Why I Don’t Consider Myself a Feminist

In the weeks since Emma Watson issued her formal invitation for men to take up the mantle of feminism, I’ve seen a number of articles, blog posts, and tweets encouraging dudes to follow Watson’s good advice. As the Women Goodwill ambassador to the United Nations, Watson is currently promoting the HeForShe campaign, a solidarity movement aimed at recruiting men to fight for gender equality for women.  A core goal of this movement is to push back against the "persistent misconception" that feminism is anti-man.

There’s a lot to admire in this effort, and the visceral reaction to Watson’s speech from some corners of the Web—from sexist comments to direct threats of violence—only serves to validate many of her points.  As someone who supports gender equality in the workplace, shared parental responsibility at home, and a number of the other goals that Watson puts forward, I can’t help but feel like I’m a prime target for this kind of cross-gender outreach.  Yet Watson’s speech and the HeForShe campaign more generally also hints at a central problem within the contemporary feminist movement that often dissuades men like me from taking her up on her offer. 

As the name implies, the primary objective of HeForShe is to “bring together one half of humanity in support of the other half.” Under this conception of feminism, gender solidarity appears to be a one-way street, where men champion women’s rights without any reciprocal obligation on the part of women. Issues that disproportionately affect men—paternity rights, gang violence, homelessness, sexual assault in the criminal justice system—are simply not part of the contract, except to the extent that they can be re-framed as women’s issues.  

This is obviously not the way that all—or maybe even most—self-identifying feminists view gender solidarity, but today it’s all too common to see this kind of one-sided dialogue.  Privilege provides men with a shield of protection, where social stereotypes may cause annoyance, but never lead to real problems.  This is a common refrain among some of the most vocal feminist activists and bloggers:  

"[G]eneralizations about women–along with misogyny as a whole–can lead to rape, murder, abuse, belittling, harassment, wage gaps, and handfuls of other harmful things.  Generalizations about men cause hurt feelings."

How did so many modern feminists arrive at a place where even the suggestion that men also experience violence, sexual abuse, and discrimination is often greeted with sneering responses about how this “derails” the conversation? When did prominent feminist voices decide that “male privilege” demands that we de-contextualize every issue so that even the specter of disproportionate male victimization in some areas of life is treated as a distraction, rather than a common cause?  

More than three decades ago, Karen DeCrow, the president of the National Organization for Women, broke with feminist orthodoxy when she served as the defense council in Frank Serpico’s paternity case, arguing that “[j]ust as the Supreme Court has said that women have the right to choose whether or not to be parents, men should also have that right.” DeCrow took the position that because men have no “legal power to either veto or compel an abortion, it is only just that they shouldn’t have to pay for a woman’s unilateral decision to bring the pregnancy to term.” This is a complicated and controversial issue, and reasonable people can come to different conclusions about the value of forcing men to support children they did not want. But today, prominent feminist bloggers respond with the following non-sequitur at the mere suggestion of a man’s right not to be tied to an unwanted child:

"Boo fucking hoo . . . . Yeah, it’s unfair for them, but it's not nearly as unfair as forced motherhood."

The same can be said for issues like sexual assault, where the mantra of “teaching men not to rape” is infused into feminist dialogue. The suggestion that very few men actually commit sexual violence, or that men also confront rape (at the hands of women) far more often than people tend to believe, is all too often met with the following retort:

"If you don’t want women to think of you as a potential rapist, then maybe you should start by working to end rape by educating men not to rape women, rather than attacking women for implicating all men in rape culture. Men are the people doing the majority of the raping in this country. Acknowledging this reality is not anti-male, [it’s] simply stating a fact. You never raping anyone doesn’t negate the fact that most rapists are men."

If feminist advocates want more men to fight for equal opportunity and reproductive rights for women, and against sexual violence, then the movement truly has to become about mutual respect and support, rather than a megaphone for vicious and sweeping generalizations about men. If you don’t believe that this is a wide-spread and frequently ignored problem within the contemporary feminist movement, I’d like to offer a simple thought experiment. Imagine for a moment that a prominent Christian thinker tweeted the following quote, in reference to the on-going persecution of Christians in many parts of the Muslim world:

"'Muslims are afraid that Christians will laugh at them. Christians are afraid that Muslims will kill them." #YesAllChristians."

What would be the reaction to this tweet? I suspect this kind of language would be treated by many progressive thinkers as a malicious and bigoted smear against a religion practiced by nearly 1.5 billion people. Many would take issue with the implication that Christians are incapable of committing religiously-motivated violence against Muslims. Others would offer a more nuanced caution against treating relatively a small group of extremists as though they are the ambassadors for a vast and diverse faith.

