Co-blogger Bryan Caplan quotes Matt Yglesias, claiming that his words are wise. Here’s what Bryan quotes:
Trump’s accession to the presidency alarmed liberals on two levels.
On the one hand, there was the policy damage he might wreak. That policy worry doesn’t go away with the House in Democratic hands, since control over the judiciary and the administrative state still matters. But in truth, the GOP’s legislative accomplishments in 2017-’18 were quite modest, and Tuesday’s results mean that there will be no further Republican legislative agenda. If you were worried primarily about a new round of regressive tax cuts offset by cuts to the social safety net, you should breathe easy today.
Notice the last sentence. A “new round of regressive tax cuts” suggests that the first tax cut, in 2017, was regressive. I had understood it to be progressive, at least on the individual income tax side. That is, the average tax rate for low-income people fell by a higher percentage than the average tax rate for high-income people. One of the main drivers was the limitation of the state and local tax deduction, which disproportionately hurt higher-income households, and the related substitution of a $24,000 standard deduction (for a married couple filing jointly) and $12,000 standard deduction (for a single person filing) for the previous much-lower standard deduction and deduction per person, which disproportionately helped low-income households. Maybe it’s regressive when one considers the drop in the corporate tax rate, but when you consider that cut, you need to make assumptions about tax incidence: who bears the burden of the corporate income tax?
But when I went to check by Googling “was the 2017 tax cut regressive?”, all I found was people like Jared Bernstein doing the analysis wrong, pointing out that higher-income people got a huge percent of the tax cut. Of course, they did; they were paying a huge percent of taxes. That’s not the way to estimate regressivity, as is known to virtually anyone who carefully studies the relevant chapters of a public finance text.
So I went to the Trump Council of Economic Advisers’ 2018 Economic Report of the President, figuring that if the tax cut was not regressive, they would have the right incentive to “trumpet” (pun intended) that fact. But I couldn’t find it there either. They emphasized the growth consequences of the tax cut.
So I’m not saying that Matt Yglesias’s words are not wise; I’m saying that I don’t know if they’re wise. My gut feel is that he’s wrong about the alleged regressivity of the 2017 tax cut. If my gut feel is right, then that part of Yglesias’s piece is not wise at all.
READER COMMENTS
Mark Z
Nov 8 2018 at 12:50am
I think of corporate tax as essentially falling on three groups: investors, employees, and customers (with unemployed people who might have jobs if the tax were lower being grouped with employees). The big questions, then, are, how much of the gains go to each group, and how are the gains distributed within each group (e.g., how much of a pay increase did executives get relative to line workers?)?
I remember Paul Krugman claimed that there was consensus among (‘serious’) economists that at most about 20% of the corporate tax was born by workers. I took that with a big grain of salt because I’ve seen plenty of research (though perhaps not by sufficiently ‘serious’ people) finding considerably higher figures. I haven’t looked up how much of corporate tax cuts tend to go to consumers in the form of price cuts. I doubt it’s negligible. There seems no reason to assume a corporate tax cut disproportionately benefits rich investors and executives though.
Perhaps this isn’t very charitable to Yglesias, but I maybe he’s simply beholden to the popular conventional wisdom that corporations = rich people.
Vivian Darkbloom
Nov 8 2018 at 3:35am
“But when I went to check by Googling “was the 2017 tax cut regressive?”, all I found was people like Jared Bernstein doing the analysis wrong, pointing out that higher-income people got a huge percent of the tax cut. Of course, they did; they were paying a huge percent of taxes. That’s not the way to estimate regressivity, as is known to virtually anyone who carefully studies the relevant chapters of a public finance text.”
I’m not sure I follow this. Bernstein cites the Tax Policy Center estimates which seem to do pretty much exactly as you suggest they should (follow the link in his article). The estimates don’t refer to “the percentage of the tax cut” received by each income group (for example, the “tax cut” totaled $ 1 trillion and the highest income quintile got x percent of that). Rather, the statistics refer to the percent change in each individual quintiles average after-tax (all cash) income. I believe this is be an adequate surrogate for “average tax rate”.
