Progressive taxation: yeah, right

Alex Tabarrok and Greg Mankiw have the right answer to the wrong question. The question is whether the rich pay a higher share of their income in taxes than the poor, and the answer is yes*.

Do you remember Robin Hood? He stole from the rich and gave to the poor; there is no account of the story where he is described as stealing from the high-earners.

The progressivity of income tax is not the *issue* at all. What really matters for people's welfare and purchasing power is wealth. Looking at the tax system as a whole, the rich pay a scandalously small proportion of their wealth in taxes, the poor a scandalously large one. (let me remind you that in the US 1% of households owns 38% of all wealth on last count, and that's not including intangible wealth such as human capital and access to corporate assets.) And still we have this ridiculous situation whereby people try to figure out how redistributive our society is by looking at the flow of purchasing power and ignoring the bloody stock.

Now, Robin, this is status quo bias.

*these numbers are computed in a way that makes the gap in the effective tax rates between the poor and the rich appear wider than is actually the case, but that's an issue for a different post.

Disclaimer: As is usually the case, this is all positive analysis, and descriptive - rather than policy prescriptive - (couldn't help the rhyme here) at that. I'm not saying the rich should be paying more and I'm not saying that they shouldn't. I'm not saying we should be looking to tax wealth rather than income either. And if the words 'consumption' and 'savings' sprung to mind as somehow justifying it all, well done, but this is not a post about morality.

by datacharmer | Wednesday, December 19, 2007
  , | | Progressive taxation: yeah, right @bluematterblogtwitter


  1. Matt Nolan Says:

    One issue I have with using wealth statistics for any equity (at least in the way they are calculated in New Zealand) is that they also include people with negative or low wealth, who have a high level of expected lifetime earnings.

    For example I have a substantial student loan which will keep my wealth position negative for a longtime in the future. However, I have invested heavily in human capital and so expect to make a return in the future ... I don't think anyone should compensate me for that.

    However, I know that you weren't saying anything about that, I just really wanted to get it off my chest ;)