Taxing the Rich Less Is Not the Solution to Inequality

Household Tax Progressivity vs Redistributive Effort

This graph comes from an article by Cathie Jo Martin and Alexander Hertel-Fernandez that appeared at Vox on Wednesday, How Sweden Fights Inequality: Not by Taxing the Rich. According to the authors, “The figure below makes this point clearly, showing that the more progressive a country’s taxes, the less the country does to reduce inequality.” But it doesn’t show that. And the article is very annoying in providing such a provocative graph with no scale and linking to a report where it is not at all clear what data the authors used to make the graph.

Indeed, the OECD report that Martin and Hertel-Fernandez link to says, “Despite the substantial gains of high-income earners in some countries, income taxes played a relatively minor role in moderating trends towards higher inequality. The reason is that trends towards lower income taxes, on the one hand, and more progressive taxation, on the other, had opposite effects on redistribution and partly cancelled each other out.” So it doesn’t seem that the OECD is making the argument that they are making.

But there is one most frustrating thing about the article: what do the authors mean by “household tax progressivity”? I’m open to their basic argument, which is that taxes are a shared responsibility and we American liberals have to accept that the middle class has to pay more in taxes to have a properly functioning government. Of course, I also know that overall taxes in the United States are not that progressive. (See also: Is “Tax Day” Too Burdensome for the Rich?) So are the authors looking at total taxes? And why are they looking at household taxes rather than individual taxes? This is all extremely annoying because they are making a highly controversial statement. They really need to back up their claims.

Matt BruenigAs a result of this, I didn’t write about the article. I wanted to wait until someone more versed in these issues came to my rescue, and Matt Bruenig over at Demos did so today, Sweden Does Soak Its Rich. The article is just a tad technical, but I think it is well worth reading. On the central issue, he shows that if you look at tax rates to compare progressivity, you will get a situation where low tax rate countries appear to be the most progressive.

For example, he shows that a country with the lowest tax rate of 1% and the highest tax rate of 10% would rate as very progressive: ten to one! But a country with the lowest tax rate of 15% and the highest tax rate of 30% — just a two to one progressivity index — is actually far more redistributive. Thus, the graph above is almost definitional: countries with high levels of taxation will necessarily have low progressivity indexes.

The best case scenario here is that the authors were just looking for an exciting and counter-intuitive bit of data to make headlines with. And this is a problem with the Vox commitment to #SlatePitch journalism. But I’m inclined not to see it as a simple error, but rather as an ideological ax grinding away. Regardless, it isn’t true that Sweden is some unknown free market paradise where the poor are saved.

Redistribution

Speaking of the poor, the Vox article also claims that the reason that the Nordic countries have a low poverty rate is because they use all that redistributed money to “increasing the skills and earning power of low-end wage earners.” Ah, yes: the old conservative canard that the poor just need to get educated and all problems will be solved. It’s a silly argument that I’ve discussed many times. But Bruenig takes a different approach to the issue.

He shows that the before taxes and transfer programs, the Nordic countries have about the same level of people living in poverty as in the United States. (Poverty is defined as those with incomes less than 50% of the median income in a country.) In fact, Finland has distinctly more people living in poverty. But if you look at the situation after taxes and transfer programs, things look very different. In these terms that are, you know, what actually matter, the United States has roughly twice as much poverty.

Of course, there are other aspects of tax policy. The low tax rates in the United States have caused CEOs to be paid far more than they used to and far more than they are paid in other advanced economies where the top tax rates are higher. Consider what Thomas Piketty had to say about the issue:

Of course changes in tax laws are themselves linked to changes in social norms pertaining to inequality, but once set in motion they proceed according to a logic of their own . Specifically, the very large decrease in the top marginal income tax rate in the English-speaking countries after 1980 (despite the fact that Britain and the United States had pioneered nearly confiscatory taxes on incomes deemed to be indecent in earlier decades) seems to have totally transformed the way top executive pay is set, since top executives now had much stronger incentives than in the past to seek large raises. I also analyze the way this amplifying mechanism can give rise to another force for divergence that is more political in nature: the decrease in the top marginal income tax rate led to an explosion of very high incomes, which then increased the political influence of the beneficiaries of the change in the tax laws, who had an interest in keeping top tax rates low or even decreasing them further and who could use their windfall to finance political parties, pressure groups, and think tanks.

There are a lot of reasons that go into our high level of inequality. But clearly, what Cathie Jo Martin and Alexander Hertel-Fernandez are offering up is exactly the opposite of what needs to be done. But like so much of what passes for serious debate in this country, arguments that say exactly what the rich want to hear get big distribution — even in supposedly liberal publications like Vox. It is sad. For all those people asking, “Why can’t we have an honest conversation about…” There is your answer. If an honest conversation would make the power elite uncomfortable, we can’t have an honest discussion about it. And that pretty much means we can never have an honest discussion about anything. Because most of our social ills come down to the fact that we have an extremely unfair society. And that is the last thing the rich want to talk about.

