Cue the Noisemakers!

Cue the noisemakers! Greg Mankiw writes:

Greg Mankiw's Blog: Framing and Progressivity: ...today's CEA op-ed... will likely generate a blogosphere debate with the most heat and least light" as a result of this sentence "The president's tax cuts have made the tax code more progressive."

And Greg then cues the first wave of noisemakers:

The basic problem is that there is no single way to gauge changes in progressivity.... Consider a simple example.... A rich guy earns $200,000. A poor guy earns $20,000. At first, the rich guy pays $50,000 in taxes, and the poor guy pays $1,000. Then a new President takes office and cuts the rich guy's taxes to $48,000 and the poor guy's taxes to $800. Who is getting the better deal?

• You could say the rich guy gets the better deal: The rich guy gets an extra $2000 in take-home pay, while the poor guy gets only $200. After the tax cut, the difference in take-home pay between the two guys is larger.
• You could say the deal is evenly balanced: Everyone gets to keep an extra 1 percent of his income.
• You could say the poor guy gets the better deal: The poor guy gets a 20 percent tax cut, while the rich guy gets only a 4 percent tax cut. After the tax cut, the rich guy pays a larger share of the total tax burden.

It is impossible to say on purely economic grounds which of these perspectives is better. All of these statements are mathematically correct, even if they leave the reader with a very different impression. If you are a politician or a journalist trying to argue that this tax cut is good for the rich, good for the poor, or somewhere in between, you can do it!

The first problem with Greg's post--the first reason that Greg is generating more heat than light--is that Lazear and Baicker's op-ed doesn't say "the tax code is more progressive, even though the differences taxes generate in after-tax take-home pay have grown." What Lazear and Baicker say is "The president's tax cuts have made the tax code more progressive, which also narrows the difference in take-home earnings." They claim--a claim that I think is simply false--that the Bush tax cuts are progressive no matter what definition of progressivity you adopt.

The second problem is deeper. Let me try an analogy. I, full professor Brad DeLong, am having lunch with lecturer Dariush Zahedi today. After lunch, I presume Dariush will say we should split the bill--$10 each. Suppose I say: "That isn't fair. Berkeley pays you less (a lot less: what we do to our lecturers is shameful) than it pays me. I should lay out more cash for this lunch. How about this: I put down $5 cash, you put down $0, and we put the balance on your credit card. That would be fairer, wouldn't it?"

Dariush would then be an unhappy camper. He would think--correctly--that I was mocking him.

Back in 2000 the U.S. government was running a surplus of some $200 billion a year--a broadly appropriate fiscal policy, given the state of the business cycle and the looming health care costs dilemma. Today we're running a deficit of $300-$400 billion a year. Relative to what would be a sane, reality-based, and appropriate fiscal policy, the Bushies are putting $500-$600 billion this year on our collective national credit card. That bill will come due: somebody has to pay it. To pretend that it won't--to pretend that you can talk about the progressivity of the burden of paying for the federal government without talking about the long-run incidence of the national debt--well, that would be the equivalent of me telling Dariush that only cash matters: that when we talk about who paid for lunch, we should count only cash put down now, and we shouldn't count the fact that his credit card bill will show an extra $15 due next month.

As I said: more heat than light.

That's too bad. One can debate the appropriate stance of somebody in the government working as part of a team for policies some of which he or she approves of and some of which he or she doesn't. But we all agree that the first role of an academic is to generate more light than heat: to, whatever else he or she does, raise the level of the debate.

Comments

[Barry]

Thanks, Brad!

I had seen your previous softening towards Greg as a sign of corruption (insiders favoring each other, no matter what). It's good to see that I was wrong.

[save_the_rustbelt]

Pay for lunch - and the tip.

Let's see how well Mankiw's economic advice (first term Bush administration) stacks up:

A very tepid jobs recovery after a very mild recession.

The jobs being created are of relatively low quality.

A massive mountain of debt.

No entitlement reform.

Record foreclosures and personal bankruptcies (2002 - 2005).

Flat real wages for most Americans.

Skyrocketing energy prices.

.......but the Chinese economy is going gangbusters.

Would you buy used economic advice from this man?

[Bernard Yomtov]

If Mankiw is correct that the statement is meaningless then perhaps Lazear and Baicker shouldn't have made it, and perhaps it should be criticized on that ground. Trying to assign a meaning and then arguing that it is a false statement is falling into a trap, it seems to me.