However, in the modern feminist movement, literally thousands of people can re-tweet the following quote from Margaret Atwood under the #YesAllWomen campaign without a hint of protest from prominent feminist thinkers:

"Men are afraid that women will laugh at them. Women are afraid that men will kill them."

Pointing out the inherent bigotry in this kind of language all too often results in lectures about patriarchy, or non-sequiturs about how violence is really an instrument of institutional power structures and privilege. The only appropriate response is to accept your own privilege, which means recognizing that you have no right to be offended. In other words, the game is rigged.

I'd love to call myself a member of a movement for true gender equality—one that rests on mutual support, accepts responsibility for its own self-policing, and applies universal standards of respect and reciprocity. But I won’t call myself a feminist until the movement does some serious soul-searching and stops pretending that every problem in modern feminism is a fiction invented by Men’s Rights Activists.

Top 1 Percent - Income versus Tax Liability

Sources:

Piketty and Saez, The World Top Incomes Database; retrieved from: http://184.168.89.58/sketch/ 

Congressional Budget Office, Historical Effective Rates, Historical Effective Tax Rates, 1979 to 2005; December 2008; retrieved from: http://www.cbo.gov/ftpdocs/88xx/doc8885/Appendix_wtoc.pdf

Econ Lesson for Cali

The Agony and the Ecstasy of Paul Krugman

In a series of recent posts, Paul Krugman argues--correctly, in my view--that raising the top marginal income tax rates is unlikely to have a substantial impact on work incentives. Unfortunately, he relies on some terrible data to make his point.

Krugman writes:

[We] have pretty good evidence on the (small) actual incentive effects of changes in top tax rates, enough to suggest that the optimal rate is in the 70-80 percent range — which is where it was in the 1960s, a decade of very good economic performance.

Here's the relevant graph:

Why is this so unbelievably misleading? 
Let’s start with the optimal tax rate.

Krugman doesn’t cite the 70-80 percent figure, but he seems to be referencing this recent paper by Christina and David Romer, which estimated “an optimal top marginal [income tax] rate of around 76 percent.”

It's important to note that the Romers’ study relies on data from the 1920s and 1930s, so the external validity already seems questionable. Other studies have produced dramatically different results using different data and methodologies.   

Either way, the Romers are careful to qualify their findings. They point out that their analysis only looks at ordinary income, and not capital gains:

One important complication in these calculations involves capital gains, whose tax treatment varied greatly over the interwar period. To address this issue, we exclude capital gains from our definition of income, and focus on the relationship between taxable income exclusive of capital gains and marginal rates on non-capital-gains income . . . . Excluding capital gains is standard in studies of tax responsiveness, both because they often reflect the timing of realizations rather than current income and because they are often taxed differently than other types of income (Saez, Slemrod, and Giertz, 2012).

All of this is pretty damning to Krugman’s analysis, whether or not he pulled his numbers from the Romers' paper. If it's true that excluding capital gains is “standard in studies of tax responsiveness,” then anyone claiming to have knowledge of the "evidence" on the top tax rates should be aware of this fact.

Of course, it seems clear that Krugman is invoking the Romers' work. Not only does the 76 percent figure fit his claim perfectly, but Krugman’s follow-up post specifically links to Christina Romer’s NYT op-ed about her findings.
In other words, the "evidence" that Krugman is citing seems to be based around a study that ignores capital gains, a common practice when estimating optimal marginal income tax rates. Yet Krugman goes on to compare the 70-80 percent figure against another study conducted by Piketty and Saez, which looked at changes in total income--including capital gains--from 1960 to 2004.

How can Krugman justify making this comparison? He doesn't say. 

To back up his claim, Krugman would have to show that tax rates on ordinary income  (excluding capital gains) have decreased dramatically between 1960 and 2004, since this is the kind of income on which the Romers and others have focused. But as Piketty and Saez point out, that isn't really the case.  

From Piketty and Saez:

[T]he larger progressivity in 1960 is not mainly due to the individual income tax. The average individual income tax rate in 1960 reached an average rate of 31 percent at the very top, only slightly above the 25 percent average rate at the very top in 2004. Within the 1960 version of the individual income tax, lower rates on realized capital gains, as well as deductions for interest payments and charitable contributions, reduced dramatically what otherwise looked like an extremely progressive tax schedule, with a top marginal tax rate on individual income of 91 percent. The greater progressivity of federal taxes in 1960, in contrast to 2004, stems from the corporate income tax and the estate tax.

