A note on tax progressivity and tax reform

Thoughtful conservatives:

Yes, I’ll support sensible anti-global warming policies, as long as it’s a carbon tax, and as long as it’s revenue neutral.

Thoughtful progressives:

Yes, I’ll support moving toward taxing consumption, as long as it’s as progressive as the current tax regime.

Environmentalists get annoyed by conservatives putting up preconditions that are unlikely to be met in reality.  I get frustrated by the fact that our measures of tax progressivity are flawed on so many levels that it will be impossible for a consumption tax to look equally progressive, even if it is equally progressive.

Over the next decade or so I’ll make a fairly steady upper-middle class income from teaching in a college.  Then I’ll suddenly be “rich” when I sell my house, and earn a vast capital gain.  (I bought the house in 1991, and it’s a two family.)  If we replaced the current income tax regime with a progressive payroll tax that hit me equally hard over that decade, the new tax regime would look far more regressive, even if (by assumption) it was equally progressive.  That’s true for all sorts of reasons:

1.  My capital gain was already taxed once as wage income before I invested the funds, and should not be taxed again.

2.  Even if real capital gains should be taxed, I get taxed on nominal gains.

3.  The actual gains occurred in small amounts over many years, I’m just paying the entire amount at the point of sale.  Nothing objective about my economic “class” changed the year I sold that house and bought a new (retirement) house of equal value.

For all these reasons the income tax looks vastly more progressive than it really is.  And for all those reasons (and many others) progressives will see any “progressive consumption tax” proposal as coming up woefully short, when compared to the current tax regime, even if it is equally progressive using proper inequality metrics–i.e. in terms of consumption.  The official tax data will show someone making a couple hundred thousand dollars in capital income (when I sell out), and only paying tax on wage income.

This makes me very pessimistic about the prospects for meaningful tax reform.

And as for effective anti-global warming measures—not happening.

From tax reform to monetary policy to environmental policy, far more of our policy failures are due to cognitive illusions (as opposed to special interest groups) than is generally acknowledged.

PS.  The recent Obama tax increase gave me an incentive to let my rental unit lie empty for 2 years.  Taxes don’t just cause workers to become unemployed, they cause capital to become unemployed.

PPS.  I just noticed this excellent comment by Matt Yglasias:

The fact remains that if you tax rich golfers’ income and give the money to poor people, you increase the sum total of felicity in the world. If you find a way to collect the same amount of money from rich golfers but do it primarily by taxing rich golfers’ consumption, then you do an even better job. When you think about physical disabilities this becomes particularly clear. We try to help out people who are blind or who lost a leg in Iraq or who are born with a congenital heart weakness not because providing such assistance accords with a principle of merit, but precisely because people who lack “merit” in the field of seeing or walking or not dying as a child due to heart failure are the people who need help. But lots of people suffer from less visible problems, be it a genetic weakness for alcoholism or the below-average intelligence that afflicts exactly 50 percent of the population. Those people should have great lives, too. But a very egalitarian society in which everyone enjoys a high standard of living is almost certainly going to have become that way precisely because it doesn’t strive to turn the remorseless meritocracy of the PGA tour into a model for society.

BTW, it’s really easy to tax the consumption of rich golfers without taxing their income—just put a progressive payroll tax in place, and consider golf winnings to be wage income.

PPPS.  Commenter Steve sent me a Bloomberg radio interview of Thomas Moore and Erik Larsson from the Bentley Fed Challenge team (which took second place in the national competition) and also one of the two coaches, Aaron Jackson.



53 Responses to “A note on tax progressivity and tax reform”

  1. Gravatar of Morgan Warstler Morgan Warstler
    29. March 2013 at 05:27

    And again, I want to discus the special case of:

    I earn $10 per tax, invest it and next year sell for $40.

    That $30 in income was not taxed. Period. The End.

    Now yes it isn’t possible to do that routinely.

    VC routinely see 10% of investment go far bigger than that gain. A few do ok, and the rest go dead.


    Now Scott would say the VC should be judged / taxed by the broad swath of his investment portfolio.


    Because Scott is admitting that some investments have untaxed income AND he wants to count the OTHER lost investments as after tax income, he doesn’t want to judge them as lost investments.

    Everything isn’t your house Scott.

    There are special cases where we can PROVE and SEE capital gain are not taxed already.

    Go look at 1031 exchanges. Whole market set up to let real estate guys take advantage of ZERO CAPITAL GAIN TAX law, and the only guys who use it are the ones hiding profits.

  2. Gravatar of Don Don
    29. March 2013 at 06:26

    The response to liberals is to include FICA in the calculations (employer side too). That horribly regressive tax makes the entire tax structure pretty flat across all incomes.

    The next step is to escape the paradigm of the 16th amendment and stop trying to tax income. Turn the “fairness” argument into expenditures and wealth. A 10/1 plan (10% sales,; 1% wealth annually) is optimally fair*. It replaces corporate, small business, FICA, wage, investment income,… The mental leap is hard, but once the liberal and conservative are there they like it.

    * fair==a system that charges proportionally to benefit and there is no appearance of cheating. People don’t like a system that appears like they are being cheated for being honest. Preservation of wealth is the greatest benefit from federal govt.–rule of law and all that.

