No, Ed Kleinbard Does Not Want a Less Progressive Tax System

October 10th, 2014 at 12:19 pm

I favorably reviewed Ed Kleinbard’s book here the other day so I’m obliged to step in and correct what looks to me like a misimpression growing out of an oped he has in today’s NYT.

Because the oped is entitled “Don’t Soak the Rich” and because Ed, IMHO, doesn’t articulate the nuances in his argument the way he needs to, the oped is being misrepresented as a call for a less progressive tax system (I also think Ed’s mistaken in his claim that the US tax system, all in, is the most progressive across advanced economies—in fact, it’s only mildly progressive…but more on that in a later post).

For example, responding to the oped, Len Berman, a DC tax expert, tweeted “a progressive’s call for less progressive taxation.”

I can see where Len gets that from the piece, and obviously Ed will have to speak for himself, but Ed’s book clearly supports progressive taxation. He may not see the need to make the tax system more progressive, though his book calls for just that in ways I’ll note in a moment. But he certainly does not call for less progressivity.

Ed’s argument, which is a good one, is that what matters in terms of progressivity at the end of the day is the not just taxing, but spending as well.

…achieving equality through the tax structure is the wrong way to think about the issue. Reformers have blundered by confusing what seems fair — more progressive taxation — with what is actually important, and lacking: a progressive fiscal system. As other developed countries have figured out, reducing inequality is not about where the money comes from, but where the money goes, and how much of it is spent.

Now, to be clear, the way things stand today, as I myself wrote in the NYT a few months ago, “To Lift the Poor, You Can’t Avoid Taxing the Rich.” The vast majority of growth in recent years has gone to those at the top of the scale, and since their income has grown faster than their tax liabilities, their effective tax rate—taxes paid as a share of income—has generally gone down over the decades. In the near term, it makes no sense to increase taxes on those who’ve seen so little pretax growth go their way.

And while Ed clearly doesn’t want to raise the marginal tax rates of the wealthy, he devotes a whole chapter of his book to cutting a boatload of their tax breaks in ways that would unquestionably raise their effective rates. If Len is thinking there’s a pending love match between Grover and Ed, I assure you, it ain’t happening.

Here’s what Ed says in defense of progressive taxation in his book:

If one accepts the fundamental premise of this book, that material outcomes are determined by an undifferentiated porridge of personal efforts and brute luck, by virtue of which we all have a bit less control over our material successes than we like to pretend, then some tax rate progression functions as a broad social insurance program to address the brute luck competent.

In fact, Ed advocates going back to the Clinton-era marginal tax rates, which would raise tax rates on more than just the rich, and here too he’s got an important point. As I wrote in my piece on this:

To be clear, the tax burden on all Americans, not just the wealthy, is low both in historical and international terms. We’re collecting less revenue than many other advanced economies and less than we have in the past. So it’s not just the rich that will ultimately have to pony up if we’re going to continue to fund the things we want and need in a sustainable way.

At any rate, it’s a nuanced argument, and Ed lost the nuance in his oped today. And as he’s probably finding out as we speak, the DC tax debate doesn’t do nuance.

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5 comments in reply to "No, Ed Kleinbard Does Not Want a Less Progressive Tax System"

  1. Joe Leahy says:

    Obviously, Kleinbard is not advocating for LESS progressive taxation. But his argument against MORE progressive taxation is nonetheless deeply flawed.

    The key flaw is his assumption that “government spending invariably is very progressive” and “[l]ower-income Americans get disproportionately more value from government spending, relative to their incomes, than do the affluent” in that both social services and general government spending “on highways or other infrastructure, or our defense budget also is progressive in its effect.”

    I have no doubt that the spending on food stamps and so forth is progressive in its effect. But any assertion that spending on highways and defense is progressive can only be based on a flawed understanding of how people “benefit” from general spending. (The top commentors on the NYT’s website saw through this easily, so I am not pointing out anything new here.) There are at least three (and perhaps four) flaws with this view.

    First, highway funding that repairs the highway on which the CEO and janitor drive to work DOES benefit the CEO and janitor in proportion to their incomes from their jobs. Presumably, a CEO cannot telecommute and therefore must be in the office (or on the road) — and making those trips to the office is what earns the CEO his salary and bonus. So to simply suggest that the CEO and the janitor both benefit the same from their commute to work is wrong. While the CEO may have additional income from capital appreciation on pre-existing wealth, at a minimum both CEO and janitor both gain from highway funding in proportion to their job-based income (which, I assume, is where Klinbard gets his “200 times” figures).

    Second, the CEO and other shareholders of the corporation benefit from highway spending in ways that the janitor does not. The corporation presumably makes a profit on the goods or services it sells (or it will soon go out of business, absent a government bailout — another benefit Kleinbard does not mention). The highway allows those goods and services to get to market. Further, the janitor is paid a set wage (i.e., is a fixed expense to the corporation) while the CEO and shareholders own the residual benefit from the profit resulting from the sale of goods and services. Thus, every trip on that highway made by the goods or those performing the services benefits the CEO and shareholders, because any increase in the residual value of the corporation should be reflected in the price of their stock holdings; the janitor, by contrast, who has a fixed claim on the corporation’s assets, gains nothing additional from the sale of those goods and services. Although the janitor may purchase some of the corporation’s goods and services, any benefit that he gains from the lower costs of the goods (due to the highway being in good repair and so forth) will be swamped by the corporation’s profits because presumably the corporation has many more customers than employees.