This isn’t the only problem with Krugman’s analysis. In fact, his entire comparison is apples-to-oranges. The Romers' study--and almost every other study of optimal income tax rates--looks at marginal tax rates (the rates that people pay on their last dollar of income), while the Piketty and Saez paper shows effective tax rates (the rates that people pay on their total income). This seems like a pretty elementary error for a Nobel laureate.

We’re left with this: Krugman almost certainly referenced a paper on the incentive effects of raising marginal tax rates on ordinary income. He then compared it to a paper on the changes in effective tax rates on total income, including capital gains, between 1960 and 2004. This is not a consistent comparison, no matter how you spin it. 

None of this means that Krugman is wrong about raising marginal income tax rates on the wealthiest Americans or reforming the corporate income tax structure.  

But let’s not forget that Krugman is a pundit who routinely bemoans the intellectual dishonesty of his opponents. If nothing else, he should be able to make his points without fudging the numbers. 

The Buffett Rule: Q & A

What is the Buffett Rule?

The Buffett Rule is a tax reform championed by President Obama that would equalize the treatment of capital gains and “ordinary” income for Americans earning above a certain threshold. Capital gains are profits received through the sale or transfer of a capital asset, such as stock or real estate. Currently, capital gains income is subject to a lower top marginal tax rate than ordinary income. This tax policy is intended to encourage private investment. The top rate for “ordinary” income is 35 percent, while the top rate for long-term capital gains is 15 percent.

How long has capital gains income received preferential treatment through the tax code?

Since the 1920s, capital gains have been taxed at a substantially lower rate than other forms of income, except for a brief period in the late 1980s. A detailed historical comparison of the top marginal tax rates on capital gains and ordinary income can be found here.

What is the purpose of the Buffett Rule?

President Obama has cited two main reasons for instituting the Buffett Rule: to enhance vertical tax equity and to reduce the federal debt.

As the president argued in his State of the Union address:

“If you make more than $1 million a year, you should not pay less than 30 percent in taxes . . . . Do we want to keep these tax cuts for the wealthiest Americans? Or do we want to keep our investments in everything else, like education and medical research, a strong military and care for our veterans? Because if we’re serious about paying down our debt, we can’t do both.”

How much would the Rule help to reduce the debt?

In a recent column in the Washington Post, Robert Samuelson did the math and found that the Buffett Rule would do very little to help reduce the long-term deficits that are adding to the national debt. Samuelson explains:

“In September, the Congressional Budget Office estimated the 10-year deficit at $8.5 trillion. The nonpartisan Tax Foundation estimates that a Buffett Tax might now raise $40 billion annually. Citizens for Tax Justice, a liberal group, estimated $50 billion. With economic growth, the 10-year total might optimistically be $600 billion to $700 billion. It would be a tiny help; that’s all. ‘The purpose of the Buffett Rule is not to close the deficit gap,’ Buffett has said. Hard choices remain, in part because existing deficit estimates already assume steep defense cuts.”

Why do some believe that the Buffett Rule would do little harm to private investment?

A big question on the minds of policy wonks is whether the Buffett Rule would have any serious impact on economic development. The preferential tax treatment of capital gains is believed by many economists to promote private investment and drive long-term growth in the economy.

Proponents of the Buffett Rule argue that it would have little dampening influence on private investment. They believe that the substitution effect—in which people shift away from capital investment as it becomes relatively more expensive—is likely to be offset by an income effect, where people invest more to compensate for the reduction in their after-tax earnings. Whether the Buffett Rule would weaken private investment really depends on the relative magnitudes of the income and substitution effects. And it’s very difficult to know what those would be given the lack of empirical data on this subject. A 2011 report by the Congressional Research Service (CRS) also appears to endorse the view that a Buffett Rule would have little impact on private savings and investment:

“Behavioral theories of saving emphasize the role of inertia, the lack of self-control, and the limit of human intellectual capabilities. To cope with the complexities involved in making saving decisions, individuals often use simple rules of thumb and develop target levels of wealth. Once their target level of wealth is obtained, many individuals suspend active saving. Saving rates have fallen over the past 30 years while the capital gains tax rate has fallen from 28% in 1987 to 15% today (0% for taxpayers in the 10% and 15% tax brackets). This suggests that changing capital gains tax rates have had little effect on private saving.”

This may indeed be the case, but the empirical evidence provided by CRS seems fairly weak for two reasons. First, the important question is not whether the capital gains tax rate has fallen, but whether the rate has fallen relative to the rate on ordinary income. Second, correlation does not imply causation.

Why do some believe that the Buffett Rule would help raise national investment?

