Tax Day and the Rich

On Tax Day in America, we all recognize two important traditions. First, like all days, we salute the troops for making Tax Day possible. Second, we rehash stuff that has been beaten into the ground so much that you want to die reading about it.

This year, the latter tradition is being carried on by writing takes about Donald Trump not releasing his tax returns. Nobody really cares that much about this topic, not even those who pretend to. But for some reason, some power players in the non-profit and media sectors have decided that this is a thing we’re going to have to keep dealing with, and so we are.

As for me, I would like to respect the dead-horse-beating tradition by rehashing the issue of taxes and tax justice, especially as it pertains to the rich. I’ve written about this plenty of times before (see, e.g., I, II), which is precisely why it is a great candidate for this ritual.

You see, there is a problem with the way we talk about taxes and especially the way we talk about who pays them and what an individual’s “fair share” is. What we tend to do is group everyone into quintiles on the basis of their gross market income and then sum up how much tax is “paid” by each quintile. From there, depending on the point we are trying to make, we might also then divide each quintile’s taxes paid by their gross market income in order to get their tax rate.

But what is a gross market income exactly? Why have we decided to use that to assign people to groups and then use that to divide taxes paid by? What is so important about it? Is it people’s real income? Is it their separate-from-government income? What makes it so special?

Gross market income is how much money each person would have received from factor payments in a hypothetical world where taxes did not exist but the tax-funded political economic system that factor payments depend upon somehow still did. More clearly, gross market income is the amount of income paid out to capital and labor “before” (as an accounting matter) we deduct taxes.

The reason we use this particular figure in so many things is because, under prevailing capitalist ideology, factor payments are understood as your real, deep, separate-from-government income. Everything else, whether it is taxes or public benefits, is treated as if it invades that natural, pre-political distribution of income. This particular understanding serves to legitimize the capitalist order and those who benefit the most from it, which, as any good Gramscian will tell you, is probably why it is so pervasive.

It certainly is not pervasive because it makes sense. After all, the magnitude and distribution of factor payments are no more removed from politically-imposed economic institutions than transfer payments or anything else. The rich are not a freestanding class of people that the government then comes in and taxes. Rather, the rich are created by the government when the government puts in place the institutions that direct all that factor income to them in the first place.

Given this reality, the proper way to understand taxes is not as something that takes from each person’s income, but rather as something that — along with factor payments, transfer payments, and every other income institution — determines each person’s income.

The idea of “the rich paying their fair share” understood as remitting taxes equal to some percent of the factor payments our system directs their way is ultimately incoherent. The proper amount of tax rich people should “pay” is not determined by grasping abstractly at tax rates, but rather by determining what taxes are necessary to achieve a fair distribution of income in society.

Why Consumption Taxes are Fine

In my last post, I said that it would be good if the US imposed a consumption tax such as the value-added tax (VAT). Critics generally say that these kinds of taxes are bad because they are “regressive.” While it is true that they are regressive under the way that word is generally used, that entire way of thinking about taxes is confused and muddled (as I’ve discussed previously in the case of the Nordics).

The standard response to those who raise the regressivity objection is to say that it just depends on how the proceeds of the consumption tax are spent. This is true, but only because it is true of all taxes. Even progressive taxes are only good if the proceeds are spent well. You could spend them on bad things and even in ways that make inequality worse.

The bigger problem with the regressivity objection, in my view, is that dividing taxes paid by income seems to obscure the more important point. What really matters in all of this is how many dollars you are scraping from poor, middle class, and rich people. Consumption taxes scrape more dollars from people who consume more and it is the rich who consume more.

According to the 2015 Consumer Expenditure Survey, the richest income quintile consumes an average of $110,424 while the poorest income quintile consumes an average of just $24,355.

Screen Shot 2017-04-05 at 10.46.56 PM

A 10 percent consumption tax would thus draw $2,435 from the poorest quintile and $11,042 from the richest quintile. Which is to say that such a tax draws 4.5 times as much money from the rich as the poor.

Whether the money drawn from the consumption tax ultimately reduces inequality does depend on how it is spent, but it is not like it needs to be spent in an especially “progressive” way, i.e. in a way that is heavily targeted towards the poor. Even if you spent this money in a way that benefited all quintiles equally, you’d still see a pretty significant net swing.

Screen Shot 2017-04-05 at 11.00.48 PM

Of course, this graph features a rather simplistic analysis as it assumes consumption does not change at all in response to the tax and benefit reforms. But even if the precise figures would be somewhat different in a real life implementation, the basic pattern of the graph above would still hold.

None of this is to say that a consumption tax is better than other taxes. The US has plenty of room to increase its tax level by upping income taxes, and so that’s a natural place to look. But to say consumption taxes are bad generally is pretty clearly mistaken.

The VAT Tax

A value-added tax (VAT) is a consumption tax. It is not meaningfully different from a sales tax except in the way that it is collected.

Donald Trump is reportedly considering a value-added tax as part of his tax plan. It seems unlikely that such a tax would pass into law given the current Congress. But it’s not a bad idea. In fact, it’s a good idea, which is the opposite of bad.

VATs are common throughout the rich, developed world. Here is how some selected countries break down on their VAT reliance in 2015:

Screen Shot 2017-04-04 at 3.12.05 PM

The US does not have a VAT, but it does have state and local sales taxes. If we bring those in to the picture (and include sales taxes also imposed by the other countries), the picture looks like this:

Screen Shot 2017-04-04 at 3.12.11 PM

No matter how you slice it, it is clear that the US has a lot of room to introduce something like a VAT on the national level. If used to raise revenue to fund good stuff, it would be a helpful complement to the taxes already in place.

Of course, the US lags many of these countries on just about every tax that you can think of. Thus, the US could expand its tax level through other mechanisms as well, including a large increase in income taxes.

Screen Shot 2017-04-05 at 11.10.32 AM