    Third, let us consider the question more generally, rather than looking at specific examples. Who gains more from the stability and security that is garnered from spending on infrastructure and the national defense (and on police and court systems)? The best way to ask that is to ask how much the janitor and the CEO each stand to lose if the country were to fall into chaos due to a lack of this sort of spending. That is to say, who benefits most from having a stable and reliable government system? For the CEO’s benefit, let us assume that chaos would result in BOTH the CEO and the janitor losing all of their wealth. (The French Revolution seems to suggest otherwise, though.) Since the janitor has far less wealth to lose, despite that they will both lose “everything,” the CEO obviously stands to lose far more in terms of absolute wealth than the janitor. Indeed, the amount of wealth that each stands to lose is not in proportion to their income, because the janitor will have a much higher percentage of his income on consumption while the CEO will have saved the great bulk of his income or spent it on assets that can be resold (art, yachts, etc.). Hence, spending on infrastructure and defense (and police, courts, etc.) does far more to protect the CEO than the janitor.

    Finally, one could even argue that CEOs, shareholders and the corporations that they own and manage benefit more from non-social service government spending on the regulation of business. While the janitor certainly benefits from government regulations that protect his health and welfare, corporations also benefit from such regulations. Government regulation only harms business if you view the alternative to regulation of business as the absence of all regulation. However, since government could easily prohibit rather than regulate business activities that it finds to be abhorrent or even problematic, to a large degree regulation actually promotes business because it allows business to exist rather than be prohibited. (The alcohol industry and the burgeoning marijuana industry are two fine examples.) So, to some degree, regulation legitimizes business that might otherwise not prosper. (Just one more example: some have argued that US securities benefit, rather than suffer, from US securities laws because of the legitimacy conferred upon US securties by the securities laws.) Therefore, while this question is certainly an esoteric one, it is at least arguable that business owners and managers — like the CEO and the shareholders of his company — benefit at least as much from government regulation of business than regular people like the janitor do.

  2. smith says:

    The nuances are manyfold

    Don’t cut marginal rates
    Don’t raise marginal rates
    Close some loopholes
    Raise nearly everyone’s taxes
    Increase the size of government
    Use increase to raise the floor and supplement the middle class with universal benefits

    The problems with this are:
    The rich know how to defeat raising rates, they call for cuts, they never give up.
    Higher marginal rates are a (if not the) critical component of preventing or turning back a ruling class of the wealthy
    Loophole closing should be argued separate from rates
    No general increase (excepting Bush tax breaks) should be allowed until marginal rates are raised and the middle class again begin to participate in economic growth
    Some things government should do, defense, regulation, education, but the goal should still be the smallest government control and economic participation

    Most importantly, Kleinbard’s policy to not soak the rich is a losing policy. It an envisions a society with greater government control, greater reliance on government to make up for failings of the marketplace, but leaving the rich largely as they are today, getting richer.

    A NYTimes commenter got it right:
    “We can either have democracy in this country or we can have great wealth concentrated in the hands of a few, but we can’t have both.” – Justice Louis Brandeis

    You can’t prevent “great wealth concentrated in the hands of a few” without higher marginal rates.
    Joe makes $20,000 today
    J.R. makes $20 million
    In Keinbard’s future world Joe makes the equivalent of $40,000
    Who still runs things?

  3. PJR says:

    What’s missing in the analysis: tax policies do much more than take money from people. Tax policies affect pre-tax allocations of money in the private sector. Before the 1980s, tax policies encouraged allocations that decreased income equalities.

  4. Robert Salzberg says:

    It isn’t the “brute luck” that needs to be compensated for, it’s the way our economy is gamed to help the wealthy through everything like lower taxes for income from investment than wages from work, aggressive attacks on the power of unions, regulatory capture, a multitude of tax credits, incentives, and deductions that favor the wealthy, a historically low minimum wage, unpaid for externalities for things like carbon pollution etc.

    Add them all up and you get a large government mandated upward redistribution of wealth. That’s what needs to be compensated for unlike, “brute luck” which is usually balanced between good and bad.

    • Smith says:

      This is a good point raised above about “brute luck” not playing the part Kleinbard and those supporting his thesis would have you believe. On further consideration, I would go even further.
      First, it’s unclear whether “brute luck” of Kleinbard includes how rich your parents are, and how much money they pass on to you. Terming that “luck” strikes one as purposeful obfuscation of an important aspect of inequality and opportunity. In either event, the argument appears dishonest.
      If parental wealth is left out, then the analysis is laughable in what common sense indicates is an important aspect in determining success (see also Mankiw’s defense of the 1% where he understands the significance of the question, but then cites a paper and misstates it’s findings, drawing the opposite conclusion of the results).
      If parental wealth is included, that’s hardly what we normally consider “luck” in the usual sense. The reason for hiding that aspect is to defend the status quo. Luck implies everyone has an equal chance, and so lets make adjustments for those with less luck, though the system is basically fair.

      But the bigger point should be that it doesn’t matter if it was hereditary, luck, or personal effort. Enormous wealth and power in the hands of a few is bad, wrong, and dangerous. Restore confiscatory rates as we had in the Eisenhower era.

      Also, increased government funding for needed programs, programs to end poverty, and higher marginal rates to reduce the enormous power and wealth accruing to the very rich are separate issues. Closely related to marginal rates are stagnant wages, but even that is still a separate issue. Conflating and mixing up all four, necessary at some level of planning, is often just adds unnecessary complexity to problems hard enough to solve by themselves.

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