However, the problem with these sorts of analyses of the progressivity of tax *cuts* is they fail to account for the status quo baseline which was (and is) very highly progressive. It is difficult to make a “tax cut” progressive in the above-referenced sense when a very large percentage of lower quintile groups pay zero tax. On average, the reduction of zero from zero is zero. One would need to introduce (more) refundable tax credits to acheive a different result. If that is what Yglesias and Bernstein are griping about, they should be more specific to their readers. By their very nature, given the existing system, tax *cuts* (taken logically as a reduction of tax otherwise paid under existing law) will almost always to some extent be “regressive”, even with your preferred methodology.
Yglesias (and Bernstein) can be criticized for failing to include these nuances in their rather politically rhetorical arguments. As far as Yglesias is concerned, however, I would have taken greater umbrance to the following:
“If you were worried primarily about a new round of regressive tax cuts *offset by cuts to the social safety net*, you should breathe easy today.”
This suggests, quite clearly incorrectly, that the last round of tax cuts were “offset by cuts to the social safety net”. They were not. In fact, they were not offset by anything. We should all be concerned about that.
Thaomas
Nov 8 2018 at 8:18am
If “any public finance textbook” can’t figure out that a tax that increases the deficit to raise the net of tax income of higher income folks more than lower income folks is not “regressive” then it needs to be revised. [Or is this an argument that the incidence of the corporate income tax does not fall mainly on the owners of corporations and that most of these these have above average incomes?]
robc
Nov 8 2018 at 11:18am
Tax cuts can’t cause deficits.
Deficits are spending in excess of revenue, the tax cuts only effect the latter. The lack of cutting the former proportionately is the cause of the deficit.
If we can get federal spending capped at 15%* of GDP, I think any reasonable tax regime will be able to run a surplus.
*that is more than I think it should be, but I have said that I will shut up about federal spending for the rest of my life if it stays below 15%. This isn’t impossible, it was last there 1948-51.
Alan Goldhammer
Nov 8 2018 at 8:58am
I’m holding my powder dry until I actually do my tax return early next year. Maybe it ends up being a wash but I doubt it because of the limitation on SALT with impacts me as a Maryland resident. The other “funny” thing is that as retirees of a certain age we now have to start taking mandatory IRA withdrawals which will keep us in a high tax bracket until we are six feet under!! Anyone who has had successful IRA and 401(k) investments should not be fooled by the old saying “…your income will be lower in retirement with a lower tax burden…” And of course we are looking at higher Medicare and Medigap insurance premiums as well.
Bill
Nov 8 2018 at 9:29am
Cato’s Chris Edwards wrote that the tax legislation added to the progressivity of the individual income tax:
https://www.cato.org/blog/final-tax-bill-biggest-cuts-middle
David Henderson
Nov 8 2018 at 10:06am
Thanks, Bill.
David Henderson
Nov 8 2018 at 10:05am
Vivian above wrote:
There are two problems with the TPC estimates. First, they make huge assumptions about how the tax cut will be “paid for” in the future. You need to make some assumptions, of course, but notice two assumptions they make: (1) that the feds will not default at all on the debt, and (2) that the feds won’t cut defense spending at all.
Second and even more important, even if the first one were not a problem, the percent change in after-tax income, in a system like ours that has progressive rates, is NOT a good measure of whether the tax cut is regressive.
Here’s a numerical example. Assume that the average federal income tax rate for a low-income person making $30K a year is 4%. Taxes are cut so that his average income tax rate is now 3%. Assume that the average income tax rate of a high-income person making $200K a year is 20%. Taxes are cut so that his average income tax rate is now 16%. So the low-income person got a tax cut of 25%; the high-income person got a a tax cut of 20%. In short, the tax cut is progressive, not regressive.
Now let’s look at the percentage increases in after-tax income. The low-income person’s after-tax income before the tax cut was $28,800. After the tax cut, it is $29,100. His increase in after-tax income is therefore $300/$28,800 = 1.04%.