Even if the Buffett Rule did weaken private investment, many advocates contend that it would increase public investment by reducing federal deficits. Thus, the Rule’s net impact on national investment could be positive if it strengthens the federal budget without substantially altering the behavior of households and business. This line of reasoning assumes that all revenues derived from the Buffett Rule would be used to address the deficit crisis rather than to pay for cuts in government spending, which is the preference of many conservatives.

As Matt Yglesias explains:

“If you do what the Bush administration did and reduce taxes on investment income purely by borrowing money, it’s extremely difficult to see how that’s supposed to increase overall investment. By contrast, if you finance your capital gains tax cut by reducing [public assistance] benefits, it’s hard to see how that wouldn’t increase overall investment. To be sure, you’d be stealing food out of the mouths of poor children to offer a regressive tax cut, but the net impact will be to increase the national savings rate.”

Why do conservatives have a problem with the Buffett Rule?

Putting aside facile claims about “class warfare,” there are a lot of reasons why smart conservatives are concerned about the impact of the Buffett Rule.  

In his most recent column, David Frum points out that the capital gains tax distorts transfers of ownership that could be extremely beneficial in many cases. He writes:

“If Joe can run the company better than Jane, if Jill can make better use of the corner of Main and Elm than Jack, then we want to see ownership of that company or that corner transferred as expeditiously as possible to the higher and better user. That’s why we encourage transparent and efficient markets for capital assets. A capital gains tax is a tax on the transfer of control of assets. If that tax is set too high, it can discourage even the most glaringly urgent transfers of control. Under Joe’s management, the value of the company may rise 30%. But if the capital gains rate is set at 50%, then the transaction from Jane to Joe will not occur—and everybody will be worse off.”

In addition to this, wealthy folks who earn most of their income as dividends and capital gains—and thus pay a lower top marginal rate—also bear the burden of corporate taxes. The numbers stated on Warren Buffett’s tax returns do not accurately reflect his effective federal tax rate. In fact, an analysis of effective tax rates by the Tax Policy Center suggests that, on average, the U.S. tax code is highly progressive when corporate taxes are taken into account.

Though tax avoidance has become a serious problem with certain corporations, many fair-minded conservatives argue that the correct solution is to fix the corporate tax structure rather than to raise taxes on capital gains. Frum notes:

“A light rate of capital gains is premised upon a well-functioning corporate income-tax system. The US corporate income tax system is anything but. Even very highly profitable companies often pay no tax at all. But it’s the corporate income tax system, not the capital gains rate, that is the problem here.”

Are there any other reasons to be skeptical of the Buffett Rule?

One final cause for concern among policy-oriented conservatives is that the Buffett Rule will further encourage corporations to use debt financing rather than equity financing. In the wake of a financial crisis exacerbated by debt leveraging, this seems like a dangerous notion. Manhattan Institute economist Josh Barrow writes:

“Because interest is taxed only once and profits are taxed twice, corporations take on more debt than they would in absence of the tax distortion. The distortion is mitigated by the fact that dividends and capital gains are taxed at lower rates than interest income. Because the Buffett Rule would raise capital gains and dividend tax rates and, in many cases, lower the effective tax rate on interest, corporations would face even more incentive to overleverage themselves.”

What are some alternatives to the Buffett Rule?

For those who care about vertical tax equity but want to encourage private investment, the best revenue-increasing options seem to be the imposition of progressive consumption tax or the elimination of regressive federal tax expenditures, such as the home mortgage interest deduction. Both of these solutions would do far more to increase revenue than the Buffett Rule, but—unfortunately—both options seem far less politically viable.

Corporate Lobbying and Research Methods

I’m a big fan of NPR’s Planet Money blog, but this recent post on the rate of return from corporate lobbying is pretty indefensible.

The author, Alex Blumberg, cites a 2009 study from the University of Kansas, which found that corporate lobbying for the American Jobs Creation Act (AJCA) yielded a return on investment of approximately 22,000 percent. Among other things, the AJCA allowed companies to bring back profits from offshore divisions at a one-time reduced tax rate.

Naturally, many multinational corporations found AJCA exceedingly lucrative, but the important question is whether their lobbying efforts were actually successful. Is the fact that the law was passed evidence enough?

The key challenge in studying the impact of lobbying is trying to figure out what would’ve happened in the absence of these efforts. Would the outcome have been the same, or would lawmakers have come to a different conclusion?

Research methodologists call this kind of thinking “counterfactual causal analysis” because it first considers what would’ve happened without the intervention (no lobbying) and then compares this hypothetical to the present condition (lobbying). It’s complicated stuff, and it’s the kind of thing that makes real-world analysis so difficult.

