A Look at the Role of Taxes and Transfers…

May 9th, 2014 at 3:20 pm

…in both real income growth and inequality, with references to “Cap21!”  Over at the Upshot.

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6 comments in reply to "A Look at the Role of Taxes and Transfers…"

  1. Robert Buttons says:

    Hard to talk about “MARKET outcomes” producing inequality, when total govt (Federal, state and local) spending accounts for nearly 40% of GDP.

  2. Steve Roth says:

    Good response, but just to suggest that you’re altogether too kind. Only looking at the effect of federal taxes.

    State and local taxes are horribly regressive, and when you combine all taxes, you find that the total tax system really isn’t progressive at all above about $80K a year in income. Latest data linked here:


    “Right” economists play this game constantly (cherry picking particular slices and measures of taxation and showing how progressive they are), really important not to accede to that playing field and framing.

    Thanks for listening…

    • Smith says:

      There are at least six distinct issues characterizing inequality though the relevance of some are contingent or dependent on others.
      1 before vs. after taxes,
      2 what to include as income (employer payroll tax, health benefits)
      3 can government disbursements triggered by low income rationally be counted in measuring inequality of income (ridiculous stupid and insane is how to dismiss this argument)
      4 Separately, would a sicker populace raising medicare and medicaid costs shrink inequality
      5 measuring capital gains (and as a subset, realized vs. accrued)
      6 role of state and local taxes in measuring effective rates

      A simple explanation of why the Piketty approach works best is that it best addresses the question: Of the money available to be earned from work or investment, how much is going to some segment of society, what’s my share, what’s what’s yours or theirs?


      Again, one must consider why the CBO issues reports that minimize the effect of inequality, showing the 1% with income shares nearly half the Piketty levels.

      • Robert Buttons says:

        You are quixotically making the assumptions that:
        1. Economics is a zero sum game (“Of the money AVAILABLE to be earned from work…”; emphasis mine). Piketty measures only the money people are willing to work for.
        2. Transfer payments have ZERO inhibitory effect on wealth creation by low income people receiving those payments. In other words, how do transfer payments affect the marginal income gains (or losses, because those payments are income based) from more work

        Further, Pikkety gleefully measures the inequality created by transfer payments to the 1% (eg. Loan guarantees for non-viable green energy projects) but he suspiciously refuses to measure the transfer payments on the other end of the economic spectrum.

        • Smith says:

          I am definitely not making the assumption economics is a zero sum game, and I don’t believe the average reader would or could infer that from my comment. Since 1947 The U.S. has experienced 2.2% average productivity growth, and pretty close to that the last 10, and 20 years.
          http://www.bls.gov/lpc/prodybar.htm My assumption is the money AVAILABLE from work or investment includes productivity gains. How could it not?

          Based on 67 years of data one could argue it’s a zero-plus-2.2% sum game. The data however shows some segments, and lately nearly all segments of income distribution, have been getting zero or less shares of the 2.2% thus creating rising inequality.

          Due to the current depression, there is a special issue of the unemployed. Obviously putting them back to work lessens inequality without necessarily having to subtract from high income and wealth. Unfortunately it falls on the government to do this, eventually paid for in part by progressive taxation, which then puts you back in zero-plus-2.2% sum game territory.

          Piketty measures not just money people are willing to work for, but money people were previously willing to work for and didn’t need, so they saved it, creating wealth and resulting capital gains from such. But the implication of your argument is that there is money available, which needn’t come from the affluent, if only people were willing to work for it, and thus it isn’t zero sum. This is also different from the argument of structural unemployment (wrong skills) and lack of education (low skills) causing reduced income and heightening inequality (which is belied by unemployment across sectors and stagnant wages for high skills).

          Regarding transfer payments, the two biggest, Social Security and Medicare, are directed at seniors, probably not who you mean are inhibited from working (though they are) since the purpose is to provide income and health benefits so they’re able to retire. What then is the inhibitory effect of medicaid, food stamps, earned income tax credits, and unemployment insurance? Since I’ve already argued its “ridiculous, stupid, and insane” to count aid to the poor as offsetting inequality, I’ll add that’s also why transfer payments to the 1% should count, because they are not getting the payments because of inequality.

          Unfortunately, the so called liberals and center left seem all too satisfied with treating the symptoms of inequality with transfer payments instead of going at the causes, which might make the 10%, 1%, and .1% uncomfortable (i.e. cost them some real money). Transfer payments definitely inhibit people from demanding jobs, free child care, free health care. Perhaps on could include free public education ($10,000/child U.S. average) in measuring inequality. That would raise the question does the transfer to poor families inhibit them from working more? No. Besides, the issue of poverty and rising inequality are separate, though related (because middle class are falling behind too).

  3. Smith says:

    There seems to be an implication that 40% government spending (Federal, state, local) is too much. So the question is, where is the money going?

    12% Transfer payments of which about 5% Social Security, 5% Medicare and Medicaid, and the remaining 2% mostly Unemployment, Food Stamps, and EITC, i.e. Earned Income Tax Credit.
    1% Interest on debt

    4% Defense
    4% Public Schools (roughly .4% Federal, 1.8% state, 1.8% local)
    2.5% State and local health spending

    It’s a $17 trillion GDP, so 1% is $170 billion.
    State and local spending combined is over $3 trillion, and federal spending over $3.5 which gets you to the 40% and Social Security, Health, Education, Defense, and Debt are nearly 25% leaving a more easily assimilated 15% of GDP to ponder.


    From the site below we get 45% in 2012 * 17% of GDP less 5% Federal = 2.5% state and local
    # By 2022, federal, state, and local government health care spending is projected to be nearly 50 percent of national health expenditures, up from 45 percent in 2012, with federal spending accounting for about three-fifths of the total government share.
    # NHE grew 3.7% to $2.8 trillion in 2012, or $8,915 per person, and accounted for 17.2% of Gross Domestic Product (GDP).


    Federal spending cuts both ways. Health care spending for big pharma, and defense spending for the military industrial complex promote inquality. Propping up auto companies that still undercut labor promotes inequality. Bailing out banks while keeping in place the same people and system that destroyed the economy promotes inequality. Tax loopholes (a form of expenditure), not taxing foreign profits, historically low effective corporate rates, taxing dividends and capital gains at lower rates than labor income, not to mention hedge fund carried interest, promotes inequality, lack of antitrust enforcement leading to rents, promotes inequality. No bailout for homeowners, allowing 30% interest consumer loans, ballooning tuition supported by government loans promotes inequality.
    Free public schools including public magnet and charter schools (vs. for profit publicly financed charters), transfer payments of social security, unemployment, food stamps tend to lessen inequality. EITC purports to lessen inequality, but I would argue it promotes inequality by driving down everyone’s wages with subsidies, while taxing the middle class and perpetuating inequality by treating symptoms instead of causes of poverty.