The high-income person’s after-tax income before the tax cut was $160,000. It is now $168,000. His after-tax income rises by 4.76%. QED.
Vivian Darkbloom
Nov 8 2018 at 10:16am
@Bill,
Even if we accept the adjustments made by CATO and the underlying estimates, would not their conclusion be limited to the first year of the tax bill and not necessarily all years? See the underlying JCT data which refers to average tax rates over the 10 year period, not just 2019.
@David Henderson
In re-reading your post, it is possible that some of the (my?) confusion arises from this sentence:
“That is, the average tax rate for low-income people fell by a higher percentage than the average tax rate for high-income people.”
It is possible that what you meant by this is that the *rate of reduction* –rather than the reduction in the average tax rate –compared to current law fell more for lower income taxpayer than for higher income ones (that is, the distinction between the level of reduction and the rate of reduction). If this is correct, I would make that more explicit. In other words, in order to visualize the “progressivity” of the tax code, one would create a graph showing the slope of the average tax rates from the lowest quintiles to the highest. If one does this, in some years (but not all) the slope should steepen, thus making the tax code more progressive than it was before the bill. Again, this depends on the tax year(s) one looks at. Simply using 2019 may be misleading as may numerous adjustments various parties make to arrive at the “right” result.
Benjamin Cole
Nov 8 2018 at 10:41am
I am happy to say that I agree with David Henderson.
I thought the Trump Administration received little credit for raising the standard deduction, and did not even seem to claim credit.
I would have preferred a tripling of the standard deduction and waiting a year or two for the corporate income tax cut.
But if the corporate income tax cut works as advertised, that is spurs real investment, then perhaps the Trump’s administration made the right call.
Vivian Darkbloom
Nov 8 2018 at 10:42am
@David
It appears as though our latest comments crossed. Your example confirms what I suspected in the last comment might have been your intent. Your comment makes your point more clear. Again, I think if one would graph the results by average tax rates before and after using the TPC assumptions regarding incidence of corporate tax, etc, the general result would be more progressive in the first year but not necessarily in all years.
I’m not sure what the assumptions regarding spending on defense and/or possible default on debt have to do with the progressivity analyses…
David Henderson
Nov 8 2018 at 11:29am
Vivian,
It appears that they did cross.
You wrote:
Then take another look at the TPC study that you referenced. As I said above, Gale et al assume that the tax cut must be “paid for.” If the government defaults, much less of it has to be “paid for.” If the government cuts spending on defense, much less of it has to be “paid for.”
Vivian Darkbloom
Nov 8 2018 at 12:23pm
David,
OK. I was focusing only on the distributional analysis of the TPC and not Gale et al’s speculation about how this might be “paid for” in the future. Such speculation is of course irrelevant to the analysis of the effect of a particular tax bill’s effect on progressivity of the Code and that speculation (thankfully) does not enter into the TPC’s primary distributional analysis.
FWIW, I was relatively pleased with the substantive provisions of the tax bill, particularly the useful reforms to individual tax preferences, as well as the corporate tax reforms, particularly the international provisions. I wasn’t pleased with the effect on the budget, because there was not any attempt to offset the cuts on the spending side. Apropos speculation, shortly after the bill was passed I left a comment on Tyler’s blog to the effect of: “Don’t worry, when the Dem’s inevitably take back control, they will simply increase the marginal rates (again) on the “rich”, leaving the other useful reforms in place. What remains will be even more progressivity but some needed reforms in the mix.” It is politically impossible to enact those useful reforms cutting back preferences without offering something in return. Additional taxes on the upper reaches of the income scale may happen before the end of Trump’s term. Such is politics…
derek
Nov 12 2018 at 9:38am
Wait, are we seriously questioning the reasonableness of an assumption that the US Government does not, in fact, default on its debt? I guess it is at least plausible that the US will significantly reduce its military spending at some point, but that seems like something for which the burden of argument is very much on defense spending not rising.
