How Progressive is the U.S. Federal Tax System?

There's been a lot of discussion about how progressive taxes are in the U.S. and how the progressivity of the tax code has changed over time. In particular, the Wall Street Journal editorial page, Eddie Lazear, and others have claimed that the Bush tax cuts have made U.S. taxes more progressive mainly because of changes at the top of the income distribution. Thomas Piketty and Emmanuel Saez, the leading experts on long-term trends in inequality, look at this question and conclude the opposite, that progressivity at the top of the income distribution has declined dramatically since 1960:

How Progressive is the U.S. Federal Tax System? A Historical and International Perspective, by Thomas Piketty and Emmanuel Saez, NBER WP 12404 Issued, August 2006: Abstract This paper provides estimates of federal tax rates by income groups in the United States since 1960, with special emphasis on very top income groups. We include individual and corporate income taxes, payroll taxes, and estate and gift taxes. The progressivity of the U.S. federal tax system at the top of the income distribution has declined dramatically since the 1960s. This dramatic drop in progressivity is due primarily to a drop in corporate taxes and in estate and gift taxes combined with a sharp change in the composition of top incomes away from capital income and toward labor income. The sharp drop in statutory top marginal individual income tax rates has contributed only moderately to the decline in tax progressivity. ...

In pictures, here's total federal taxes by income group in 1970 and 2004. Starting in 1960 instead does not change the picture much:

What caused this change between 1970 and 2004? Following Piketty and Saez and focusing on the top income groups (the following graphs collapse the income groups below the 90th percentile into one group), was it income taxes?:

Some, but not so much. How about payroll taxes?:

Nope, that's not it, those go the wrong way, though the overall percentage changes aren't that large. Corporate taxes perhaps?

Bingo. And how have estate taxes changed?:

That reinforces the corporate tax change. Thus, as noted in the abstract, the change in progressivity is due primarily to changes in corporate taxes with an assist from estate taxes, as well as a compositional effect not shown in these graphs.

From the conclusion to the paper, contrary to what others have said:

These large reductions in tax progressivity since the 1960s took place primarily during two periods: the Reagan presidency in the 1980s and the Bush administration in the early 2000s. The only significant increase in tax progressivity since 1960 took place in the early 1990s during the first Clinton administration.

Comments

[anne]

Yes; political policy really really really matters, though conservatives deny that when the least of a problem for them. Conservatives have been fostering increasing inequality through the last 6 years as they did through the 1980s.

[marcel]

I don't understand what I am looking at. What is the denominator in the calculation of percentage in each group? Total taxes (of whatever type is being graphed), or income of each group. Or, in the graph of corporate taxes, well I can't figure it out at all. A bit more description of each graph would be helpful.

Thanks

[spencer]

How does he allocate the corporate tax? By stock ownership or dividend income or something like that?

[anne]

Corporate tax is allocated according to share ownership as David Cay Johnston has explained. About 58% of shares were held by 1% of Americans in 2004....

[anne]

http://www.nytimes.com/2006/01/29/national/29rich.html?ex=1296190800&en=784822e4b0735ee5&ei=5090&partner=rssuserland&emc=rss

January 29, 2006

Corporate Wealth Share Rises for Top-Income Americans
By DAVID CAY JOHNSTON

New government data indicate that the concentration of corporate wealth among the highest-income Americans grew significantly in 2003, as a trend that began in 1991 accelerated in the first year that President Bush and Congress cut taxes on capital.

In 2003 the top 1 percent of households owned 57.5 percent of corporate wealth, up from 53.4 percent the year before, according to a Congressional Budget Office analysis of the latest income tax data. The top group's share of corporate wealth has grown by half since 1991, when it was 38.7 percent.

In 2003, incomes in the top 1 percent of households ranged from $237,000 to several billion dollars.

