” non-taxpaying class remains very small and very poor.

[Correction, Jan. 22: On closer examination, the American Prospect pegged Altman incorrectly. His co-authorship of the unemployment-insurance-privatization paper notwithstanding, Altman’s views tilt liberal. But Altman’s academic credentials remain, and obviously his academic work is well-regarded by Feldstein, a prominent conservative. Altman’s two other Ph.D. advisers, David Cutler  and Andrei Shleifer, are more liberal.]

Meme Watch archive:
Jan. 20, 2003: “Return of the Lucky Duckies”
Jan. 16, 2003: “Tony Snow Says Tax the Poor!”
Jan. 14, 2003: “A Payroll Tax Rise?
Jan. 2, 2003: “Bushies Get Cold Feet
Dec. 16, 2002: “Bushies Take the Bait
Nov. 27, 2002: “Introducing the Meme Watch