  3. Gravatar of mpowell mpowell
    29. March 2013 at 07:38

    This is an interesting point. I’d make it another way: people who have gotten wealthy over their working lives and are spending their pool of money down in retirement will probably be spending more than they make in investments in any given year. So a progressive consumption tax will look particularly regressive if compared to income, and the silliness of drawing that conclusion is highlighted in the case of wealthy retirees.

    I think you just have to recognize that you either tax based on income and assess progressivity based on income or tax based on consumption and assess progressivity based on consumption. Trying to do a cross class comparison requires a deep investigation of life time earnings pattern and you cannot simply pull a few numbers out of IRS records for a single year.

  4. Gravatar of Mike Coffin Mike Coffin
    29. March 2013 at 07:51

    “The fact remains that if you tax rich golfers’ income and give the money to poor people, you increase the sum total of felicity in the world.”

    I don’t think that’s necessarily true. Here’s the problem. I work for a corporation that has an entire department devoted to determining employee compensation based on value to the corporation. Suppose that my taxes go up. Suddenly, my real compensation is out of kilter compared to, say, a less valuable employee. My employer reacts by tilting the next round of raises toward the high-income employees to bring things back into balance. So who winds up really paying the tax? Not me, I have roughly the same after-tax compensation as before and my consumption patterns don’t change an iota. I may be the one writing a check to the IRS, but I’m not paying the tax in any real sense.

    What really happens is that the impact of the tax is spread over lots of people. My lower-paid coworkers get smaller raises than they would have otherwise. The corporation itself reports lower profits, which affects stockholders — including pension funds and small investors. One of those small investors decides that times are tight, and doesn’t tip her house cleaner. Etc.

  5. Gravatar of TallDave TallDave
    29. March 2013 at 07:53

    I think it would be more accurate to say no thoughtful person espouses carbon taxes, because 1) AGW is highly speculative, there is no reliable basis for predicting climate within the relevant range 2) it’s not clear AGW will have net negative effects even if it materializes (history argues otherwise), and 3) even if AGW happens and has strongly negative negative consequence, everyone agrees G7 emissions controls would make no difference anyway — future mitigation makes far more sense.

    The mendacity on this issue is really pretty breathtaking — it’s not every field that has the audacity to claim they’re saving the world and simultaneously refuse to let anyone check their work. AGW is little more than environmentalist agitprop that sometimes gets dressed up as science to sway the gullible.

  6. Gravatar of Philo Philo
    29. March 2013 at 07:58

    One can measure the progressivity of a taxing scheme with respect to many different quantities: with respect to (this year’s) *income*, or (this year’s) *consumption*, or (present) *wealth*, or indefinitely many other possibilities. There is no use talking of “progressivity” without specifying one of these quantities.

    I do not know which of these is most important to those who set great store by “progressivity.”

    P.S.: You must have an enormous capital gain on your house: there’s a big once-a-lifetime exclusion from capital gains tax on the sale of a home.

    P.P.S.: Taxing wage income is not at all the same thing as taxing consumption. Why do you suggest otherwise?

  7. Gravatar of David R. Henderson David R. Henderson
    29. March 2013 at 08:13

    Scott, Do you really think that Yglesias’s comment is a good one? How does he measure felicity across people? That one was answered in economics in the late 1800s: you can’t.

  8. Gravatar of Mike Sax Mike Sax
    29. March 2013 at 08:35

    I was reading one of Krugman’s books from the 90s-“The Accidental Theorist.” Interestingly he had said that most economists support the carbon tax-there aren’t many that don’t, that it’s has as close to universal agreement among economists as you’re going to find

    Even if you can tax consumption at the same level of progressivity-not sure you can but we’ll leave that to one side-why is it preferable?

    On capital gains I’m with Morgan. I don’t see how it’s taxed twice in any more meaningful way than I’m taxed twice when I pay property taxes and then later when I spend my income have to pay various taxes-consumption, tolls, etc.

    What you call “taxing twice” is the rule. I’m being taxed twice when I have to pay to walk along the sand at the beach after paying property taxes. Or when someone pays their property taxes and yet the school suddenly starts requiring them to pay for the gymn equipment their kids use or pay for the kids bus ride in the morning.

    I don’t think there are many people who pay taxes at only one point-wages, consumption, investing etc. Usually you pay at each point.

    And yes Moran is right. If you have capital gains on an investment that’s something different from the original wage you were paid. On the other hand, if you lose money you get to write it off.

  9. Gravatar of Mike Sax Mike Sax
    29. March 2013 at 08:38

    I know you’ve explained this a lot, but I can never figure out what the gain is in a consumption tax. Perhaps I’m fooled by the optics but I never get it.

    I only really am interested in tax proposals that would either increase revenue or cut taxes for the non-rich-we can that in different ways but the new top rate for the fiscal cliff deal wouldn’t be a bad place to start-$450,000 per couple.

  10. Gravatar of TallDave TallDave
    29. March 2013 at 08:46

    I think Matt’s wrong about the PGA. It’s actually quite egalitarian — anyone can watch it, which is where the utility comes from that allows us to pay the best golfers lots of money. Who decides that pay distribution? Well, we do, by demanding to see the best golfers and not a collection of average golfers. There’s no law of the universe that makes this happen, it’s purely preference.

    Similarly, the economic growth created by the rich is consumed by the masses (except where such wealth is obtained coercively). Who creates that disparity? Consumers, by refusing to buy crappy products at bad prices.

