Tax Fairness: What Do People Think About It?

April 15th, 2014 at 10:16 am

I’ve been thinking about tax fairness in recent days, and was thus interested to peruse the Gallup results of the question.  Nothing too surprising—those who pay more in federal taxes think they’re too high; almost nobody thinks their tax bill is too low.  Stop the presses!

But departing from the data a bit, there are two factors that I suspect have an impact on our general perceptions of tax fairness.  For one, there’s our feelings about what we’re getting for our tax dollar.  In this regard, dysfunctional or ineffective government, from the shutdown to the health reform rollout, likely chips away at fairness perceptions.  My readers know my take on this: those policy makers and their funders who would shrink government by slashing spending and choking off revenues benefit greatly from this dynamic.  They have a strong incentive to pursue dysfunctionality.

Second, pretax wage stagnation for the many in a context of sharply rising incomes for the few could also contribute to a sense of unfairness in terms of taxation, even in a progressive system (and especially in one where wealthy corporations pay low effective rates).

Below, I’ve plotted the real median wage against Gallup’s share of those who say the federal tax system is fair (I’ve lagged the fairness result by one year, so your feelings about tax fairness this year are influenced by your last year’s real wage).

Now, do not take this too seriously.  There are lots of lines that move like this and it would take a lot more work to see if this correlation means anything.  But it’s suggestive.




Source: Gallup, EPI (median wages)

Random Thoughts on Tax Day Eve

April 14th, 2014 at 7:41 pm

–There’s increasing noise about tax fairness, particularly given the increase in the share of total federal taxes paid by the top 1%, as in this WSJ piece today.  I’ll have more to say tomorrow about different ways to think about fairness in the tax code, but a key factor here is that those whose liabilities and tax shares are going up are just about the only ones whose incomes have been going up in recent years.  A general sense of the evidence can be seen here and here but more to come.

–So, given a progressive federal tax system with high levels of inequality in terms of pretax income growth, you’d expect the share of taxes paid by those at the top to increase.

–One measure of tax fairness I find quite intuitive compares shares of pretax income with shares of taxes paid, ideally not just at the federal level but at including all three levels: fed, state, local.  The smart folks at CTJ provide us with just that table.  The tax shares of all income groups are within a few points of their income shares.  At the top 1%, the total tax share is 24%; the income share is 22%.  For the middle fifth, the tax share is about 10%, the income share, 11%; at the low end, the tax share is 2%, the income share, 3%.  Hard to hear a blaring unfairness fire alarm in these numbers.

–In fact, as the last column of the table shows, the effective, or average tax rates, including all levels of taxation, for the top 60% range from 27-33%, leading CTJ to conclude:  “Contrary to popular belief, when all taxes are considered, the rich do not pay a dispropor­tionately high share of taxes. Of course, in a truly progressive tax system, they would pay much higher effective tax rates than everyone else.”

–Compared to other OECD countries, we’re a relatively low tax country (here’s the table, a hairy one to be sure, but worth a look).

–I’ve already heard folks going on about complexity in the code and concluding that a flat/single rate tax or national consumption tax would be much simpler.  Yes, re complexity but it the problem ain’t the rate structure.  We could have a system with 100 different rates and you could just look up your liability in a booklet or online in well under a New York minute.  What complicates the code is all the different treatments of different types of incomes, the trillion bucks in tax expenditures that the Treasury forgoes each year, the deductions, credits, and so on.  I’m not saying they’re all misguided either, but don’t kid yourself that the complexity derives from the fact of the graduated rates (here’s a neat read on this point, from PPI).

And here’s a shout out to my fav CPA: you go, MEA!

What’s Driving the Growth of US Inequality: Labor or Capital Income?

April 13th, 2014 at 12:29 pm

As noted yesterday, I’m working on a longer piece about sky-high salaries—merit vs. “rents”—so I was interested to see this piece (“Invasion of the Supersalaries”—nice!) in the NYT this AM.  That piece reports that “the median compensation of a chief executive in 2013 was $13.9 million, up 9 percent from 2012…”  I’m assuming that 9% is nominal (not inflation adjusted) but according to the BLS, nominal median weekly earnings for regular old full-time workers not from the exec suites went up about 1% last year, which was actually a bit behind inflation (1.5%; see table 7; we’re talking about $40,000/year).

So, the bakers are once again getting smaller slices of the pie.

A related observation came to mind today as I working through Thomas Piketty’s incredible new book on inequality (the fact that it’s already a best seller gives me more hope for the future of this critical debate than almost anything else I can think of in recent years).

What with the rise and fall and inexorable rise again of financial markets in recent decades, many people who think about this believe that it is the rise of capital incomes, like capital gains, that’s the primary factor driving US inequality upwards.

