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Let’s Tax Regressively

July 26, 2010

Everyone’s talking about taxes, so here is my take.

Like a lot of generally liberal people, I am generally in favor of progressive taxation. However, Monica Prasad’s excellent The Politics of Free Markets – which is also about the politics of taxation – has made me rethink that commitment.

Progressive taxation is a means, not an end: I have no commitment to progressive taxation in and of itself. My ideal taxation scheme would lessen inequality and improve the living standards of the poorest Americans, in what ever manner you can accomplish that.

Progressive taxes are highly visibile: Income taxes are paid in one big lump (unlike sales taxes). People hate this, and so income taxes are very salient. People are likely to know exactly which income bracket they fall in and exactly how much they give to the government.

Progressive taxation organizes voters into interest groups: A minority of voters fall in the lowest two income brackets. A plurality (majority?) of voters fall in the middle two brackets, and a majority of wealth (i.e. political contributions) fall in the upper two brackets.

The natural coalition is the rich and the middle class against the poor: In cartoon version, the very wealthy people remind the middle class that the government is stealing 25% of their income despite the fact that they still have trouble paying off their mortgage and their kid’s tuition. The middle-class votes and upper-class money combine into a powerful anti-tax, anti-redistributionist coalition. Corporate welfare thrives, welfare-welfare is slashed.

My Relatively More Regressive Proposal

Why not collapse the bottom four tax brackets into one big bracket at, say, 15%? The majority of voters will receive what looks like a 10-13% tax cut. Taxes will be raised on the poorest, but the difference between 10% and 15% of $16,000 a year can easily be made up through increased services.

Then let’s add a few brackets on the top. My heart doesn’t go out to those making $400,000 a year, but I don’t get why they are taxed at the same rate (and accounting for loopholes and tax sheleters, probably a lower rate) than those who make a million plus.

Whatever revenue is lost through the income tax cuts can be made up (and then some) through relatively invisible taxes like sales taxes, value-added taxes, and a carbon tax. These taxes may be especially regressive, but they are also less visible and so allow the government to increase its revenues without voter backlash. If these increased revenues are then put toward universal social programs – medical care, public nurseries and child care, public transit, public schools and universities, community colleges, job training, unemployment benefits, etc. etc. – once again lower and middle class Americans benefit and are not placed in opposing interest groups.

In short, something like the above could improve the living standards of the poorest American Americans while making new electoral coalitions possible.

Update: Dylan Matthews just posted a breakdown of income groups by share of the electorate, which is pretty useful to look at alongside what I just wrote.

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