So, how did University of Kansas researchers derive their counterfactual scenario? Well, they didn’t.

As Blumberg explains:

Raquel Alexander and Susan Scholz calculated the total amount the corporations saved from the lower tax rate. They compared the taxes saved to the amount the firms spent lobbying for the law. Their research showed the return on lobbying for those multinational corporations was 22,000 percent. That means for every dollar spent on lobbying, the companies got $220 in tax benefits.

The implicit assumption in Alexander and Scholz’s research is that the money spent on lobbying had a decisive impact on the ultimate passage of AJCA. In other words, the money was not squandered courting legislators who were already inclined to support the AJCA, or who failed to support the legislation in spite of lobbying efforts.

It’s certainly possible that this is true. Lobbying efforts from large corporations with deep pockets are likely to have some influence over lawmakers, given the nature of American electoral politics. And if these efforts were decisive in the case of AJCA, then the 22,000 percent return on investment is pretty astounding. That magnitude is worth considering as a pure thought experiment, if nothing else.

But whatever value the 22,000 percent figure may have in informing the debate over corporate lobbying, there’s an obvious problem with any research design that presumes what it’s trying to prove. As I’ve written before, not all research is good research. Well-respected news organizations like NPR should do a better job explaining the potential shortcomings of different research methodologies rather than simply regurgitating findings.

The bigger issue, of course, is that researchers must be more willing to acknowledge possible flaws in their methodology. While reporters may lack expertise in research design, there’s really no excuse for academics attempting to pass off weak studies as providing definitive results.

And, unfortunately, that is exactly what seems to be happening in this instance.

Free Speech, Elections, and the Left

With the Occupy Movement’s renewed commitment to “getting the money out of politics,” the idea of restricting wealthy Americans' freedom of speech appears to be gaining traction on the political left. 

Of course, most people who champion spending limits on “electioneering communications” would frame the issue quite differently. The standard premise is that money is not speech, and corporations are not people. Thus, many progressives argue, portraying the Supreme Court’s decision in Citizens United v. Federal Election Commission as a defense of civil liberties is simply a category error.

Those on the left who support repeal of Citizens United argue that the Court’s ruling implies wealthy corporations are entitled to “more speech” than the average American. And given the level of influence that money has in our political system, this strikes many progressives as an incredibly dangerous principle to adopt.

However, despite what some activists seem to believe, the notion that spending on electioneering communications represents a form of protected speech has been around for quite a long time. In fact, the Supreme Court first articulated this view decades ago in the case of Buckley v. Valeo (1976). Though justices in this case upheld provisions in the Federal Election Campaign Act limiting individual contributions to candidates for federal office, they struck down all restrictions on independent electioneering expenditures. The logic of the Court was fairly straightforward, but it’s worth reading through the relevant passage in this ruling:

A restriction on the amount of money a person or group can spend on political communication during a campaign necessarily reduces the quantity of expression by restricting the number of issues discussed, the depth of their exploration, and the size of the audience reached. This is because virtually every means of communicating ideas in today's mass society requires the expenditure of money. . . . By contrast with a limitation upon expenditures for political expression, a limitation upon the amount that any one person or group may contribute to a candidate or political committee entails only a marginal restriction upon the contributor's ability to engage in free communication. A contribution serves as a general expression of support for the candidate and his views, but does not communicate the underlying basis for the support. At most, the size of the contribution provides a very rough index of the intensity of the contributor's support for the candidate. . . . While contributions may result in political expression if spent by a candidate or an association to present views to the voters, the transformation of contributions into political debate involves speech by someone other than the contributor.    

Some may argue that this decision validates the underlying point that more money implies a greater capacity for free speech, allowing the wealthy to exercise outsized influence over the political system. But if having more money gives certain individuals an unfair speech advantage, doesn’t celebrity provide the same advantage? What about rhetorical skill, personal charisma, or the sheer volume of a person’s voice? Status and ability certainly enhance a person’s capacity to disseminate ideas, but no one seems to be suggesting that we restrict famous or dynamic speakers from engaging in electioneering communications.

While more money may provide certain individuals with a greater capacity to communicate political messages, there’s no principled reason to single out this advantage over any other kind of advantage. Keep in mind that the Court deals in rule-based distinctions, not pragmatic quibbles over which form of advantage may be most dangerous.

As Eugene Volokh explained in a 2010 blog post:

People continue to characterize the Court’s campaign finance decisions as resting on the theory that money is speech. And of course money isn’t speech.

