Greg Mankiw linked to a post showing data for income inequality and tax progressivity. Matt Yglesias argued that Mankiw is unreliable because the data he used is incomplete (income taxes only. But actually it’s not just income taxes.) Then Karl Smith presented the exact same data in the form of a graph rather than a table, and Yglesias praised Smith’s graph, while continuing to argue that Mankiw engaged in “malfeasance.” I’m confused. Here’s how Matt Yglesias interpreted the Smith chart:
The rich pay a huge share of the total taxes in the United States because they have a huge share of the money.
But that’s not really what Karl Smith’s graph shows. It’s not saying that if you make twice as much money you pay twice the taxes. It shows something far more interesting, something that I was unaware of. The graph shows that countries with more income inequality tend to adopt tax regimes with more progressivity. I knew that was true between the US and Europe, but didn’t know it was also true within Europe. That’s completely consistent with Mankiw’s (implied) claim that the US tax system is the most progressive.
PS. The reason it shows progressivity related to inequality is that the line on Smith’s graph has a relatively flat slope.
Update: On second thought I may have erred in saying it was simply a function of the relatively flat slope; the intercept also matters. Math isn’t my forte.
HT: Commenter “example”