    History says you can have meritocracy and rising living standards for all, or you can make everyone equally miserable. Even in the socialized Nordic countries, there is much more competition within the public sphere.

  11. Gravatar of Randomize Randomize
    29. March 2013 at 09:11

    Totally agree on the anti-Global Warming, Scott. Tax-and-dividend FTW: Attach the cost incentives to carbon-intensive purchases and maintain consumer spending power. Sure, the Democrats won’t get a new stack of cash to hand out to their cronies but the base will like the ultra-progressive dividend checks.

  12. Gravatar of Aidan Aidan
    29. March 2013 at 09:26

    Scott – do you agree with the hypothetical thoughtful conservative that a carbon tax should be revenue neutral? Why?

  13. Gravatar of dbeach dbeach
    29. March 2013 at 09:30

    I didn’t understand this bit: “BTW, it’s really easy to tax the consumption of rich golfers without taxing their income””just put a progressive payroll tax in place, and consider golf winnings to be wage income.”

    How is the “progressive payroll tax” a consumption tax? It’s directly taxing their wages rather than their spending. Or maybe I don’t understand what you mean by a progressive payroll tax.

  14. Gravatar of Jake Jake
    29. March 2013 at 09:39

    How did everyone get so convinced that a carbon tax will increase overall utility? As David R Henderson astutely points out above, you can’t actually measure something like “net change in utility” even across two people, much less an entire population.

    I think we can safely assume that carbon usage has an external cost, and reducing that cost would be of some benefit. But isn’t it equally true to say that the carbon tax would mean higher energy costs for consumers, which would negatively impact almost every aspect of our lives?

    I just don’t see how the cost-benefit analysis on that is so open-and-shut in favor of the tax.

  15. Gravatar of ssumner ssumner
    29. March 2013 at 10:56

    mpowell, That’s one reason why it might be better to tax consumption via a payroll tax than a VAT. But I favor some of each.

    Mike Coffin, There’s some truth to that, which I why you don’t want to have excessively high taxes. But I think some progressivity is appropriate.

    TallDave, I’ve read many scientific articles on the subject, and I think the science is very solid. One can never be 100% certain, but that’s true of all government policies, including those that libertarians like.

    Philo, Progressivity should be measured in terms of consumption or wealth (which in the long run are equivalent.) Income is pretty much a meaningless concept. A consumption tax and a wage tax are identical—that’s one of the first things you learn in public finance courses. I have a two family house, as I said in the post, which is why I’ll get hammered by the cap gains tax. Unless I leave the rental unit empty for 2 years.

    David, Yes, you cannot measure utility, but nonetheless we do our best to estimate it. I favor public policies that maximize aggregate utility, as best we can estimate. All public policies depend on things than cannot be precisely measured, but rather can only be estimated. Why have laws against gasoline that puts lead into the atmosphere? No one can prove that low IQ people are less happy than high IQ people.

    Mike Sax, It’s too complicated to explain quickly, but I have other posts that discuss why. It’s generally accepted among tax economists that capital taxes tax future consumption at a higher rate than current consumption.

    Aidan, Yes, I favor revenue neutral. The government collects plenty of money, it just needs to spend it more wisely, as Australia does.

    dbeach, It’s hard to explain, but tax economists agree that a payroll tax is identical to a consumption tax like a VAT. It’s simply collected a tax different point. By analogy, a $1 gas tax per gallon on gas stations would have an identical effect to a $1 gas tax per gallon paid by gasoline consumers.

    Jake, That’s why I want it to be revenue neutral.

  16. Gravatar of Peter Peter
    29. March 2013 at 12:14

    I’m happy that we wont get a carbon tax.

    “OVER the past 15 years air temperatures at the Earth’s surface have been flat while greenhouse-gas emissions have continued to soar.”


  17. Gravatar of Geoff Geoff
    29. March 2013 at 12:58

    Once again Yglesias makes a post full of economic fallacies.

    1. One cannot add, subtract, multiply or divide utility across different individuals. It is not true that there is such a thing as a “gain in total utility” by taking from the rich and giving to the poor. All that occurs is that in the short run the rich are worse off and the poor are better off, and in the long run, both are worse off because of a reduced incentive of the rich to invest. Yglesias needs to learn the basic principles that utility is ordinal, not cardinal, and that one cannot add or subtract utilities across individuals. They are incommensurable.

    2. If Yglesias is concerned with helping the poor, he is not being a hero, or virtuous, by demanding that others pay at the point of a gun. That isn’t benevolence, it’s cowardice.

    One of the things that amuses me about this blog is how often Yglesias is positively mentioned, despite the fact that he constantly makes piss poor blog posts full of flaws and immoral ethics.

  18. Gravatar of johnleemk johnleemk
    29. March 2013 at 13:09

    Re why the payroll tax is equivalent to a consumption tax: the way I think about it is that any regular income tax is already a consumption-ish tax, because a good proportion of income goes to consumption. To the extent that we reduce any tax leveled on the proportion of income which is saved/invested, we are making the income tax more like a consumption tax.

    If we change the income tax into a pure payroll tax on income earned from wage (non-capital) sources, then we have eliminated all taxes leveled on the proportion of income which is saved/invested. We are only taxing the income which is consumed. By definition, we have turned the income tax into a consumption tax.