But, as I wrote a few years ago, money isn’t abortion, either. Nonetheless, a law that banned the spending of money on abortion would surely be a serious restriction on abortion rights (whether or not you think that the Court was right to recognize such rights). A law that capped the spending of money for abortions at a small amount, far smaller than abortions often cost, would likewise be a burden on abortion rights, and dismissing this argument as “it is quite wrong to equate money and abortion” would be unsound.

It goes without saying that the concept of “corporate personhood” is largely disconnected from the idea of spending as speech. But once you accept the notion that spending on independent electioneering communications is a form of protected speech, it’s easy to see why corporations should be entitled to the same liberties as other associations of people. In the same way that a group of private citizens may come together and pool money to pay for an independent political advertisement, a collection of shareholders may choose to use corporate funds—owned by each shareholder relative to her percentage of stock—to pay for an independent political advertisement. To restrict the latter and not the former is to draw an arbitrary division between business associations and other kinds of associations. Why should associations of people lose their constitutionally protected freedoms simply because of the legal structure of the organization?

The fact that most major media outlets are set up as corporate entities only reinforces this point. Are news corporations entitled to freedom of the press, but not freedom of speech? Why wouldn’t other kinds of corporations be entitled to freedom of the press? By what logic should only a single clause in the First Amendment be applied selectively to certain kinds of corporate entities?

Freedom of the press does not simply mean freedom to publish the news. Ever since Lovell V. City of Griffin (1938), the Court has held that this constitutionally protected liberty is “not confined to newspapers and periodicals. It necessarily embraces pamphlets and leaflets. These indeed have been historic weapons in the defense of liberty, as the pamphlets of Thomas Paine and others in our own history abundantly attest. The press, in its historic connotation, comprehends every sort of publication which affords a vehicle of information and opinion.”

To add a bit of irony, it seems that the majority of Americans—particularly well-educated people—dramatically overestimate the amount of corporate money in political campaigns, in part because media outlets present a distorted picture of reality. In a sense, opponents of corporate electioneering communications seem to be heavily influenced by misleading corporate media communications.

The truth is that money doesn’t have as much of an influence over our politics as people seem to believe. While this subject is difficult to study empirically, political scientists who are familiar with the literature tend to believe that spending is a relevant but less important factor in campaign outcomes. Most campaign ads have a minimal impact on the results of an election, even when they’re coming directly from the candidate. Indeed, voter perceptions and media narratives are far more likely to influence the results of an election than any electioneering communications.

As my undergraduate political science professor once put it: “shelves of academic research suggest that individual political ads have only marginal power to swing races, which depend instead on fundamentals like people’s perception of the economy.” The same can be said of lobbying, which appears to have a little overall impact on policy changes, given the general inertia of our political system.

Instead of trying to restrict freedom of speech, perhaps a better goal of the Occupy Movement and the political left would be to focus on problems like the advantage of incumbency or the general lack of engagement and understanding throughout the electorate on basic policy issues. At this point, it’s just strange to see a movement that was founded on constitutionally protected rights to freedom of speech and association so eager to take these rights away from other Americans.

Income Inequality and Tax Policy: Q & A

There’s been a lot of talk lately about the causes and consequences of income inequality, particularly in relation to tax policy. So, I figured I’d offer some thoughts (and some data) on this subject in the form of an extended Q & A. Enjoy.

Is rising inequality a uniquely American phenomenon?

The short answer is no. Since the late 1970s, income inequality has been steadily increasing throughout the industrialized English-speaking world. The time series chart below shows income shares of the top one percent across four major Anglo-Saxon economies.

Source:   
Piketty and Saez, The World Top Incomes Database; retrieved from: http://184.168.89.58/sketch/

All four countries appear to be following a similar trend, though the United States is a bit of an outlier in terms of the magnitude of its growth in recent decades. What could possibly account for the discrepancy? If we scrutinize the data a bit more closely, we see a dramatic – and seemingly permanent – jump in the share of income accruing to top earners in the mid-1980s.

Academic economists have proposed a number of explanations for this jump, but Scott Winship (a resident scholar at The Brookings Institute) makes a compelling argument that it is largely a figment of changes in the tax code:

It helps to know that the 1986 tax reform created big incentives for people who had previously reported income on corporate returns (where it is invisible to the datasets above) to report on individual income tax returns (where it appears as an out-of-the-blue increase).  And if this may be considered a permanent change in the tax regime, then the effect is for more income to show up on individual returns after 1986 than before, artificially lifting the top income share in every subsequent year

Whether or not this theory is correct, it’s clear that other post-industrial Anglophone countries have been following a similar (if slightly less extreme) upward trend. This suggests that the growth in earnings at the top of the income distribution is driven in large part by cross-national factors like globalization. The bottom line is that the increase in U.S. income inequality is far from exceptional, and probably has a lot more to do with larger macroeconomic forces than with U.S. domestic policy.

