Taxes and Incomes

by Dave Schuler on August 9, 2011

The chart above was produced by long-time commenter Andy who blogs occasionally at his own blog, Organizing Entropy. It’s part of an ongoing discussion that’s been going on in comments that I thought worth promoting to the front page. The discussion is about the frequently encountered claim that taxes are lower than ever before (or lower than they’ve been since 1995 or 1983).

As I see it Andy’s chart supports everybody’s perceptions.

  1. It is true that taxes as a percent of income has fallen from its highs.
  2. It is also true that taxes are not at an all-time (or even post-war) low.

I note that all of the valleys in taxes as a percent of personal income are associated with recessions and the last two peaks are associated with bubbles. That’s an artifact of the reliance on the income of those in the highest decile. And there’s your rising income inequality, too. Earners in the top percentiles get more from assets and inflated assets prices are what make bubbles.

Perhaps I’m misinterpreting them but as I see it Dr. Krugman and those who agree with him argue that all that are necessary to resolve our fiscal dilemma are to a) raise taxes on the top earners and sometimes b) reduce defense spending. I think that a) is based on a cherry-picking of the evidence and is unlikely to yield as much revenue as they think it will. I think that b) is correct but needs to be combined with a revised strategic and grand strategic plan.

Among Republicans in Congress there appears to be a group (a dominant group) that believes that if we lower tax rates additional revenue will be realized. I think that is, as P. G. Wodehouse might have said, far from hinged.

My view:

  1. We need to reduce defense spending (see above for caveats).
  2. We need healthcare reform.
  3. Social Security needs a few tweaks, e.g. raising the retirement age or some version of means testing (it already has some means testing cf. the sliding scale of payments), but no major corrections.
  4. A properly constructed revision to the personal income tax could yield additional revenues
  5. Foreseeable minor revisions to the personal income tax are unlikely to be properly constructed.
  6. More attention should be focused on the deduction side than on the rate side, e.g. caps on mortgage interest deduction.

We would probably get more real mileage by reducing marginal income tax rates, eliminating FICA, and imposing a VAT but I don’t see any real prospect for those measures (and all of them would need to be implemented together for such a plan to work).

I also think that revenue increases are politically necessary, that the Simpson-Bowles commission got it about right, and that the president’s failure to get behind the recommendations of the commission that he appointed is one of the saddest aspects of the entire fiscal fiasco.

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