America’s Quantum Taxes
How Our Tax System is Both a Particle and a Wave
The CBO recently released a report on the effective marginal tax rates for low- and moderate-income workers and once you account for federal and state income taxes, federal payroll taxes, and SNAP (food stamp) benefits the tax system for these workers looks pretty flat.
Higher income groups pay roughly the same range of tax rates (or too often less) as the working class groups we see graphed above, so we basically have a de facto flat tax. As economic’s professor and former advisor to Mitt Romney, Greg Mankiw, points out, “we could repeal all these taxes and transfer programs, replace them with a flat tax along with a universal lump-sum grant, and achieve approximately the same overall degree of progressivity.” Saying “same overall degree of progressivity” is another way of saying no progressivity.
The United States is often thought of having a highly progressive tax code because most of the revenue we generate comes from the richest Americans. But if our effective marginal tax rates are basically flat, how are our revenues so “progressive”? Inequality. People at the top end of the income distribution must own a disproportionately large share of the national income.
Eduardo Porter, writing in the New York Times, is right that we shouldn’t get overly fixated on tax progressivity; our concern should be raising enough money to fund programs that can benefit the poor and the middle class.
[T]he government’s success at combating income inequality is determined less by the progressivity of either the tax code or the benefits than by the amount of tax revenue that the government can spend on programs that benefit the middle class and the poor.
The entire budget for cash assistance for families in the United States amounts to one-tenth of 1 percent of the nation’s economic output. The average across the O.E.C.D. nations is 11 times bigger.
Porter argues that European style flat taxes (e.g. VAT, carbon taxes) can raise more revenue to pay for larger benefits. But we don’t have that type of flat tax. Just like the wave-particle duality in quantum mechanics, where particles exhibit the characteristics of both waves and particles, the United States created an astonishing tax system: A highly inefficient de facto flat tax that somehow manages to disproportionally rely on the rich while collecting insufficient revenue and doing next to nothing about inequality. It’s simultaneously flat and progressive and, to paraphrase Richard Feynman, nobody understands the tax code.