Thursday, September 23, 2010

Stop! Hey... What's that sound? Everyone look what's goin' round...

In the course of my many, sometimes aggravating, discussions with some of my right-leaning, self-identified conservative Republicon friends, the idea of a 'flat tax' often gets floated as a reform to our inefficient & presumably unfair system of taxation.

The idea of a progressive tax has garnered support from economists and political scientists of many different ideologies - ranging from Adam Smith to Karl Marx, although there are differences of opinion about the optimal level of progressivity. Some economists trace the origin of modern progressive taxation to Adam Smith, who wrote in The Wealth of Nations:
The necessaries of life occasion the great expense of the poor. They find it difficult to get food, and the greater part of their little revenue is spent in getting it. The luxuries and vanities of life occasion the principal expense of the rich, and a magnificent house embellishes and sets off to the best advantage all the other luxuries and vanities which they possess. A tax upon house-rents, therefore, would in general fall heaviest upon the rich; and in this sort of inequality there would not, perhaps, be anything very unreasonable. It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion.

My friends don't seem to know this.  Neither the historical origins of progressive taxation, nor the logic involved (nor moral basis, for that matter).  Something I learned in my freshmen Macro Econ 102 course, some 30+ years ago, and which had [apparently mistakenly] assumed was general public knowledge.  Wikipedia has a relatively succinct summary of the historically offered pros & cons here [referenced with all the necessary caveats & disclaimers about Wiki-sourced information].

After I explained the arguments - both pro and con, as best I know them, including economic, political and other behavioral aspects - my friends would always nod in diffuse agreement, smile politely and revert back to explaining why they still thought a flat tax was a good idea.  My powers of persuasion need honing, I guess.

I've always wondered why so many of them seem to think similarly?

Emmanuel Saez, recipient of the 2009 John Bates Clark Medal, which is awarded to "that American economist under the age of forty who is judged to have made the most significant contribution to economic thought and knowledge", concludes in seminal research on the U.S. federal tax system, that:

[I]n contrast to the standard political economy, the progressivity of the current tax system is not being shaped by the self-interest of the median voter.
How Progressive is the U.S. Federal Tax System? A Historical and International Perspective
by Thomas Piketty & Emmanuel Saez
Journal of Economic Perspectives - Vol. 21, No. 1 - Winter 2007 - ppg. 3-24

[Echos of my mind.  I wonder if Saez & Piketty listened to Emerson, Lake & Palmer in their youth, like me?]

What then IS shaping the current U.S. tax system?

Is the standard political economy model flawed?  Quite possibly. 

Is the median voter ignoring his or her own obvious self-interest?  Very Probably.

If so, has the median voter suddenly become universally altruistic regarding the distribution of relative tax burdens?  Very Doubtful.

One obvious speculation might be, given that:
  • the progressivity of the U.S. federal tax system at the top (e.g., typically the top 1% of all taxpayers) has declined sharply since the 1960s; 
  • [perhaps not coincidentally also a time frame when] the income inequality gap (whether measured on a pre-tax or post-tax basis] has steadily widened to record - some might say obscene? -  proportions, not seen since the late 1920s run up to the Great Depression,  in favor of the wealthiest, highest-earning segment of U.S., 
 ... perhaps the median voter's self-interests are being obfuscated, confused and ultimately overwhelmed by a decades-long campaign of unproven and [perhaps] unprovable claims flowing from these hidden, moneyed interests? 

Somehow the billionaire Koch Bros. & like-minded economic conservatives, through literally years and years of underwriting such innocuous sounding & purportedly independent opinion-shaping institutions as:
- Freedom Works,
- the Heritage Foundation,
- the Cato Institute,
- the Club for Growth and
- Americans for Prosperity
(by no means an anywhere near comprehensive list)

... have convinced the populous at large that reducing the progressivity of the tax system for the ultra-rich [if not eliminating it altogether] somehow produces supply-side economic benefits of such tremendous magnitude that the median voter's self-interest parallels that of Goldman Sachs.

Notwithstanding evidence to the contrary. [A topic for a different blog posting at a later date.]


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