Not so (though with an asterisk).  The figure below from Piketty’s book shows the increase in the share of US income going to the top 10%, i.e., the top decile.  The increase in the wage share since 1970 is about 10 percentage points, or about two-thirds of the increase.  The increase in capital income explains the other third, which ain’t nuttin,’ but the wage story told in the NYT piece and the figure below is still the main driver.

Piketty also shows how the rise in supersalaries has changed the composition of income at the very top.  Back in 1929 (the last time inequality was at today’s levels), income from capital comprised the main source of income for the top 1%; today, you’d have to go all the way up to the top 0.1% before capital overtook earnings as the main source of income.

Re that asterisk, labor economist Larry Mishel correctly stresses that stock options are typically counted as part of compensation in this research (which seems right to me) and they’re a growing source of CEOs pay packets.  Is that labor income or capital income?  Somewhere in between, I’d say, but certainly connected to work.


Source: Piketty (2014, Fig 8.7)

A Striking Picture of Pay and Deregulation in Finance

April 12th, 2014 at 2:41 pm

I’m crunching on a longer piece on “rents” versus merit in US high-end salaries and their role in our uniquely high levels of inequality (“rents” here means being paid above your marginal product, or your individual contribution to your firm’s bottom line).

Anyway, for good and I think obvious reasons, a strain of this literature focuses on the finance sector, where there’s very compelling evidence of highly inefficient rent seeking.

A reasonable, if not naïve, question then becomes: aren’t the financial regulators supposed to prevent this?  Sure, but they’ve been outgunned by lobbyists and seemingly captured by the finance industry, and these factors too are major contributors to rents.

Anyway, I stumbled on this figure below, from a very insightful paper by Philippon and Reshef.  The figure plots an index of financial deregulation against relative pay in the industry (an increase in the deregulation index implies looser regulation).


Source: Philippon, Reshef (2009).

I was struck by how tight the fit is between deregulation and pay in finance relative to the economy-wide average.  But does this really imply rents are afoot?  Perhaps it just shows that when you un-cuff Adam Smith’s invisible hand, you unleash efficiencies that plodding regulators were formerly blocking (note clever use of “afoot” and a “hand”—full-body economics here, folks).

Not so fast.  First, there’s the fact that the sector helped to tank the economy, so let’s factor in negative externalities.  Second, there’s a growing body of work relating the growth in the finance sector to price distortions (overpriced financial intermediation), unproductive rent-seeking, and of course, systemic risk.

Call me dark, but what I see here is a toxic relationship between deregulation, underpriced risk, and exorbitant, inefficient pay scales that contributes to the growth of inequality, not to mention the shampoo economy (bubble, bust, repeat).

Summers on Infrastructure Needs

April 11th, 2014 at 10:47 am

If there’s something awry in the logic of Larry Summers’ argument here for more infrastructure investment, I certainly can’t see it.  Based on low real interest rates, still high unemployment particularly among blue-collar production and construction workers, and most of all, the need for productivity-enhancing investments in our aging public goods, Larry is very much correct to ask “if not now, when?”

A few key points:

–we are, at some point, going to wise up and start engaging in the needed maintenance of our depreciating stock of public goods.  America’s roads, airports, and public schools of 2024 will not be those of 2014.  So given the confluence of factors Larry identifies, shouldn’t we start now?

–there are many “two-fers” in this space: create jobs for the un- and underemployed WHILE improving productive capacity; borrow to invest WHILE real rates are still low; repair our public schools WHILE improving their energy efficiency (see our FAST! idea)

–Larry doesn’t get much into the politics, but they’re of course central.  One could historically count on bipartisan support for this type of investment.  I mean, business interests might oppose the minimum wage and unions, but of course they want and need adequate ports, roads, airports, and so on, not to mention a skilled work force.  No firm can supply these public goods.

–But in a sign of how different these times are, not only is bipartisan support for infrastructure investment far from forthcoming, Rep. Paul Ryan’s new budget significantly cuts transportation funding.  According to the Senate Budget Committee’s analysis of the Ryan budget “… would cut funding for transportation projects next year by $51 billion…and a total of $167.5 billion from federal transportation programs over the next decade if no additional revenue is identified. Roll Call (no link) points out that the budget “…also suggests a pilot program to allow states to opt out of the federal motor fuels taxes and funding programs entirely and pay for transportation projects strictly with state revenue.”

Rep. Ryan calls his plan a “Pathway to Prosperity.”  All’s I can say is that if you’re driving down that pathway, you’d better have some serious shock absorbers because that path is fraught with deep, deep potholes.