Can tax policy distinguish between the rich and the rest?

February 4th, 2015 at 8:27 am

That’s the Room for Debate question over at the NYT. I weigh in here riffing off of the recent 529 screw-up. Despite the fact that CATO economist Jeff Miron and I wind up in diametrically opposed camps–I think the code should be more progressive (though I argue there’s no “middle-class exemption,” where “middle class” means almost everyone) and he clearly doesn’t–much of his argument seemed pretty spot-on to me. There’s a ton a upward redistribution through the tax and regulatory codes, as Dean Baker has also emphasized.

Though that’s an old story, it’s also the predictable outcome of high levels of wealth concentration and lots more money in politics, wherein the wealthy can buy and protect the policies that support their holdings. They also can and do buy the “think-tank” results they want to support their case, so good for Miron/CATO in calling out the upside-down subsidies in the system.

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8 comments in reply to "Can tax policy distinguish between the rich and the rest?"

  1. foosion says:

    It’s good to see Cato acknowledging the massive upward redistribution done by government. He should have mentioned the patent system, monetary policy and trade policy, all of which have been covered extensively by Dean Baker.

    In looking at the tax system, it’s important to look at all taxes, including social security and state and local taxes. Our tax system is even less progressive than many believe when you include these.


  2. foosion says:

    BTW, Kevin Drum has a good post on the politics of trying to help the middle class but not those much wealthier. The basic problem is that the political system is only responsive to those at the top economically. http://www.motherjones.com/kevin-drum/2015/02/heres-big-problem-liberals-middle-class-agenda


  3. Smith says:

    The dirty secret is that we finance education exactly the way Milton Friedman proposed back in the 1960s in a book (someone find the book, I’m at work, I can add later, maybe). The predictable result is that education industrial complex profits (especially the so called expensive non-profits), the banks profit, the poor are preyed upon mercilessly, saddled with loans and no degree, and even state tuition fees climb in a era of easy money backed by the federal government. Look it up, I couldn’t make this stuff up. Who was it who though tax credits which were easily anticipated to favor the rich would be a good idea? Look at Clinton for example (Bill)


  4. Jan Konigsberg says:

    In the context of the discussion about tax policy and the middle class, I am left to wonder about the fairness of the Required Minimum Distribution (RMD).

    The IRS’s recent regulation to allow RMD deferral through the Qualified Longevity Annuity Contract (QLACs) seems a tacit acknowledgement that the potential (income) tax ramifications of the RMD may not be fair; but the QLAC provision strikes me as a perverse incentive to entice middle America to protect themselves from the risk of running out of money due to living a long life, and staying OFF of social programs because they have become broke.

    Yet, as poorly conceived as I believe the QLAC reg to be, the IRS seems to have cracked opened the door to reforming the RMD..

    As mentioned, the IRS reg is the implicit acknowledgment of a federal agency that the tax consequences of RMD may not be fair to those of us who have lived as frugally as possible during our working lives only to find our savings when RMD-ed (to coin a phrase) will be taxed at the 25% bracket, assuming $78,300 of other income.

    When we all started saving in tax-deferred retirement accounts, we were led to believe that when we stopped working (I say “stopped working” rather than “retirement”, because the term “retirement” as applied to us Baby Boomers implies some sort of pension) and began withdrawing from the retirement accounts, our income would continue to be taxed moderately — maybe 15%, but not 25%,which is far higher than most corporations – who got the use of at least some of our tax-deferred savings when invested in equities and bonds – have been taxed this past 40 odd years. Moreover, as the average life span of boomers has increased by nearly 10 years since 1975, the potential 25% tax-hit on our retirement income means we are faced with a double whammy.

    The tax-deferred retirement instruments were/are sound public policy, but it seems to me the 25% tax on RMDs is unfair to the middle class and is unsound public policy, which argues for changing the tax code. I would think this is a tax reform both Ds & Rs would support. But maybe not?


  5. Jan Konigsberg says:

    (Please do not post my full name as I am likely to be mistaken for another Jan Konigsberg (no relation) who has much more economic expertise than me). I am a mr. the other is a ms.


  6. Jan Konigsberg says:

    By “likely to be mistaken” I do not mean to suggest that my comment is of the caliber the other Jan Konigsberg would offer, but rather I am concerned that those who know the other Jan K might wonder why she made such an “un-expert” observation!


  7. foosion says:

    IRAs are mainly a gift to the best off. They are the ones who put the most aside and, because they are in the higher tax brackets, they get the most tax benefit. Generally, deductions favor the best off, while tax credits are more level.

    RMDs are a way for the government to get some of this back.

    $78,300 in other income is a lot, considering the median income is in the $50,000 neighborhood.


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