Daily BulletinDaily Bulletin

News

  • Written by Robert Breunig, Professor of Economics and Director, Tax and Transfer Policy Institute, Crawford School of Public Policy, Australian National University

Over the past month a huge political dispute has sprung up in the US about the fairness of its tax system. It is fuelling debates between Democratic presidential rivals, and it is raising questions about the fairness of tax systems everywhere, including in Australia.

It began with a New York Times article entitled The Rich Really Do Pay Lower Taxes Than You.

It was accompanied by one of the most evocative graphics you are likely to see:

Here’s what the graphic shows.

The vertical axis is total tax (US federal, state and local) as a proportion of income. The horizontal axis is income band, from lowest to highest.

At first the yellow line displays the graph for 1950 which is sloping upwards, showing that the highest earners paid the highest proportion of their income in tax (70%) and the low earners the lowest (less than 20%).

It shows what is known as a “progressive” tax system, in which those with the highest income sacrifice the greatest proportion of their income.

Read more: So you want to tax the rich – here's which candidate's plan makes the most sense

Hit “play” on the graphic, and the yellow line gets less progressive over time until 2018 when it becomes pretty flat, except for the few very rich Americans at the very top of the income distribution who pay less of their income in tax than everyone else.

That moving graph of US tax rates that went viral, it's probably wrong. Here's why The Triumph of Injustice, by Emmanuel Saez and Gabriel Zucman. W.W. Norton

The graph is derived from a new book by economics professors Emmanuel Saez and Gabriel Zucman entitled The Triumph of Injustice: How the Rich Dodge Taxes and How to Make them Pay.

Their claim that the US has sleepwalked away from progressive taxation is compelling partly because it is so different from the conventional wisdom.

Warren Buffet might pay less tax than his Secretary, but the traditional story is that the US tax system is progressive, along the lines of Australia’s.

That’s been the view of the US Treasury, the US Congressional Budget Office, and the US Tax Policy Centre.

It’s also the finding of the Organisation for Economic Co-operation and Development and a peer-reviewed 2018 Quarterly Journal of Economics article by Saez and Zucman themselves.

It depends on what you think is income

Heavyweights such as Nobel Prize winner Paul Krugman and former US treasury secretary Larry Summers have chimed in, taking opposing positions pn #econtwitter about the veracity of the graph.

More helpfully, David Splinter from the US Joint Committee on Taxation points out that Saez and Zucman’s measure of income differs from the traditional measure in two significant respects:

  • It assumes that underreported, untaxed income goes primarily to high-income earners. This under-reporting occurs when US taxpayers report less income than they earn, or claim more deductions, exemptions or tax credits than they are entitled to (a large and underappreciated issue. That explains much of the apparent low rate of tax on income at the top end.

  • It excludes from its definition of income government payments other than social insurance payments and deducts payroll taxes. Given that government payments are directed more to those at the bottom end than the top, this has the effect of pushing down apparent income at the bottom and pushing up the apparent tax rate.

The impact of the first is that if a top earner gets, say, $10 million of taxable income and pays $6 million of it in tax, but is assumed to earn an extra $3 million in untaxed income and $1 million in untaxed retirement income, that person’s implied overall tax rate falls from 60% to 43%.

Read more: What did the rich man say to the poor man? Why spatial inequality in Australia is no joke

The impact of the second can be illustrated by this thought experiment: imagine increasing the marginal tax rate of those earning more than $1 million to as much as 100%, and then returning all the tax to them via a government payment.

Saez and Zucman’s method would treat this as a genuine tax rate of 100% for high earners and find that the system had become extraordinarily progressive, even though no-one’s cash position would have changed.

Without these peculiarities of measurement, calculations by Wojciech Kapczuk of Columbia University suggest that the tax system has remained pretty progressive, retaining its upward sloping graph.

Kapczuk and other economists have also questioned the imprecision of some of the data, particularly the guesses needed to calculate the tax paid by the top 400 taxpayers since 1950, and the latest data, which was incomplete when the book was published.

Harvard University’s Larry Summers and Greg Mankiw demolished Saez in a rather unforgiving fashion during a debate at a recent Peterson Institute workshop on combatting Inequality.

It might damage the cause of research

To their credit, Saez and Zucman have welcomed scrutiny and released a partial working paper responding to critiques and a Q&A dealing with some of the issues on the book’s website.

The graph has alarmed many people, and by being released in a popular book during the US primaries has had a more immediate impact than it would have had it been subject to the slower and more painful academic process designed to establish the truth.

The credibility of Saez and Zucman’s work hangs in the balance. Should it ultimately be discredited, trust in economic research more generally will suffer. We will all lose.

Authors: Robert Breunig, Professor of Economics and Director, Tax and Transfer Policy Institute, Crawford School of Public Policy, Australian National University

Read more http://theconversation.com/that-moving-graph-of-us-tax-rates-that-went-viral-its-probably-wrong-heres-why-127233

Vital Signs: Shorter meetings but longer days – how COVID-19 has changed the way we work

arrow_forward

The Conversation
INTERWEBS DIGITAL AGENCY

Politics

Did BLM Really Change the US Police Work?

The Black Lives Matter (BLM) movement has proven that the power of the state rests in the hands of the people it governs. Following the death of 46-year-old black American George Floyd in a case of ...

a Guest Writer - avatar a Guest Writer

Scott Morrison: the right man at the right time

Australia is not at war with another nation or ideology in August 2020 but the nation is in conflict. There are serious threats from China and there are many challenges flowing from the pandemic tha...

Greg Rogers - avatar Greg Rogers

Prime Minister National Cabinet Statement

The National Cabinet met today to discuss Australia’s COVID-19 response, the Victoria outbreak, easing restrictions, helping Australians prepare to go back to work in a COVID-safe environment an...

Scott Morrison - avatar Scott Morrison

Business News

Reinventing The Outside Of Your Office

Efficient work is a priority in most offices. You need a comfortable interior that is functional too. The exterior also affects morale. Big companies have an amazing exterior like university ca...

News Company - avatar News Company

Kaspersky and Ferrari partnership: tailoring cybersecurity for an iconic brand

Kaspersky is commemorating the 10 year anniversary of its strategic partnership with iconic, global brand - Ferrari. The cybersecurity company is a sponsor of the brand’s Formula One racing team...

News Company - avatar News Company

Instant Steel Solutions Review

Are you keen on having the right guidance, knowledge and information about the right kind of steel purchases for your industries? If yes, then you are in the right place. There is no doubt that ...

a Guest Writer - avatar a Guest Writer



News Company Media Core

Content & Technology Connecting Global Audiences

More Information - Less Opinion