  19. Gravatar of TravisV TravisV
    29. March 2013 at 13:13


    You assert that making taxation progressive is extremely harmful. But you don’t have any evidence. Why the heck do virtually all major wealthy countries have substantial progressivity in their tax codes?

    Among major developed countries, is there a negative correlation between the degree of redistribution and GDP per capita? No.

    Is the tax code even flat in Singapore?

  20. Gravatar of Lucas Lucas
    29. March 2013 at 14:10

    “From tax reform to monetary policy to environmental policy, far more of our policy failures are due to cognitive illusions (as opposed to special interest groups) than is generally acknowledged.”
    In other words, you’re a public choice skeptic, right?
    I’d be interested in knowing more about your positions on political economy.

  21. Gravatar of Steve Steve
    29. March 2013 at 15:18

    “Taxes don’t just cause workers to become unemployed, they cause capital to become unemployed.”

    The also cause me to move to NH. This year, the April Fool’s joke is on the MA DOR.

  22. Gravatar of John Thacker John Thacker
    29. March 2013 at 15:25


    Be careful to distinguish between tax progressivity and degree of redistribution. The US has very high tax progressivity, the highest in the OECD. However, the amount of redistribution is pretty low. This is a combination of two things:

    1) While the taxes are very progressive, the total amount of taxation is relatively low. (Note that the Bush tax cuts made the US tax system more progressive, not less, and the changes during Obama’s Administration has made them more so.) Part of the reason why the taxes score as very progressive is that the upper middle class isn’t really taxed very much at all compared to European countries.

    2) US spending is fairly inefficiently targeted at redistributing to low incomes; obviously there’s a lot of military spending on hardware and the like, along with other programs that shuffle money around among someone’s lifespan (like Social Security), and spending aimed at the rich and upper middle class, like ag subsidies (which generally increase prices, not decrease), grants for energy companies, Amtrak subsidies, the Corporation for Public Broadcast and the National Endowment for the Arts, and so forth.

  23. Gravatar of Jim Glass Jim Glass
    29. March 2013 at 21:40

    it’s really easy to tax the consumption of rich golfers without taxing their income””just put a progressive payroll tax in place, and consider golf winnings to be wage income.

    Or maybe not so easy. The fact that there are obvious defects in current policy doesn’t mean that a theoretically much superior alternative would be “easy”, or even possible, to adopt in practice.

    Let’s look at some realities of getting rid of golfer’s income tax and replacing it with wage tax. While doing the same for everybody else, of course.

    Data from IRS for 2011:

    Taxable Income (AGI) $8.3 trillion
    Income tax: $1.1 trillion
    Overall income tax rate: 13.3%

    Wages including golfers’ self-employment income: $6.2 trillion.
    Payroll tax on wages: $820 billion.
    Overall wage tax rate: 13.2%

    Now, abolishing the income tax and moving the amount of income tax currently collected onto the smaller wage base:

    Tax collected on wages; $1.92 trillion, 31% total rate.

    State income taxes too? State income tax systems generally ride on the federal system, so if it converts the states will more or less be forced to do so as well. And surely we do want state taxes to convert for the same reason as we want the feds to. That’s another $332 billion.

    Tax collected on wages; $2.25 trillion, 36% total rate.

    That is disregarding federal corporate and business taxes (the bulk being corporate income tax) of $250 billion. Add that logically to the wage tax (are we going to preserve income tax just for corporations?) and…

    Tax collected on wages: $2.5 trillion, 40% total rate.

    OK, if we make this tax “progressive” the rate structure would run how, maybe from 15% to 65%? Certainly the top will have to be well over 50% to keep workers at Dairy Queen from paying over 30%, double what they pay today.

    And all that of course disregards the deficit of $1.3 trillion, which will require *some* tax increases to close it. That deficit was 8.7% of GDP of $15 trillion. To knock it down to a “sustainable” 3% of GDP requires $840 billion, let’s hope contra Krugman only a modest 25%, $210 billion, needs to come from tax increases (with the rest from growth and spending cuts)…

    Tax collected on wages: $2.7 trillion, 44% total rate.

    Here I’ll be merciful and not at all consider the **huge** revenue increases that will be needed by 2030 to fund entitlements (1.5% of GDP for Social Security trust fund operations alone under current law) **even if** a fiscal crisis-driven political compromise slashes their rate of increase by fully half. (My mind boggles here.)

    Two observations…

    1) Politically, this reform requires selling to the general public:

    “While landlords will pay 0% tax on the rents they collect from you, millionaire investors pay 0% tax on their dividends, interest and gains, and Warren Buffett & Bill Gates pay 0% tax on their gains on their invested billions, all you *working people* will pay an average 31% (or much much more!) on your salaries — a rate paid by only the top 5% of highest-income earners today. Vote for this!”

    Good luck with that. You’ll have an easier time selling Oprah on her third diet. By comparison, selling the Fed on NGDP level targeting has been like selling Oprah chocolate cake.

    2) Economically, this reform runs squarely into the public finance 101 theorem that the deadweight cost of taxes rises not with the tax rate but by the square of the increase in the tax rate (double the rate, the deadweight cost quadruples) — and thus into the basic public finance policy prescription that it is better to have multiple low-rate taxes than a few high-rate taxes (or a single very high rate tax!).