David Henderson
Nov 13 2018 at 6:41pm
“are we seriously questioning the reasonableness of an assumption that the US Government does not, in fact, default on its debt?”
I am, yes.
Alan Goldhammer
Nov 8 2018 at 10:52am
I’m pretty much on Vivian Darkbloom’s side. The other thing that is critical to consider is that even though low and middle income folks may get better treatment from a % point of view, in absolute terms are they any better off?
David writes about the % tax cut for a low income vs. a high income tax payer. One really should consider this in absolute terms. The low income earner gets a 25% tax cut but only an increase in income of just over $1K whereas the high income earner gets a 20% tax cut but an increase of absolute income of $8K. From a definitional perspective one can argue that yes this is a progressive tax cut (ignoring for the moment that certain tax preferences will impact individuals differently) but in absolute terms it is not.
One needs to ask is the low income earner any better off compared to the high income earner.
Mark Z
Nov 8 2018 at 11:44pm
There’s another side to that coin: even if the tax is regressive, maybe we shouldn’t care, if the tax increases the welfare of the lower strata absolutely. Maybe Yglesias is wrong to emphasize the question of whether the tax is regressive, rather than whether it, in net, improves the welfare of society?
Vivian Darkbloom
Nov 8 2018 at 10:58am
@Goldhammer
I don’t think there is any question of “sides” here. In fact, I don’t agree with your apparent view that the nominal amount of a tax cut in dollar terms is the best way to determine the progressivity of the Code or the effect of changes to the Code on progressivity.
Alan Goldhammer
Nov 8 2018 at 11:29am
I think you need to look at the argument a little closer. Using David’s argument, one would think that the low income person is better off because he got a bigger tax cut. My point is that this is not true when taken in absolute terms. Of course one needs to adjust for a number of other factors as well such as family size, cost of living, and other related expenses. One who receives a 25% tax cut may be no better off than before; that’s my main point.
David Henderson
Nov 8 2018 at 11:32am
I agree with Vivian that it’s not a matter of sides. I was simply addressing Yglesias’s claim that the tax cut was regressive. There’s a well-known way of measuring that, which is why I made a general reference to public finance texts. The TPC study doesn’t do that.
Josh Wexler
Nov 8 2018 at 11:58am
Alan Auerbach and Laurence Kotlikoff have a paper on the TCIA. I have no economic training and limited understanding of their methods, but I think they’re saying: that when you look at lifetime spending (not just current income), the tax cuts were indeed not regressive as Yglesias suggests. The prior progressivity is basically maintained.
https://www.google.com/url?sa=t&source=web&rct=j&url=https://eml.berkeley.edu/~auerbach/The%2520New%2520Tax%2520Bill%2520–%2520Winners%2520and%2520Losers%252006-30-2018.pdf&ved=2ahUKEwj1qqvdncXeAhWQqIMKHUi1DroQFjAAegQIAxAB&usg=AOvVaw1Zyca0zmcwUKs_GU8jZHs5
Josh Wexler
Nov 8 2018 at 11:40pm
Laurence Kotlikoff and Alan Auerback wrote a paper called something like Winners and Losers in the TCIA, and concluded that the tax bill basically retains the prior progressivity. They measured using lifetime spending instead of simply current income.
Mark Z
Nov 8 2018 at 11:50pm
Something that may obfuscate the issue of regressivity vs. progressivity of a tax cut in practice is that, if I recall correctly from a few papers I read on this a while ago, corporate tax increases have a stronger impact on wages than corporate tax decreases. I’m too tired to look up the citations at the moment, but multiple studies suggested there was a sort of ratcheting effect: increasing the rate seemed to drive down wages more than decreasing the rate drove them up. I’m not sure what the explanation for this was.
Niko Davor
Nov 9 2018 at 10:00am
Less than 24 hours after this was posted, Matthew Yglesias tweeted support of “terrorizing his family” with regards to the incident at the family home of Fox News host, Tucker Carlson. This is one of the chosen intellectuals representing openborders.info. Unwise is an understatement.
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