[maryLou]

Sounds like the bloom is off the Mankiw rose. No more celebration of the wise man's newfound freedom to speak truth?

[maryLou]

Sounds like the bloom is off the Mankiw rose. No more celebration of the wise man's newfound freedom to speak truth?

[Brandon Berg]

The lunch analogy is rubbish. First, the division is closer to $17 cash and $3 credit than $5/$15. And the balance goes mostly on your credit card, not his, because the debt will be paid off from income tax revenues, which come overwhelmingly from high income earners.

Unless you're arguing that most poor people will eventually become rich?

[knzn]

I agree that the debt issue is more important than the progressivity of current taxes. But you seem to be assuming implicitly that the debt incidence is regressive. Given that projected growth rates (about 3% = 2% productivity growth + 1% population growth) exceed the long-term interest rates paid on government debt (e.g. 2.4% on 30yr TIPS), I would suggest that, as a first approximation, the debt incidence is progressive. Future generations – who pay the debt – will be richer than the current generation.

[Alan]

Is it soo hard to understand that the poor guy gets MUCH more benefit from government services than the rich guy.

This is the cornerstone of conservative thinking: that the poor guy does not deserve the benefits of government paid for by the rich. At best, they should get the benefits proportional to what they pay in. Anything more than that is "wealth redistribution" and should be shunned because it is an economic dis-incentive.

Agree with that or not, but there is no other conclusion that a tax policy that gives the poor guy $200 in exchange for losing $48,000 in government funding is to the disadvantage of the poor guy.

[foo]

Shorter Brandon Berg:

Don't listen to Brad, the tax code is set so the current rich will stay rich and live forever.

[JimW]

In public finance literature, the definition of progressive taxation is that a change in taxation is progressive if it reduces the inequality in after-tax incomes. Before tax policy became so politicized, Treasury and congressional staff routinely published data on the impact of proposed tax policy changes on the distribution of after-tax income, so that the public could evaluate the progressivity or lack thereof of proposed changes. Those data are no longer published by the government, although they are available from other sources (Brookings, etc,).

In Mankiw's example, the proposed change is clearly regressive. The higher-income taxpayer experiences a 2/150 = 1.3333% increase in after-tax income. The lower-income taxpayer experiences a 0.2/19 = 1.05263% increase in after-tax income.

[Something Polish]

It is impossible to say on purely economic grounds which of these perspectives is better.

It depends. Is Diminishing Marginal Returns of dough an Economic Concept?

[Arun Garg]

A major problem with both the Mankiw post is that if fails to consider all the taxes (in particular the Social Security tax). If that is taken into account, I don't understand how Mankiw's numbers could possibly work (the share of total taxes cut by Bush on a poorer person would be smaller in all three scenarios).

[howard]

thank you, JimW, for beating me to the punch. Exactly - i don't think the question of what constitutes "progressivity" in taxes is all that complex.

and the bush tax cuts have increased the after-tax share of the income pie to the uppper .1% of households by income, meaning, by definition, everyone else's share has fallen.

[James Wimberley]

Can you really get a decent, Brad-sized lunch for only $10 a head in San Francisco?

[Pancho Villa]

Huh!Got the kind of feeling that Brad is terribly angry...

[Jacob]

Hi Brad,
I always read your blog with interest.
But your
“Immigration Is a Good Thing
is wrong.

1. Diverse controllable immigration is a Very Good Thing.
2. Immigration of only or mostly uneducated workers is a Not such a Good Thing.
3. Illegal uncontrollable Immigration of uneducated workers is a Very Bad Thing
4. Illegal uncontrollable Immigration of uneducated workers from a single country is a Disaster in a Making.

It’s a country where a middle class is shrinking, where the gap between rich and poor grow bigger and faster and where poor are mostly Mexican while rich are Indians, Chinese and some Whites.
If you need any prove, just stop blogging and check out student body of Economics department at Berkeley. Don’t even go to EE department at Berkeley. Moreover, if you want to know the trend, please read:

http://www.mercurynews.com/mld/mercurynews/living/education/14535127.htm

Sanchez has failed the math portion of the exam twice and was scheduled to take it again Wednesday. He said the exit exam isn't fair.
``We try to get good grades and we work really hard. And then they come up with another exam to pass.''

and
http://select.nytimes.com/2006/05/14/opinion/14kristof.html?hp

Why are Asian-Americans so good at school? Or, to put it another way, why is Xuan-Trang Ho so perfect?