    This contra-wise very high cost on wages with none on other forms of income would drive *massive* tax-shelter conversion of wage income into other forms of income. This is not theory. A good deal of this goes on now due to current rate differentials, and in the left’s longed for good old days of 70+% top tax rates this happened on a mass scale. (For anyone old enough to remember Art Linkletter, he didn’t just talk amusingly to kids — he was also a top-level business entrepreneur and has some great reminiscences saved on the web about his career converting 90%-tax-rate earned income into tax-favored investment gains and zero-tax shelter income.)

    There was a *massive* pernicious tax shelter industry back then — killing it off was the main reason why the left-Democrats joined the right in lowering the top tax rate to only 28% in the bipartisan 1986 Tax Reform Act. But now all that’s forgotten.

    Anyhow … *replacing* the income tax with wage tax is simply impossible for those two reasons: (1) by arithmetic, the wage base just is not big enough to carry the tax by the math, making it politically utterly impossible for beginners; and (2) apart from that, the deadweight cost distortions due to different rates would dwarf even the massive tax-“shelter”/evasion problems of pre-TRA ’86 — which would be economically ruinous, and the people responsible for having any kind of functional tax system (in both the public and private sectors) will as one not even begin to let that happen. Rightly so. And 2 x impossible is pretty well impossible.

    (BTW, same for a VAT replacing income tax — arithmetically impossible, which is a reason why no European country has done anything like replace its income tax with a VAT.)

    Educating the public about the superiority of consumption tax over income taxation of investment returns, so we can move the tax system more in that direction, is very well and good — I try to do that with my clients and associates all the time.

    But actually pushing *replacing* the income tax thusly as a real “reform” proposal to be actually enacted is, at best, a waste of one’s time and effort (and at worst damaging to one’s credibility as well).

    The fact that an idea looks great on economic principles doesn’t mean it is possible (or even anywhere close to possible) in real-world practice. This is something we run into in the tax world all the time. From Georgism on…

  24. Gravatar of Steve Steve
    29. March 2013 at 22:13


    Fascinating commentary. I mostly agree with two other thoughts:

    – States should move to a real estate tax instead of an income or payroll tax. States like TX and NH are able to fund themselves with a ~2% property tax. Property taxes reasonably progressive, too.
    – Obamacare is going to come crashing down because you can’t have a sector (healthcare) that is 20-25% of GDP and is funded mostly by transfers and subsidies (Medicaid, Medicare, Mandate taxes, and tax free employer health plans). Ultimately you need to tax employer provided health plans and control costs.

  25. Gravatar of John Thacker John Thacker
    30. March 2013 at 09:42

    Jim Glass:

    I dispute that a tax on wages and a tax on income that appear on the same W-2 statement are really two low rate taxes on different things, considering the overlap. I think that weakens your argument substantially.

  26. Gravatar of Jason Jason
    30. March 2013 at 09:50

    Isn’t any housing appreciation completely tax free up to $250k or $500k if you are married?


    I don’t work for these people or anything. Scott’s argument seems kind of just so, so I tried to look up what really happens. My friend just sold a house and will probably take a capital loss and I’m thinking of buying one soon so I’ve been thinking about this. But the way Scott describes it, we should be seeing a lack of people selling a house and buying a new smaller one because the marginal tax rate would be prohibitive! 40-50%!

    Most of that appreciation comes from zoning and other regulations driving up housing prices (q.v. Yglesias), so I don’t actually see a problem with taxing it as income in Scott’s example. It is ill-gotten gains from economic rent and incumbency.

  27. Gravatar of Jason Jason
    30. March 2013 at 10:10

    “Yes, I’ll support sensible anti-global warming policies, as long as it’s a carbon tax, and as long as it’s revenue neutral.”

    Or, more accurately, Yes, I’ll support sensible anti-global warming policies, as long as it has no net negative effect on me.

    “Yes, I’ll support moving toward taxing consumption, as long as it’s as progressive as the current tax regime.”

    Or, more accurately, Yes, I’ll support sensible anti-global warming policies, as long as it has no net negative effect on the poor.

    The key to the difference between these wonky “thoughtful” conservatives and liberals is the precondition in the last phrase: “no net negative effect on me” vs “no net negative effect on the poor”.

  28. Gravatar of ssumner ssumner
    30. March 2013 at 10:47

    Peter, The Earth will be warmer in 30 years, there’s very little doubt about that fact. Yes, 1998 was a very warm year, but year to year fluctuations don’t change the trend.

    Thanks Johnleemk.

    Lucas, Obviously there is plenty of truth in the public choice models, but I also think ignorance plays a big role. Also culture; some cultures have more civic virtue (I’m not sure why.)

    Jim Glass, Good point. I’d favor the following changes, which I sometimes forget to mention.

    1. Tax wages and benefits, that greatly increases the base, and it lowers the rate.

    2. Have a 20% VAT, and rebate enough money to pay a poverty level consumption bundle. So people only pay VAT on non-necessity level consumption.

    3, Replace the cigarette tax with a carbon tax—it makes the system more progressive and reduces global warming.

    Do those two things, and the payroll tax rates would not be all that excessive. Recall that middle class American already face 40% MTRs, when you combine payroll and income taxes, so we are used to paying a lot.

    But that’s a good point–the deadweight loss rises dramatically at higher rates, which is why VAT plus payroll is probably better than payroll alone.

