How many legs does a dog have if you call a tail a leg? Four. Saying that a tail is a leg doesn’t make it a leg.
–Abraham Lincoln
There is no determining who is definitively right in the debate. Income is complicated. Taxes are complicated. Accounting is complicated. But Saez and Zucman have shown how focusing only on federal taxes, and not state and local taxes, has skewed our understanding of the tax code. They have also powerfully demonstrated that the very richest play by very different tax rules than the merely well-off and the working poor.
So writes Annie Lowrey in the misleadingly titled “The Rich are Different from You and Me: They Pay Less in Taxes,” The Atlantic, January 23, 2020.
The title is misleading because even if she makes her case that the rich pay a lower percent of their income in taxes than the rest of us (she doesn’t), there’s no disputing that they pay more in taxes.
But, contrary to Lowrey’s claim, there is a way to say who is right in the debate about various income groups’ taxes as a percent of their income: estimate their taxes and estimate their income and divide one by the other.
So how does Lowrey say there’s no right way? By taking seriously two Emmanual Saez and Gabriel Zucman claims: (1) that one should not treat the child tax credit and the earned income tax credit as a reduction in taxes. and (2) that one should regard employers’ contributions to their employees health benefits as a tax.
Neither claim is correct.
Sure, you can call an employer’s contribution to the employee’s health insurance a tax. But calling it as tax doesn’t make it a tax.
READER COMMENTS
Christophe Biocca
Jan 25 2020 at 6:05pm
And a tax on the employees specifically (hopefully they count it in the denominator as well, but I don’t see where they show their work, so I can’t verify).
If we take this assumption at face value, the most direct way to make the tax code more progressive would be to remove the tax-deductible status of employer provided health insurance (and not make it mandatory to provide either). According to their calculations, it would effectively cut income taxes by ~10% for the middle class.
Brandon Berg
Jan 25 2020 at 8:52pm
If health insurance premiums are a tax, why not expenditures on food and shelter? We need those more than we need health care.
Mark Z
Jan 26 2020 at 1:58am
It’s also false that the rich play by different tax rules, even if we ignore all of Zucman and Saez’s faulty assumptions. Rather, what we see is that investors play by different tax rules than workers, and of course rich people invest more than other people. Being rich isn’t a factor (well, other than that it increases your tax rate).
Vivian Darkbloom
Jan 26 2020 at 3:41am
“There is no determining who is definitively right in the debate. Income is complicated. Taxes are complicated. Accounting is complicated. But Saez and Zucman have shown how focusing only on federal taxes, and not state and local taxes, has skewed our understanding of the tax code. They have also powerfully demonstrated that the very richest play by very different tax rules than the merely well-off and the working poor.”
There is not much to argue against in this paragraph except possibly “play by very different rules” which is a rhetorical device to imply unfairness. Who’s going to argue against “income is complicated”, “taxes are complicated”, or “accounting is complicated”? Or that we should not focus on all taxes and not just federal income taxes? And, it is true that the very rich have a different mix of “income” than the working poor, so of course they are subject to different rules! The fact that the rules are different doesn’t mean they are unwarranted or unfair. And, very little in policy is “*definitely* right”. What Lowry has tried to do here (as did Saez in his exchange with Summers) is suggest that “he” (I) is (am) very likely wrong, but you can’t prove he’s (I’m) *definitely* wrong”! Because it’s complicated!
It is ludicrous to credit Saez et al for these so-called insights.
What Lowry has tried to do here, I think, is to credit Saez et al with the “insightful” discovery of trivial facts and then by extrapolation give credence to their more outrageous claims. The cited paragraph is virtually the only reasonable thing in that article and it is one big fat softball designed to take your eye off the non-sequiturs.
Thaomas
Jan 26 2020 at 10:00am
“Pay less tax” is not all that misleading compared to “pay a lower tax rate.” Probably readers of this blog were not surprised by the growing awareness (Warren Buffet’s secretary, Mitt Romney’s taxes, and now Saenz-Zukman) of the difference in rates and some even approve of the difference, but it’s still pretty “newsy.”
I agree that EITC, child tax credit are negative taxes, but surely the “employer’s” portion of FICA is a tax on employees.
TMC
Jan 26 2020 at 2:28pm
“Pay less tax” is very different than to “pay a lower tax rate.” To conflate the two is misleading. This came up, as you mention, with Warren Buffett’s secretary (this one may be true both ways, Buffett was being sued by the IRS to pay his taxes). To imply he actually paid less though was a lie, and many people took the statement to be exactly that. He was rightly called out on it.
I agree with you on your statement about FICA.
Thaomas
Jan 28 2020 at 11:42am
Were YOU misled? Did YOU think he was claiming that he paid a lower dollar amount in income and wage taxes than his secretary? Do you thank that “everybody” knew that Buffet’s average tax rate could very easily be less than a typical middle class income person “my secretary?”
TMC
Jan 28 2020 at 5:05pm
I was not, as I’ve seen this type of misleading description before, and I’m not the average ready when it comes to finance or economics. This type of sloppiness is misleading enough when those who ought to know better get fooled at times and get called out on it. If not intentionally misleading, I’d at least call it sloppy thinking.
zeke5123
Jan 27 2020 at 2:24pm
I think the argument is that the employee bears the incidence of the tax?
If that is the case, would you say corporate taxes are a tax on the shareholders? At least partially (since the incidence of the corporate income tax is at least partially borne by the shareholders). If so, then wouldn’t you need to add corporate taxes to the tax rate of investors to really compare apples to apples?
robc
Jan 28 2020 at 10:56am
Yes, corporate taxes are on the shareholder. I have seen a breakdown that includes it that way.
robc
Jan 28 2020 at 11:02am
https://files.taxfoundation.org/20190312104822/PaF-Chart-8-2.png
This divides federal taxes into 4 pieces, Individual Income Tax, Corporate Income Tax, Payroll, and Excise.
