(Bloomberg Opinion) -- For Democrats, the Overton window — the range of ideas that are not considered extreme — has shifted markedly to the left in the last few years. It now seems that the window for discourse about economic reality is moving as well.
Take the headline on David Leonhardt’s recent New York Times column, summarizing the research of economists Emmanuel Saez and Gabriel Zucman, who are advisers to Elizabeth Warren: “The rich really do pay lower taxes than you.”
No, they do not.
In a progressive system, people with higher incomes are required to pay a larger share of their income in taxes. This is reasonable and fair because people differ in their ability to earn income and because the labor-market rewards for workers of different skill levels are determined by factors other than ability and effort.
Contrary to the narrative that seems to be forming on the political left, the U.S. federal tax code is very progressive. According to the nonpartisan Congressional Budget Office, the lowest-income 20% of households have an average federal tax rate of about 2%. Those in the middle 20% pay 14% of their income in federal taxes. Higher-income households face higher rates. The top 20% pay a 27% federal rate. And the federal tax rate for the top 1% is 33%. These data are for 2016, the most recent year available.
This is half of the story. When assessing the progressivity of the U.S. federal system, it makes sense to look at both taxes and the means-tested transfer payments — Medicaid, food stamps and Supplemental Security Income — that those taxes fund.
If you subtract these payments from federal taxes paid, the tax rate for the top 20% of households (including the top 1%) is unchanged, as those households don’t receive means-tested benefits. The tax rate for households in the middle 20% drops considerably, from 14% to 9%. And the rate for the bottom 20% of households plummets to minus 70%. Those households receive $49 in transfer payments for every $1 they pay in federal tax.
When assessing the total tax burden facing different U.S. households, looking at federal, state and local taxes is instructive. The federal system is more progressive than state and local systems, but combining them — as the Institute on Taxation and Economic Policy has done — doesn’t change the story: the higher your income, the greater your tax burden. Harvard economist and top Obama adviser Jason Furman confirms this by combining federal taxes and transfers with state and local taxes.
How to square this with Saez’s and Zucman’s research? There is an active debate among economists about technical questions in income measurement. How much of the income that is not reported on tax returns should be assumed to have been earned by the rich? How to account for unrealized capital gains when determining income? Which income group pays the corporate income tax? How should social insurance programs that transfer income across a person’s life cycle — for example, Social Security and Medicare — be treated?
The answers to those questions, and to many others, in large part determine the conclusions about how the tax code treats different groups of households. That applies to any analysis, including mine, above, and to Saez’s and Zucman’s.
But the existence of this academic debate shouldn’t obscure the overwhelming consensus among economists that the U.S. tax system is progressive. This consensus holds even when you look within the top 1% of households. The Urban-Brookings Tax Policy Center finds that this group faces the highest tax rate.
Saez and Zucman train much of their focus on the 400 wealthiest Americans. This group makes up 0.0003% of households. The New York Times column describing the Saez-Zucman estimates reports that last year this group had a 23% combined federal, state and local tax rate.
In fact, the jury is still out on that number, which is based on a forecast of what income might have been last year. (The data for 2018 aren’t in. If you filed for an extension, your taxes for 2018 aren’t due until next week.) Even if it turns out to be correct, it doesn’t follow that the U.S. system is not progressive.
Characterizing features of the tax system based on a few hundred individuals is silly. For one, people cycle in and out of the top 400 every year. And there are over 120 million households in the U.S. The tax code can create strange situations for some of them, depending on their circumstances.
For example, low-income households that stand to lose Medicaid benefits by increasing their income can face implicit marginal tax rates of close to 100%. It is more reasonable to conclude that those households face a quirk in the tax code than to draw general conclusions about the tax and safety net systems as a whole.
None of this is to say that we shouldn’t be concerned if those 400 Americans don’t face the highest tax rates in the U.S. (Though that is not at the top of my list of concerns.) And whether the system is progressive is a separate question from whether policy should further increase the tax burden on the wealthy. The latter is worthy of debate.
But that contest of ideas should take place on a playing field of facts. And the fact is that the U.S. tax system is progressive.
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Michael R. Strain is a Bloomberg Opinion columnist. He is director of economic policy studies and resident scholar at the American Enterprise Institute. He is the editor of “The U.S. Labor Market: Questions and Challenges for Public Policy.”
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