    Of course the best policy is to slash government spending way down to Singapore levels, and add universal health coverage, as Singapore has done (despite their very low taxes.)

    Steve, A land tax is also a good idea.

    Jason, You said:

    “But the way Scott describes it, we should be seeing a lack of people selling a house and buying a new smaller one because the marginal tax rate would be prohibitive! 40-50%!”

    Jason, Really, where did I describe it that way?

    The $500,000 exclusion doesn’t apply to two family houses, which is what I have.

    And much of the gain comes from inflation, it’s not real. Why do you think inflated gains should be taxed? And why two family houses but not single family?

    Your final comment is pretty silly. You don’t think their are principled objections to big government? Really? Even after the 20th century?

  29. Gravatar of Doug M Doug M
    30. March 2013 at 13:01

    I fear that we will never see meaninful tax reform. There are too many entrenched interests. Any change creates winners and loosers. And the loosers will always be easier to indentify and make more noise than the winners.

    Even if the change is better for many times more people, their vioce will never be heard.

  30. Gravatar of W. Peden W. Peden
    30. March 2013 at 14:49

    Doug M,

    Perhaps, but couldn’t a similar thing have been reasonably been said before 1986?

    Surely, the lesson of the last 30 years is that change in the face of entrenched and organised special interests IS possible, just (a) very difficult, (b) very slow, and (c) dependent on things being so bad that the general public realises how they’re being ripped-off and continually elect politicians who break “the rules”?

  31. Gravatar of Mike Sax Mike Sax
    30. March 2013 at 15:19

    Ok Scott I look forward to those. I do see that certain things are preferences of most economists though lay people often don’t get it. I was just reading Krugman from the 90s and even then he said almost all economists support a carbon tax. Even back then he seemed to think that carbon taxes is a very efficient way of leveling taxes

  32. Gravatar of doug m doug m
    30. March 2013 at 18:02

    W Penden,

    The 86 reform was modest compared to a move to a consumption tax.

    A better comparison would be the Dick Army or Steve Forbes proposals on the 1990’s

  33. Gravatar of Jim Glass Jim Glass
    30. March 2013 at 18:17

    @ John Thacker

    I dispute that a tax on wages and a tax on income that appear on the same W-2 statement are really two low rate taxes on different things, considering the overlap…

    The point is that collecting all the tax on a tax base that’s $2 trillion smaller increases the average tax rate accordingly — that’s arithmetic, not disputable — and the deadweight cost of the tax *more* than accordingly, by the *square* of the increase in the rate. Not a good thing.

    @ ssumner

    Jim Glass, Good point. I’d favor the following changes, which I sometimes forget to mention…

    Ah, well then… but I submit that if you intend to replace the income tax with a wage tax *plus* a 20% VAT and a carbon tax, you really should remember to mention those other taxes. It will prevent misunderstanding – and would have saved me from writing all those words there!

    That’s quite an ambitious agenda, good luck with it. I’m on your side, but it’s going to require a whole lot of education and persuasion of the masses. Winning the world’s economists over to NGDP targeting is I guess a good practice run. 🙂

  34. Gravatar of TallDave TallDave
    30. March 2013 at 19:42

    TallDave, I’ve read many scientific articles on the subject, and I think the science is very solid.

    Spend a few minutes a day reading 3-time Science Blog of the Year WUWT and see if you still think so 🙂 For starters, you might want to look at whether the IPCC can even outforecast a random walk.

    Large portions of the science are, of course, quite solid — CO2 is increasing, temps are trending higher since 1850, many very good proxy climate studies have been done, etc. The issues are mostly in interpretation/prediction, and as Tetlock famously showed expert predictions have a terrible track record.

    At any rate,as I said before, even if the science was rock-solid and the predictions 100% reliable, carbon taxes would not make any sense as a response because even AGW proponents admit G7 carbon taxes will have very little impact on temperatures 100 years from now.

  35. Gravatar of TallDave TallDave
    30. March 2013 at 20:10

    Using assumptions based on the Intergovernmental Panel on Climate Change (IPCC) Assessment Reports, if the U.S. as a whole stopped emitting all carbon dioxide (CO2) emissions immediately, the ultimate impact on projected global temperature rise would be a reduction, or a “savings,” of approximately 0.08°C by the year 2050 and 0.17°C by the year 2100″”amounts that are, for all intents and purposes, negligible.

    Note that’s not just taxing them, but actually ceasing emissions entirely. If by chance there is a CO2-driven warming problem, you would need a global agreement and poorer countries will never sign on.

    Anyways don’t want to threadjack, just thought this should be pointed out. I know carbon taxes are popular, but the reasons have very little to do with science (a much better option would be developing an array of space mirrors, which could also be used to counter unexpected cooling — an existential threat).

  36. Gravatar of Steve Steve
    30. March 2013 at 20:24

    I’ve been biting my lip on the AGW / carbon tax issue, because it’s too complex to really flesh out in a blog post or blog reply.

    As far as the science, there are two points:
    1- the radiative physics, i.e., Planck’s Law and absorption spectra, are a hundred years old and well understood. It’s almost certain there’s positive climate forcing from greenhouse gasses.
    2- the feedback effects, e.g. albedo and water vapor, are not nearly as clear cut. It’s highly likely current thinking in this area will prove to be incorrect. There’s been a lot of (bad) research conflating weather cycles with climate change.