For every group below the top 1 percent, shares of corporate wealth have declined since 1991. These declines ranged from 12.7 percent for those on the 96th to 99th rungs on the income ladder to 57 percent for the poorest fifth of Americans, who made less than $16,300 and together owned 0.6 percent of corporate wealth in 2003, down from 1.4 percent in 1991.

The analysis did not measure wealth directly. It looked at taxes on capital gains, dividends, interest and rents. Income from securities owned by retirement plans and endowments was excluded, as were gains from noncorporate assets such as personal residences.

This technique for measuring wealth has long been used in standard economic studies, though critics have challenged that tradition.

Among them is Stephen J. Entin, president of the Institute for Research on the Economics of Taxation in Washington, which favors eliminating most taxes on capital and teaches that an unintended consequence of the corporate income tax is depressed wage rates. Mr. Entin said the report's approach was so flawed that the data were useless.

He said reduced tax rates on long-term capital gains may have prompted wealthy investors to sell profitable investments. That would show up in tax data as increased wealth that year, even though the increase may have built up over decades.

Long-term capital gains were taxed at 28 percent until 1997, and at 20 percent until 2003, when rates were cut to 15 percent. The top rate on dividends was cut to 15 percent from 35 percent that year....

[Mike]

Um, so what? I'm no Republican either. It still seems to me that to rely on a technical definition of progressivity is misleading. Right now we all define progressivity as when the average tax rate increases as income (or wealth or whatever other measure) increases. Does a lessening in this progressivity mean that the wealthy do not pay their fair share? Their average tax rates are certainly not lower than those with lower incomes. And their dollar contributions are much higher.

Why don't we focus more of a discussion on things that make the less fortunate better off? Sanctimonious muttering about how redistributive the tax system does nothing to improve the ability of the less fortunate to produce goods and services that we want.

[anne]

Fine, there is no inequality, no increasingly inequality. Policy is as nothing. Presto, the poor are made rich. Sort of loaves and fishes, I think. [I am never going to Confession again.]

[Mike]

We have no idea what is happening to inequality. Until you can follow the same people over time and tell me what happens to all of them I put no faith in the statistics presented by people on either side of the aisle. To allow yourself to defend a position based on shoddy stats puts you in a precarious place.

And no, the poor cannot be made rich, no matter what policies we put in place. Why do people never get it in their heads that in short time spans, things like poverty cannot be remedied. For example, I come from a low-income family, and I also possess few of the skills that would make me able to earn a high income in today's world. No matter what you do for me, I will never ever become upper-middle or high income. I even wasted thousands of dollars at college and that is not helping me get by. It's nobody's fault - perhaps you want to lay the blame at my parents' feet, but they did their best to raise 6 children. I simply have no idea what I can do to make lots of money. All I know how to do right now is work longer and harder than people around me - which allows me to get more stuff done - and hence earn a modest wage.

So, going on and on about loaves and fishes and how the people richer than me are not getting soaked enough is not going to make me smarter; it's not going to make me more alert or more creative, or more amenable to taking risks, or more confident in myself, etc.

And for gosh sakes, I truly do feel better off when my neighbor has more money - what right do I have to take it from him? When he has more money, he hires my family members to pet sit for him when he goes on vacation. When he has more money, he pays my friend to take him to the airport rather than having his wife take him. When he has extra dollars, he buys the pottery that my wife makes - and believe me he does not need any of it. When he has more money, he drives a nice Porchse and puts extensions on his house. Does that make me any worse off? Will preventing him from renovating his basement somehow improve my ability to satisfy the desires of others? Doubtful.

And as long as all of us are slaves to the data on progressivity and inequality, people less fortunate than my family will never be able to be helped by the public.

[Mark Thoma]

The figures come mainly from Table 3 in the paper. I usually assume that people interested in the finer details of the calculations will click through to the paper. But for those who don't have access:We consider four federal taxes: the individual income tax, the corporate income tax, the estate (and gift) tax, and the payroll tax financing disability, retirement, and health benefits for the elderly. Those four federal taxes represent over 90 percent of all federal taxes. The remaining federal taxes are primarily excise taxes like those on gasoline, alcohol and tobacco and various other small taxes such as stamp duties.