Is U.S. tax policy driving the growth income inequality?

Though Winship provides further evidence to support his theory about the 1986 tax reform, it’s possible that a genuine shift in U.S. income inequality resulted from tax policy changes under the Reagan Administration. But this seems very unlikely given the data.

As wealthier Americans captured an increasing share of the income distribution, they continued to take on an equally large proportion of the federal tax burden. The time series chart below shows the share of income (including capital gains) accruing to the top one percent of households in the United States, along with their share of the federal tax burden. 

Sources:
Piketty and Saez, The World Top Incomes Database; retrieved from: http://184.168.89.58/sketch/ 
Congressional Budget Office, Historical Effective Rates, Historical Effective Tax Rates, 1979 to 2005; December 2008; retrieved from: http://www.cbo.gov/ftpdocs/88xx/doc8885/Appendix_wtoc.pdf

The pattern here is an astounding. At least at the level of simple linear correlation, there is a strong positive relationship between the top one percent’s share of income and their share of federal taxes. Looking at this graph, it’s difficult to argue that top earners have gained a larger proportion of income because they are paying a smaller share of taxes.

However, it is still possible to argue that the declining level of federal taxes paid by top earners is a primary driver of income inequality. Perhaps lower effective federal tax rates for the wealthiest Americans have enabled these earners to gain a growing share of the income distribution.

Again, this doesn’t seem very likely given the data. The time series chart below shows the effective federal tax rate among top earning households, along with the income share accruing to these households. 

Sources: 
Piketty and Saez, The World Top Incomes Database; retrieved from: http://184.168.89.58/sketch/
Congressional Budget Office, Historical Effective Rates, Historical Effective Tax Rates, 1979 to 2005; December 2008; retrieved from: http://www.cbo.gov/ftpdocs/88xx/doc8885/Appendix_wtoc.pdf

There doesn’t appear to be any clear pattern in this data suggesting a causal relationship. At the level of simple linear correlation, these factors are simply not associated:

CORRELATION MATRIX
	Total EFTR		Income EFTR
	Income Share	Income/Gains Share	Income Share	Income/Gains Share
R	0.339	0.176	0.434	0.305
R-square	0.115	0.031	0.188	0.093

Is more progressive taxation of income the best solution to rising inequality?

While it’s fairly clear that tax policy is not the central factor driving inequality in the United States, many policy experts have argued that progressive taxation should nevertheless be a central response to the problem.

Thomas Piketty and Emmanuel Saez, two of the foremost researchers on global income inequality, argue that the “reduction in taxes at the top since 2001 has mechanically exacerbated the discrepancy in disposable income between the rich and the rest of us. Thus, it is obvious that the progressive income tax should be the central element of the debate when thinking about what to do about the increase in inequality.”

In other words, the Bush Administration’s reductions in top marginal income tax rates didn’t make the inequality situation any better. Whether or not tax policy has been a key driver of inequality, it’s certainly something that should be used to address the growing income disparity in the United States.

The argument seems very reasonable, and I personally support resetting the top marginal income tax rates to what they were in the 1990s. But as a long-term solution to the problem of rising income inequality, this simply doesn’t seem very sensible.

To begin with, the U.S. already has a highly progressive federal income tax structure relative to other industrialized countries. The Tax Foundation recently complied OECD data on the ratio of tax shares to income shares across different industrialized countries.

Alternative measures of progressivity of taxes in selected OECD countries, mid-2000s
	Percentage share of richest decile
	1. Share of taxes of richest decile	2. Share of market income of richest decile		3. Ratio of shares for richest decile (1/2)
Australia	36.8	28.6		1.29
Austria	28.5	26.1		1.10
Belgium	25.4	27.1		0.94
Canada	35.8	29.3		1.22
Czech Republic	34.3	29.4		1.17
Denmark	26.2	25.7		1.02
Finland	32.3	26.9		1.20
France	28.0	25.5		1.10
Germany	31.2	29.2		1.07
Iceland	21.6	24.0		0.90
Ireland	39.1	30.9		1.26
Italy	42.2	35.8		1.18
Japan	28.5	28.1		1.01
Korea	27.4	23.4		1.17
Luxembourg	30.3	26.4		1.15
Netherlands	35.2	27.5		1.28
New Zealand	35.9	30.3		1.19
Norway	27.4	28.9		0.95
Poland	28.3	33.9		0.84
Slovak Republic	32.0	28.0		1.14
Sweden	26.7	26.6		1.00
Switzerland	20.9	23.5		0.89
United Kingdom	38.6	32.3		1.20
United States	45.1	33.5		1.35
OECD-24	31.6	28.4		1.11
Source: Computations based on OECD income distribution questionnaire.