  37. Gravatar of Steve Steve
    30. March 2013 at 20:36

    As for the effect of carbon taxes, it depends on a lot of things:
    1) Are carbon taxes imposed domestically only? This would create a massive global carbon arbitrage. For example, shipping oil to Mexico or the Virgin Islands to get refined, then shipping the products back to the US. Or shipping iron to China to make steel, then shipping the steel back to the US.
    2) Are carbon taxes imposed back to the source? This might anger China, who could view it as a trade tariff. Are we prepared to go that route?
    3) If you don’t tax carbon back to source, do you credit industrial consumers? This creates an anti-competitive business moat, where old factories are exempted, but upstarts face steep carbon taxes. (This was one of the unstated goals of Kyoto cap-and-trade — to utilize credits from eastern bloc factories to support Europe, while restraining the Americas — it kinda blew up with the BRICs).

    If you got global agreement to tax carbon, the result is ex-ante fairly predictable. You shut down the coal industry, shift energy consumption to natural gas, and modestly incentivize conservation.

    I actually think that outcome — reduce coal, and support efficiency — is sensible for the time period of 2010-2020. The really tough questions surround whether we can make renewable energy work at scale (we can’t YET), and whether we are willing to resign ourselves to nuclear power (we aren’t YET). Reducing coal and supporting efficiency is a path we are on anyway, even without a carbon tax. Beyond that we really have to embrace uncertainty.

    My hope is that by 2020 or so, the climate science will be better, and the mitigation technologies will be more clear, and society won’t have destroyed itself fighting over premature solutions.

  38. Gravatar of ssumner ssumner
    31. March 2013 at 02:58

    Thanks Jim, I’ll try to be less sloppy in the future.

    TallDave, China is already ahead of us on carbon taxes, which is embarrassing for the US. We are the richest big country in the world, and should be showing leadership. BTW, there are many externalities from carbon besides global warming, especially the part of carbon that comes from oil and coal.

    Steve, Good post. Also keep in mind that other taxes cause massive harm. If a carbon tax does no good at all, it’s still way ahead of other taxes.

  39. Gravatar of TallDave TallDave
    31. March 2013 at 13:32

    Scott — China is building a new dirty coal plant every week. They have carbon taxes in the same sense they have environmental laws — generally a meaningless fig leaf.

    Also, I don’t think you actually read my points on AGW. The U.S. is doing a fine job of leading the world away from a nonsensical solution to a nonexistent problem.

  40. Gravatar of Floccina Floccina
    31. March 2013 at 14:07

    1. I think that a good reason to tax consumption rather than wealth is because the goal is to transfer some consumption to Government cause, defense and to the poor.

    2. I like the idea of removing the cap from IRA contributions but taxing withdrawals. A person could run all his income into his IRA and then just be taxed on withdrawals greatly simplifying his tax return.

  41. Gravatar of Bill Ellis Bill Ellis
    31. March 2013 at 14:13

    Scott says.. “Thoughtful conservatives:
    “Yes, I’ll support sensible anti-global warming policies, as long as it’s a carbon tax, and as long as it’s revenue neutral.” (…)
    Environmentalists get annoyed by conservatives putting up preconditions that are unlikely to be met in reality.”

    Actually I think there is a lot more support for a carbon tax on the left than the right. The left’s problem with your scenario is not the tax but the revenue neutral part. Even at that, I would not be surprised to find just as much support for a revenue neutral carbon tax on the left as the right… because support is soooo low on the con side, and a lot of libs are desperate to do something about man made climate change. (especially the kind of lib that calls themselves environmentalist. )

    This comment thread is a great example of the resistance to a carbon tax on the right and the blinding tribalism that fosters it. … Or maybe it is just that the cons on this thread not too “thoughtful” ?

  42. Gravatar of Bill Ellis Bill Ellis
    31. March 2013 at 14:29

    Scott says…

    “Thoughtful progressives:

    Yes, I’ll support moving toward taxing consumption, as long as it’s as progressive as the current tax regime.” (…)

    “I get frustrated by the fact that our measures of tax progressivity are flawed on so many levels that it will be impossible for a consumption tax to look equally progressive, even if it is equally progressive.”

    Well it seems like here the only problem is perception. Not a willful ignoring of hard data. ( Global warming is NOT impossible to be shown clearly. )

    It is hard for me to accept the fact that it can be equally progressive… yet be impossible to show it. ( I take you too literally here ? )
    But the more I find out about it…it becomes one of those things that gets more complicated. The increase in possibilities makes the outcome less certain. The hard numbers don’t add up.

  43. Gravatar of TallDave TallDave
    31. March 2013 at 15:24

    Bill — Again, let us know when the IPCC can outforecast a random walk. Until then, a carbon tax is the scientific equivalent of throwing virgins into a volcano to appease Warmingo, God of Rising Temperatures.

  44. Gravatar of Floccina Floccina
    31. March 2013 at 17:42

    On the carbon tax, I think that most of the revenue from the carbon tax should paid out to those who remove co2 from the air. Biochar, deep ocean iron fertilization and enhanced weathering are methods for removing co2 from the air. It could be very cheap.