The negative tax rate for the individual income tax (and the lower income end) is due to EITC and refundable credits.
Thaomas
Jan 28 2020 at 11:51am
It’s been a long time since my last economics of taxation course. Remind me of the mechanism by which a revenue neutral change in the corporate tax rate (taking account of not all corporate income being taxed equally) falls on non-shareholders. (I recognize that some shares are owned by people of all income levels through retirement savings, etc.)
robc
Jan 28 2020 at 4:18pm
Your question confused me, as I am not sure what it has to do with my post.
Your parenthetical at the end is the entire explanation of the numbers in the graphs.
Thaomas
Jan 29 2020 at 8:35am
I was trying to get at the difference between corporate taxes falling on some low income people because they own shares and the idea that corporate taxes are partly borne by other than shareholders.
robc
Jan 29 2020 at 11:26am
Got it.
While that is true (it is true of all taxes), that isn’t what the graph I linked to represents.
Same for excise taxes, depending on the demand curve slope, the excise tax is “paid” by a mix of the consumer and the producer. But in the graph, it is credited to the consumer.
Robert Schadler
Jan 26 2020 at 1:03pm
Revenue (for the govt), behavior change (for the taxpayer) and fairness (for the overall policy) are all objectives of the resulting tax code. No combination of these three goals can be aligned so that they are coherent.
Income from employment, from self-employment, from short-term capital gains, and from long-term capital gains are treated differently. There is not a single tax code, but thousands of different tax codes, and they change over time. That means there are almost no two taxpayers that affect identically.
“Fairness” also attempts to square the difference between “monetized income” and psychological “util income”: a money number for a tax or credit means something different for a wealthy or poor person. So, often, a tax is calculated as a percentage, not a fixed number.
Thus, a “flat tax” as a percentage of total income is very different than a “flat tax” per capita (based on being a citizen, being a voter, or just living in the country thereby benefiting from govt services).
Finally, as long as taxpayers are also voters, it is unlikely that they will deem “fairness” without some element of self interest. Money spent for popularly approved purposes (e.g. family, education, charities) will be treated more favorably than monies spent for less widely approved purposes.
TMC
Jan 26 2020 at 2:38pm
To me, a flat tax is the US budget/population. or about $12,300 per person. Think about what it takes to be breakeven and our immigration policy.
Progressive taxes are the percentages. The more you make the more you pay, even if the *rate* is flat. The terminology around this is to hide the true costs of taxes on us.
Alan Goldhammer
Jan 26 2020 at 2:43pm
I’m old enough to remember the first flat tax wars and each year I would compare my “graduated” tax return with what I would have owed under a flat tax formula (IIRC it was 20% and there were no tax preferences). The results were a wash and paying the flat tax would have been much easier in terms of preparing a return. I’m less worried about the income inequality portion of arguments as there will be inequality of some kind baring a 100% tax payment on all income over a certain amount. It’s always going to be a function of a capitalist system and there is nothing wrong with that.
What is wrong, is a larded up tax code that rewards certain activities and penalizes others. The argument should center around the elimination of all tax preferences (including charitable contribution and mortgage interest deductions). Get rid of the carried interest loophole that hedge funds and private equity use, eliminate the myriad preferences that real estate developers take advantage of and so on.
Thaomas
Jan 28 2020 at 11:58am
I’d like to make a distinction between favoring certain kinds of consumption (mortgage interest or charitable contributions) — maybe good or maybe bad — from favoring them with a deduction that rewards the consumption more if the consumers has a high marginal tax rate from favoring them with partial tax credits.
nobody.really
Jan 28 2020 at 2:23pm
I’ll pass on this discussion of taxation. But an aside:
1: I have never liked this adage. Why celebrate obscurantism?
2: I have found no authoritative source tying this adage to Lincoln.
However, contemporary sources say that Lincoln made similar statements. In 1862 a newspaper reported on a meeting between Lincoln and a group of religious leaders who wanted him to immediately sign an Emancipation Proclamation. Hesitant, Lincoln argued that the measure would be ineffective because it would not actually free slaves:
“[O]ne of the delegates told the meeting as follows: On pressing the policy of emancipation upon the President we received this reply ‘You remember the slave who asked his master, ‘If I should call a sheep’s tail a leg, how many legs would it have?’
‘Five.’ ‘No, only four; for my calling the tail a leg would not make it so.’ Now, gentlemen, if I say to the slaves, ‘you are free,’ they will be no more free than at present.’”
See the September 23, 1862 edition of the Daily Milwaukee News at 1, column 2, “What the President Said.” See also the October 16, 1862 edition of the Fort Wayne Weekly Sentinel at 2, column 2, “Where Are the Armed Men?” (telling anecdote about a pig rather than a sheep). So if people insist on continuing to attribute this to Lincoln, they could at least cite sheep or pigs as the animal in question.
3: For what it’s worth, it seems unlikely that Lincoln originated this adage. On April 28, 1825–when Lincoln was a home-schooled 16-yr-old in Spencer County, Indiana–the Stockbridge, MA Berkshire Star published the following at 3, columns 3-4, under the heading “Legislative Anecdotes”:
The parson was sent for, to examine a young man who had offered himself for a school-master, but on his appearance before the trustees, the parson did not like his looks. When it came his turn to speak the parson said he would put a single question.
“Suppose,” said he, “you call a sheep’s tail a leg, how many legs will the sheep have?” “Why five, to be sure,” answered the would-be-school-master with an air of wisdom. “Very well” said the parson: “So if you call a sheep’s tail a leg, it is a leg, is it? But never mind, if the trustees say so, you may keep the school for what I care!”
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