One way to do this would be via a federal consumption tax, such as a value-added tax (VAT)

TO BE NOTED: From Consider the Evidence:

"Reducing Inequality: How to Pay for It April 17, 2009

The Labour Party returned to power in the U.K. in 1997 based in part on a pledge by Tony Blair and Gordon Brown not to raise taxes’ share of the British economy. In his 2008 presidential campaign, Barack Obama promised to reduce taxes for the bottom 95% of Americans. In both instances this commitment succeeded in insulating the progressive candidate from what had become the right’s most powerful electoral club: stoking fear of tax increases by the left.

But while it may be smart electoral politics, committing not to increase taxes’ share of GDP, as Blair did, or to lower taxes for most of the population, as Obama has done, makes it difficult for a government to make much headway in addressing income inequality. Obama has some leeway; the economic crisis has necessitated increases in government spending that can justifiably excuse some backtracking on his campaign pledge. Fully consistent with his promise, he should increase the tax rate on high-end incomes (beyond simply letting the Bush reductions expire). Two other progressive tax reforms are worth pursuing, though they would affect some in the bottom 95%. One is to reduce or end the homeownership subsidy. More than 80% of the $160 billion in foregone revenues from the deduction for mortgage interest and property tax payments goes to households in the top income quintile. The other is to introduce a modest tax on financial transactions.

But should the focus be confined to steps that make the tax system more progressive? Many on the left view heightened progressivity as the key to inequality reduction. Yet in the United States and other rich countries the tax system overall, including taxes of all types and at all levels of government, is essentially flat; households throughout the income distribution pay roughly similar shares of their market income in taxes. As the following chart shows, inequality reduction is achieved not through taxation but with government transfers (and services).

Taxes help to reduce inequality mainly via their quantity rather than their progressivity. The greater the tax revenues, the more government is able to boost incomes and living standards of those in the lower half of the distribution with transfers and services.

Moderate or high levels of tax revenue can’t come solely from higher rates or new taxes on the rich; the math simply doesn’t work. To significantly increase spending on transfers and/or services, President Obama and/or his successors will need to increase taxes on the middle class. One way to do this would be via a federal consumption tax, such as a value-added tax (VAT). We have state and local consumption (sales) taxes, but we raise less money from consumption taxes than any other rich country. Consumption taxes are regressive, and for that reason they’re often dismissed by the American left. But they can be tweaked to limit the degree of regressivity. And if the money is put to progressive use, the benefits may outweigh this drawback.

This entry was posted on April 17, 2009 at 9:25 pm and is filed under Inequality, Taxes. "

the average effective tax rate is 29.8 percent, and that including state and local taxes makes the tax curve look much less steep

TO BE NOTED: From the NY Times:

"Just How Progressive Is the Tax System?

By Catherine Rampell

So says Citizens for Tax Justice, which today released an updated analysis of the effective tax rates for Americans at different income levels.

Data released last week by the Congressional Budget Office underscored the progressive nature of the federal tax system. And in an op-ed article today in The Wall Street Journal, Ari Fleischer, who served as President George W. Bush’s press secretary, used that data — in particular, the income tax numbers — to argue that the wealthiest Americans bear an unfair share of the tax burden. Other research has found that many states and local governments have more regressive tax systems, though, that might offset the progressiveness of federal tax rates.

The research from Citizens for Tax Justice — a liberal organization that advocates “fair taxes for middle and low-income families” — uses 2008 data for all federal, state and local taxes combined. It found that the average effective tax rate is 29.8 percent, and that including state and local taxes makes the tax curve look much less steep:

Source: Citizens for Tax Justice Horizontal axis shows the income group. Vertical axis shows the percentage of income that the average member of that group pays in taxes. Taxes include all federal, state and local taxes (personal and corporate income, payroll, property, sales, excise, estate, etc.). Incomes include cash income, employer-paid FICA taxes and corporate profits net of taxable dividends.

The group also finds that in 2008 the share of total federal, state and local taxes paid by each income group was relatively close to the share of income that that group brings in, at least as compared to comparable 2006 numbers for effective federal tax rates:

Source: Citizens for Tax Justice Horizontal axis shows the income group. Taxes include all federal, state and local taxes (personal and corporate income, payroll, property, sales, excise, estate, etc.). Incomes include cash income, employer-paid FICA taxes and corporate profits net of taxable dividends."

"I could come up with a pretty good list of tax rate cuts financed by spending cuts that would increase economic growth."

A very succinct and potent discussion of the connection between cutting taxes and economic growth by Gerald Prante on the Tax Policy Blog:

"If Bernstein's standard for "high" economic growth is that a tax cut pay for itself, I would agree that no major tax rate cut at today's tax levels is going to promote that much of economic growth. (I'm referring to major federal taxes, as I'm sure there is somewhere out there in a state that lower tax rates would pay for itself...say on a cigarette tax or something where there is huge border activity. Also if you consider certain prohibitions to be implicit taxes, repealing them and in effect cutting tax rates would pay for themselves.)

But Bernstein's position seems to be like many on the left, which is a lexicographic preference for government always getting bigger, and he's trying to act as if it's a free lunch. It's very similar to the view of those on the right who say that government is a waste and should be starved of all revenue. The fact of the matter is that the optimal size of government > 0, but it's optimal size is not 100 percent of the economy (and there would be substantially lower economic growth if that was the case).

There are some government spending items currently in existence that are not worth their costs to taxpayers. Then again, there are some hypothetical government spending items that do not exists right now that would be worth additional tax dollars. The secret is finding which spending items are worth their costs and only funding those, and raising the necessary revenue in the best possible way that meets various criteria (such as equity and efficiency).

It is one of the paradoxes for those who seek to rally support for starving the beast (even if it worked say at the state level under a balanced budget rule). You are starving a beast because you view the beast as too wasteful and not looking out for the best interest of the taxpayer. But whose to say that when you starve it, it's going to devote its now more limited resources to the best interest of the taxpayers. It may starve you in return of the services you and those who you seek to garner support from value most (since you already believe that it doesn't look out for your own interests), thereby not getting rid of the programs at the margin that aren't worth their costs to taxpayers but instead getting rid of the programs that are worth their costs."

Any tax must be looked at and judged by the conditions of the economy, what the money is needed for, the level of debt, etc. Even if you believe in limited government, there is no getting away from analyzing the effects of particular taxes and whether or not they are worth it, even to you. In our complicated economy, it's a hellishly hard thing to do, but there's no way around it. There's not even an easy way to judge simplifying taxes or tax rates, without discussing what you need the money for, and whether the simplification gets you to where you want to go.

Any tax or government expenditure needs to be examined on its own.

Greenspan On McCain's Tax Plan

Via Huffington Post, here's Alan Greenspan saying exactly what I have in earlier posts:

"Greenspan Says McCain Tax Plan Needs Corresponding Budget Cuts

By Scott Lanman

Sept. 12 (Bloomberg) -- Former Federal Reserve Chairman Alan Greenspan said the country can't afford $3.3 trillion of tax cuts proposed by Republican presidential nominee John McCain without corresponding spending reductions.

Greenspan, a lifelong Republican and longtime friend of McCain, said today on Bloomberg Television's ``Political Capital With Al Hunt'' that ``I'm not in favor of financing tax cuts with borrowed money.''

McCain has said he would balance the cost of most of his tax cuts with budget reductions, while providing few details beyond eliminating earmarks and other pork-barrel spending, which have totaled about $171 billion since 2001. Democratic nominee Barack Obama is proposing fewer tax cuts and more ambitious spending programs."

The idea that McCain is going to drastically cut spending defies belief.