  45. Gravatar of J Mann J Mann
    1. April 2013 at 05:20


    Don’t know if you’re still reading, but for what it’s worth, I favor a revenue neutral carbon tax shift on democratic principles. A bunch of people are concerned about global warming, and you have to tax something, so IMHO it’s a fair compromise to shift some of our tax activity onto carbon, particularly if it got the government out of the alternative energy venture capital business.

    Of course, in practice, the deal is unworkable, but in theory, it’s appealing.

  46. Gravatar of ssumner ssumner
    1. April 2013 at 06:16

    TallDave, I read your comment, but I’m convinced that AGW is not an imaginary problem, it’s a very real problem. Yes, people like Gore exaggerate the severity of the problem, but it’s very real.

    Floccina, They also need to stop forcing old people to withdraw money from 401k plans.

    Bill, I agree that many on the left would favor a revenue neutral carbon tax. Certainly many (most?) conservative economists favor such a plan. The real problem is non-economists, on both the left and the right I would add.

  47. Gravatar of TallDave TallDave
    1. April 2013 at 07:19

    Scott — Well, again, if the IPCC forecasts do no better than random walks, in what sense is the forecasted problem “very real?” Did you know the IPCC does not even have quantitative metrics for evaluating predictive reliability? (chapter 8 of AR4 , Metrics of Model Reliability: “The above studies show promise that quantitative metrics for the likelihood of model projections may be developed…“)

    As Feynman put it: “It doesn’t matter how beautiful your theory is, it doesn’t matter how smart you are. If it doesn’t agree with experiment, it’s wrong.” The models don’t agree with the observations, so they are wrong.

    I realize academics (who tend to read the scientific papers and trust the peer review process to be fair and objective) generally come to the conclusion that the problem is real and serious. Unfortunately, this is the result of a process controlled by people who are putting ideology ahead of science. Like many skeptics I have also read the papers, but I have also read the criticisms of those papers on place like WUWT and so I know that (for instance) the Marcott paper redated the coretops to produce an illusory hockey stick, that the entire warming trend from 1930s to present can be explained by “adjustments” and UHI, that sea level rise shows no acceleration in this century…

    I could go on for pages in this vein, but I don’t want to write a TLDR dissertation, just make you aware there is a very thoughtful school that sees AGW as unproven 🙂

  48. Gravatar of TallDave TallDave
    1. April 2013 at 07:26

    J Mann,

    That’s a defensible argument on democratic grounds, and I agree it’s less bad than a lot of alternatives. OTOH it’s still irrational, it makes everyone poorer, and future mitigation (such as solar mirrors) makes more economic sense.

  49. Gravatar of Bill Ellis Bill Ellis
    3. April 2013 at 10:06

    Scott says… “Yes, people like Gore exaggerate the severity of the problem, but it’s very real.”

    I agree the severity is debatable … But I think that we have been erring on the side of underestimating the rate of change at least… If true that would imply that the we have less time to deal with the problems, making them more sever than anticipated in that aspect at least.

    From those “mush minded” libs at Scientific American 😉 .


  50. Gravatar of Geoff Geoff
    3. April 2013 at 10:13

    Bill Ellis:

    You keeping up with Climategate 3.0?

  51. Gravatar of Bill Ellis Bill Ellis
    3. April 2013 at 10:51

    TallDave, look at…”Not a Random Walk”

    It is the The Trend you got to look at. The real trend.
    You can make almost any complex set of data look like it does worse than “random walks” if you cherry pick the data in the data.

    How did VS fail to reject it? I suspect he excluded a trend from his ADF test. He may also have played around with the number of lags allowed, until he got a result he liked. He excluded reality, and if you do that, you can “prove” whatever you want.


    The Climate change is debate is really not that complex…( Though making it complex is a way to confuse people. ) Do you believe the Fact that C02 is a green house gas or not ? If so, than what do you think is offsetting the effects of ever increasing Co2 ?

    Sure, different things besides C02 effect the Earth’s temp… But those things are also accounted for in the Climate change models. You can attack the particulars of the models all day long. But that does not change the fact that the factors that increase the Earths temp are increasing.

    Best Regards, Short Bill.

  52. Gravatar of Bill Ellis Bill Ellis
    3. April 2013 at 11:24


    Am I keeping up with Climategate 3.0 ? Not really. First I heard of it.
    From a quick google It seems like it is still primarily confined to the right wing echo chamber. (As a lib I don’t spend too much time with those sites… my bad. )

    Seems like mostly innuendo. Even If one guy was presenting data in deceptive way… It does not make the overwhelming consensus that Man Made Climate Change is real any more or less valid. Right ?
    I mean… One could invalidate anything just by misrepresenting it.

    In a way Climate change is just a simple math problem. You add up the inputs.
    What the earth heating inputs are is not in dispute. If you don’t believe in MMCC then you have to ignore the fact that C02 is a green house gas… or deny it… or claim that something is offsetting it.

    ( You may be surprised how many cons I have talked to deny that C02 is a greenhouse gas when confronted with this simple argument. )

    Hey…I just realized…I missed climate gate 2.0 also.
    Was it devastating to the Man-made-global-conspiracy that has me duped ? 🙂

  53. Gravatar of Bill Ellis Bill Ellis
    3. April 2013 at 15:37

    “Billionaire pledges to “destroy” climate skeptics.”

    “Obscenely wealthy retired hedge fund manager will use strength of money in politics to environmental ends.”


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