Skip to comments.Tax Myths of Warrenomics
Posted on 10/18/2019 4:48:53 AM PDT by karpov
Economists Emmanuel Saez and Gabriel Zucman of the University of California, Berkeley are advising Elizabeth Warrens presidential campaign and drawing generous media attention for their assertion that the U.S. tax system is flatthat the middle class and poor pay as great a share of their income in taxes as the rich. Theyre wrong, and three huge mistakes underlie their analysis.
The biggest mistake is to focus on gross, not net, taxes. They ignore transfer payments, like Social Security, which are disproportionately paid to the poor. In doing so, they mistake language for economics.
To see the problem, consider a simple thought experiment. Joe, a minimum-wage employee, earns $15,000 a year. The government taxes Joe $1,000 and transfers him $600, so that he pays $400 on net. In another scenario, Joe pays $10,000 in taxes and collects $9,600 in transfer payments. Again, he pays $400 on net. But in the first scenario, Messrs. Saez and Zuchman would report Joes gross tax rate as a reasonable 6.7% ($1,000 over $15,000). In the second, theyd call it an onerous 66.7%.
The flaw in their method is even more obvious when you consider that American tax laws incorporate benefit subsystems, and benefit laws incorporate tax subsystems. The federal personal income tax, for instance, includes the earned-income tax credit, a major transfer program. The Social Security benefit system includes the earnings test, a major tax. If the focus is on gross taxes, should the EITC be excluded and Social Securitys earnings test included? Economics cant say. What it does say is look past the language and measure net, not gross, taxes.
Messrs. Saez and Zucmans second mistake is measuring progressivity on a one-year rather than a remaining-lifetime basis. That ignores the fiscal systems double taxation
(Excerpt) Read more at wsj.com ...
There are lies, damn lies and economics.
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