Wednesday, October 22, 2014

Progressive Taxes and Inequality, Ctd.

Mike Konczal has an important follow-up to the recent Vox article (How Sweden Fights Inequality WIthout Soaking the Rich) on the relationship between progressive taxes and inequality.  Konczal argues that the Vox's definition  of “progressive” is misleading:

They are measuring how much of tax revenue comes from the top decile (or, alternatively, the concentration coefficient of tax revenue), and calling that the progressivity of taxation ("how much more (or less) of the tax burden falls on the wealthiest households"). The fact that the United States gets so much more of its tax revenue from the rich when compared to Sweden means we have a much more progressive tax policy, one of the most progressive in the world. Congratulations?

The problem is, of course, that we get so much of our tax revenue from the rich because we have one of the highest rates of inequality across peer nations. How unequal a country is will be just as much of a driver of the progressivity of taxation as the actual tax polices. In order to understand how absurd this is, even flat taxes on a very unequal income distribution will mean that taxes are “progressive” as more income will come from the top of the income distribution, just because that’s where all the money is. Yet how would that be progressive taxation?

HT: Kent Schenkel

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