Recent Tax and Income Trends among High-Income Taxpayers

Edward Lazear and Katherine Baicker say:

WSJ.com - America at Work: The president's tax cuts have made the tax code more progressive, which also narrows the difference in take-home earnings.

Last month, Joel Friedman, Isaac Shapiro, and Robert Greenstein said:

Recent Tax and Income Trends among High-Income Taxpayers, 4/10/06:

• High-income households will experience a larger increase in after-tax income as a result of the tax cuts than any other income group. The average after-tax income of the top one percent of households will grow by 5 percent in 2006 as a result of the tax cuts, twice the percentage increase in after-tax income that will be experienced by the 20 percent of households in the middle of the income spectrum. Tax filers with incomes of more than $1 million will see their after-tax income grow even more, by 5.7 percent, as a result of the tax cuts. The tax cuts thus have made the distribution of after-tax income more unequal.

• Not surprisingly, high-income households are receiving the largest dollar tax cuts, by far, of any group. Those in the top one percent of the income spectrum will receive an average tax cut of $39,000 in 2006, or 52 times as much as households in the middle of the income spectrum. Those with incomes of over $1 million will receive an average tax cut of more than $111,000, or nearly 150 times the average tax cut that middle-income households will receive.

Friedman, Shapiro, and Greenstein are right. Lazear and Baicker are wrong. You can redefine "progressive" in such a way that there are tax cuts which increase after-tax income differentials that are "progressive"--the same way that when Alfred Kahn was working for Carter he redefined "banana" to mean "recession." But you cannot argu

e that the president's tax cuts have narrowed after-tax earnings differentials. No way. No how.

Comments

[save_the_rustbelt]

Can economists be sued for malpractice?

[elliottg]

No, but you should call them hacks when they are hacks. Professor DeLong looks like he is one step closer to doing that instead of the civil, unshrill, "I disagree".

[robert waldmann]

What is it that makes smart economists with excellent professional reputations spout such nonsense when they become Chairmen of Bush's CEA ? Lazear and Baiker's nonsense isn't going to convince anyone. Why is Lazear willing to sacrifice his reputation for nothing ? I'm really honestly shocked.

[RedCharlie]

This is an unrelated question, but I'm posting it here as it fits under two of the same tags as this post 1) economics and 2) why can't we have better press corp?

Why do I constantly hear that China is "manipulating" their currency? To say that China is manipulating their currency is like saying that you manipulate your car to keep it on the right side of the road. Not technically untrue, but very misleading, no?

Please correct me if I'm wrong (that's why I'm posting here), but China has committed themselves to a fixed exchange rate with the dollar for a long time (decades?) So just like one controls one's vehicle (not merely manipulating it) China controls the exchage rate of the yuan with the dollar. To call it "manipulation" is to spin it as something furtive and illicit. China's actual policy, however, is quite open, quite established, and not qualitatively different from, say, Mexico, Argentina, Thailand, or Hong Kong pegging (or trying to peg) their currencies to the dollar, right?

In fact, aren't some of those who call it "manipulation" the same as those who are normally very happy with fixed exchange rates (even when it leads to crises that leave the middle class starving in places like Argentina)?

The problem with pegging your currency is having a negative current account that bleeds you dry of the foreign reserves necessary to back up the peg, no? But if you can sustain a positive current account, then you can not only maintain the necessary foreign reserves(i.e. dollars), but have a surplus of dollars (like China does at present, and Hong Kong as well, when there was an attempted run on its currency in the 90's).

So, you can't back up a peg if you don't have the dollars (as eventually there will be a run on your currency), but what is to stop a country from accumulating a surplus? The black market will put some pressure on the peg to rise, but that pressure will be more limited for a totalitarian state like China. 8 yuan for the dollar is a great deal, but to get that deal you have to go thru official channels. You can use the black market, but you don't get such a great deal, and if you use that channel too much, you may find yourself suddenly out of business (or worse).

So isn't this sort of a speculator's nightmare, an infinitely stable exchange rate? (Well, stable as long as China maintains the necessary internal discipline...)

[anne]

Actually we encouraged China and other countries to link currencies to the dollar and continaully encouraged keeping the links in Latin America even when foreign devaluation was needed. We are essenially asking China to increase the value of the Yuan, as a method of lowering the trade deficit we used 20 years ago. But, with domestic economic policy that successfully encourages growth there should be no reason for us to push harder for a higher value for the Yuan. We are be helped by lower long term interest rates as China buys our bonds, while China is building a middle class with competitive exports as a driver.

[Zephyr]

Why is anyone surprised that tax cuts benefit those who pay the most taxes more than those who pay the least?

[anne]

The surprise is that Republicans are actually turning the tax system from progressive to proportional to regressive. So, middle income households are paying a higher percentage in taxes than the wealthiest households. That Republicans have gone so far surprises me, though I suppose it should not have.

[anne]

http://www.nytimes.com/2006/04/16/us/16tax.html?ex=1302840000&en=4d5075b1ed4fe103&ei=5090&partner=rssuserland&emc=rss

April 16, 2006

With Tax Break Expired, Middle Class Faces a Greater Burden for 2006
By DAVID CAY JOHNSTON

As millions of Americans rush to meet the Monday deadline for reporting how much tax they owe on last year's income, a stealth tax increase has begun eating into the 2006 income of nearly 19 million households.

Unless Congress takes action, one in four families with children — up from one in 22 last year — will owe up to $3,640 in additional federal income tax come next April.

Few of them realize that their taxes have increased, because Congress has not voted to raise taxes. Instead, Congress let a tax break expire. That break limited the alternative minimum tax, which takes back part of the tax cuts sponsored by President Bush.

Mr. Bush has asked Congress to temporarily restore the tax break, known as the A.M.T. patch. He has also asked Congress to extend another break that lowered the tax rate on most investment income to 15 percent.

Leading Republicans and Democrats agree that there is simply not enough money to do both. Congress was unable to reach an agreement on tax breaks before adjourning for vacation earlier this month.

The expiration of the A.M.T. patch and the tax break for investment income almost balance each other out this year, according to the Tax Policy Center, a nonprofit organization whose computer model of the tax system has been deemed reasonable and reliable by the Bush administration. The impact will be felt primarily among taxpayers of two different income levels.

The A.M.T. will cost Americans who earn $50,000 to $200,000 nearly $13 billion more next April. That is about how much people who earn more than $1 million will save because of the break on investment income like dividends and capital gains....