Based on this table, the top ten percent of earners in the U.S. appear to pay a larger share of the income tax burden than in other industrialized nations. This is true both in absolute terms and relative to their proportion of income.

As the original author of the OECD study notes:

Progressivity is not the same as redistribution. Progressivity measures how the distribution of the tax burden is shared, while redistribution measures how much the tax system reduces inequality. Redistribution is influenced both by the progressivity of taxes and the level of taxes collected . . . . [T]he USA reduces inequality a lot less than most other countries, because the other thing that you need to take into account is what taxes get spent on. While the US tax system is progressive and reduces inequality, the US welfare state is much less effective at reducing inequality.

Lest anyone fail to believe that federal income taxes in the United States are highly progressive, here is some additional data from the left-leaning Tax Policy Center:

Effective Federal Tax Rates Under Current Law, By Cash Income Percentile, 2011
Cash Income Percentile1	Average Effective Tax Rate
	Individual Income Tax2		Payroll Tax3		Corporate Income Tax		Estate Tax		All Federal Tax4
Lowest Quintile	-5.7		6.2		0.4		0.0		0.8
Second Quintile	-2.8		8.1		0.5		0.0		5.7
Middle Quintile	3.2		8.8		0.5		0.0		12.4
Fourth Quintile	7.0		8.9		0.7		0.0		16.4
Top Quintile	14.0		5.6		3.2		0.2		23.1
All	9.0		7.0		2.0		0.1		18.1
Addendum
80-90	9.3		8.9		0.9		0.0		19.1
90-95	11.7		8.1		1.3		0.0		21.1
95-99	15.1		5.3		2.4		0.1		23.0
Top 1 Percent	18.5		1.7		7.0		0.5		27.6
Top 0.1 Percent	19.1		0.8		10.3		0.7		30.8

We already have a progressive income tax structure. This is the key problem that Piketty and Saez seem to be overlooking. What we don’t have – and what we truly need – is a highly redistributive spending structure. Piketty and Saez aren’t alone in conflating income tax progressivity with redistribution. Pundits on both sides of the political spectrum tend to collapse these two concepts together. It’s simply the way that Americans frame this debate.

For those who support much more dramatic progressivity in the U.S. tax structure, the obvious question is why it really matters that our income tax system is already highly progressive. Given the dramatic growth in inequality over the past several decades, shouldn’t it be even more progressive?

There are several reasons why this is not the case, but I’ll focus on what I believe are the most compelling.

First, a more progressive tax system means far more revenue volatility, which means far more uncertainty for the federal government. When we narrow the tax base, we take on more risk. Any tax policy expert will tell you that a narrow tax base is risky for the same reasons an undiversified investment portfolio is risky. You’re putting all of your eggs in one basket. It’s particularly important to understand the problems with narrowing the tax base when we’re already deriving over 25 percent of our all federal revenues from the top one percent of earners whose incomes are the most volatile.

Second, exempting such a large portion of the income distribution from paying federal income taxes creates a potential free-rider problem. In 2010, about 45 percent of households paid zero (or negative) federal income taxes. While the majority of these earners contributed to federal payroll taxes, these levies were tied (at least in theory) to specific entitlement programs. It’s easy to see why this kind of tax structure poses a problem for our political system. People who pay no federal income taxes are more likely to vote for additional government services when they know someone else is consistently paying the cost of these services. As a practical matter, everyone should have some skin in the game.

Third, higher marginal rates have a dampening effect on productivity, though recent evidence suggests that behavioral effects are far smaller than many conservatives economists seem to believe. Even if increasing marginal rates had no impact on work incentives, however, it would still be distortionary in other ways. Higher marginal rates lead to less economically efficient outcomes, and typically cause wealthier earners to shelter money in places where the federal government can’t get to it.

Fourth, generating more revenue from a small number of wealthy earners may seem like a good way to limit their power, but it’s probably not. In fact, there’s good reason to believe that a highly progressive tax system has the opposite effect. If the federal government is financially dependent on a small number of wealthy Americans, it’s likely that these Americans will have more influence over our political system. If we want to make the government officials less beholden to the rich, it might be a good idea to make sure a large chunk of their paycheck isn’t coming from these individuals.

In the debate over income inequality in the United States, I wish we would spend more time talking about redistributing on the spending side and less time talking about taxing the rich.