Update (10 October 2014 10:00 pm)

Mike Konczal just wrote, Does the USA Really Soak the Rich? He explains what’s really going on in the Vox article. The authors are looking at how much of the tax revenue comes from the top 10% of earners. So in the United States, it is 45% of taxes; in Sweden, it is only 27%. Thus: taxes are more progressive in America! This is even worse than I thought. As Konczal points out, the reason that the top 10% pay more in the US than in Sweden is because this group in the US makes a whole lot more money (relative to the bottom 90%) than this group in Sweden. He shows that there is a clear linear correlation regarding this. This makes the Martin/Hertel-Fernandez argument totally disingenuous. Their graph above is basically a correlation with itself.

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About Frank Moraes

Frank Moraes is a freelance writer and editor online and in print. He is educated as a scientist with a PhD in Atmospheric Physics. He has worked in climate science, remote sensing, throughout the computer industry, and as a college physics instructor. Find out more at About Frank Moraes.

2 thoughts on “Taxing the Rich Less Is Not the Solution to Inequality

  1. That Vox piece is some real shite. “Our research shows . . .” That’s not research. That’s getting paid straight cash to advance an agenda with bullhonky statistics. The authors pimp for more access to education, as though in America we suffer from a lack of college graduates.

    “The way a tax system fights inequality isn’t just redistribution. It’s by generating enough revenue to fund programs and benefits that help middle class, working class, and poor people participate and succeed in the economy. While talk of taxing top earners may make for good political rhetoric on the left, relying on such taxes cannot pay the bills.” I think we all know what 1980 primary candidate George Bush called that “generate enough revenue” crap, and he was right, although he said so in terms that unfairly equivocated witch doctors with supply-side economists. Witch doctors are at least randomly right.

    One: it can pay the bills. The argument against this usually stems from looking at the net worth of rich people and assuming that if you tap them for a big haul the well runs dry. Whether or not that’s a good idea in itself (some argue for a one-time wealth tax) most of the income being criminally undertaxed in this country (including corporate income) is ongoing. This argument is like looking at last year’s coal company take and saying extra precautions in mines would eventually bankrupt the coal companies. Uh, no.

    Two: Scandinavian countries DO fund education but not in the way we do, with barely-subsidized predatory loans. One of the best things many of those countries provide is paid time off for people learning new skills. You can be a parent and stop working for a year to learn a new trade, and you will be paid by the state. Even if your spouse continues to work at their job. You can go to school while your spouse works and your kids are at school, and it’s not a risky gamble on your future; it’s subsidized investment in putting people to work in the areas they have the most interest in and aptitude for.

    Three: having a serious safety net and redistributive tax policies benefitting the working class doesn’t create a nation of shirkers. (It might here, since our society is so emotionally broken, but even that would pass away in time.) In the slightly saner nations, having pride in your profession, for your enthusiasm and skill at doing it, carries serious social cachet. People are more likely to be looked down upon for going through the motions and not caring about their work than worshipped/shunned for how lucrative/low-wage their work is. If the cable gal is good at cable installation or the garage-door installer is good at that, this person is more respected than a bored investment advisor.

    I was pleased to see these hacks using “progressive” as a positive label. Glenn Beck and other wingnuts tried to tie “progressive” to all kinds of conspiracy theories, aware that while the word “liberal” may be poisoned in America right now (I like it, always have) the policies are not unpopular, and a new label for those policies might catch on. Maybe “progressive” could; maybe other words will. It’s a good sign when propagandists are stealing your terminology!

    • Good points. A couple of side thoughts…

      I’m for confiscatory taxes because I really do not want to have to redistribute income. If we had a 99% tax on incomes over a million dollars, very few people would make over a million dollars per year. This would put greater pressure on repartitioning income toward workers and away from capital.

      I find it fascinating that conservatives push this idea that if you took care of people’s basic needs, they would just lie around all day. All you have to do is look at our huge prison population. Jobs in prison are a reward — something you get to do if you are good. People want to work. It is the way our brains are wired. I suppose one could make the argument that in their way, people in prison are more “go getters!” But if that’s the case, then you have to wonder about a society in which such creative energy isn’t properly channeled.

      The original authors are liberal, I believe. Or at least they think they are. I think they are political scientists. But they sound very New Democrat to me. My general feeling is that they are trying to be provocative. I do understand that. I once worked for a small newspaper and it really was more about pitching ideas than writing. Certainly, Vox wouldn’t have published them if they had written, “Addressing Income Inequality Requires Just What You’d Think!” So I’m a bit more understanding of them.

      Just the same, Matt Bruenig concluded his article:

      One of the few good things about this piece is that the authors implicitly accept the idea that the way to fight low-end inequality is to do what the Nordics do. They then say the Nordics don’t soak the rich and that they keep inequality at the bottom low through human-capital-building that results in higher market incomes. But this just isn’t true. The Nordics soak the rich and achieve low inequality at the bottom through transfers, or “redistribution.” If the goal is to do as the Nordics do, then the lesson is to do exactly the opposite of what Cathie Jo Martin and Alexander Hertel-Fernandez say to do.

      I think that’s about right. What they’ve done is what I’ve seen Avik Roy do with healthcare. “Singapore has a better and more conservative healthcare system than Obamacare! Oh, it isn’t conservative? Switzerland has a better and more conservative healthcare system than Obamacare! Oh, it isn’t…”

      The thing is, if you aren’t ideological, dealing with social problems really isn’t hard. Modern liberals really aren’t very ideological. Modern conservatives are rigidly ideological. And that’s why they can’t solve any problems.

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