...

Columns 3 to 6 display the average (not the marginal) tax rate for each of the four federal taxes we are considering; that is, what share of income for that group was collected by that tax in 2004. Column (7) displays the sum of the average tax rate of all four taxes combined.

We use the TAXSIM calculator developed at the National Bureau of Economic Research (Coutts and Feenberg, 1993) to compute federal individual income taxes.

Payroll taxes are by definition paid based on wages and salaries and shared between employers and employees. This distinction is in principle irrelevant. We assume that both the employer and employee payroll tax is paid by the wage earner, so that for most employees in recent years, the federal payroll tax rate is 15.3% (and not 7.65%).

We will assume that the corporate income tax falls entirely on capital income and that all financial assets (and not only corporate stock) bear the tax equally. Auerbach (2006) summarizes the literature on the incidence of the corporate income tax and points out that there is still considerable uncertainty on the question because of the inherent difficulty in measuring empirically the economy-wide incidence of the corporate tax. Our assumption that the corporate income tax falls on capital income in general can be seen as a middle-ground assumption between two scenarios. In one scenario, the corporate income tax falls solely on shareholders. Because corporate stock ownership is more concentrated than wealth ownership in general, the corporate income tax would look more progressive under this scenario. In the other scenario, the corporate tax is shifted on to labor income, either in the form of reduced wages or increased commodity prices. Because capital income is more concentrated than labor income, the corporate income tax would look less progressive under this scenario. The increased openness of the US economy might have shifted the corporate tax more toward labor income, which would accentuate the trends we document here.

The federal estate tax is paid based on total net worth of the decedents after various exemptions such as spousal bequests and charitable donations. Only net estates larger than $1.5 million in 2004 are liable for the estate tax. ... We use IRS published tabulations reporting the number of estates and estate taxes paid by size of estate to estimate the amount of taxes paid by each fractile of decedents (relative to the total number of adult deaths). We then assume that those taxes are borne by the corresponding fractile of tax units. This basic method is valid to the extent that ranking by income is relatively close to ranking by wealth at the top of the distribution.

[anne]

Mike, anyone who can argue as you, even wrongly, has all sorts of talent. College was not wasted on you or you on it.

[Bruce Webb]

Call me uncharitable but I sense more than a whiff of rhetorical strawman coming from Mike's direction. This is particular is kind of gagging:

"When he has more money, he hires my family members to pet sit for him when he goes on vacation. When he has more money, he pays my friend to take him to the airport rather than having his wife take him. When he has extra dollars, he buys the pottery that my wife makes - and believe me he does not need any of it"

Are there really working class people who simply accept the fact that they are natural born servants for the wealthy? Particularly college educated ones?

Frankly this sounds like the kind of post that is normally signed "Former Democrat" but penned by some sophomore libertarian.

Maybe Mike is for real. In which case I suggest he reexamine the notion that rich people are rich because they are more "smart", "alert", "creative", "amenable to taking risk", and "confident" than poor people. Because that is either libertarian caricature or a serious case of self-esteem issues.

[anne]

Forgive me, I know, but remember when Jerry Seinfeld meets Keith Hernandez and has a crush on him but Keith wants Jerry to help him move and Jerry does not do moving especially after first dates and likely even third dates. Well, Kramer suggests that next Keith will ask Jerry to take him to the airport. "Not the airport." Not for Keith Hernandez, though I have a thing for Derek Jeter. The idea however that there is enough money to pay me to drive you to the airport is really a bit much. I might drive you because I want to, but you could not afford me otherwise I can assure you.

[anne]

No one who rents out a wife or husband for airport hauls is for real, and no one who thinks to rent me for airport hauls is for real. We indulge comedy, however.

[anne]

As Elaine keeps saying about Keith Hernandez to Jerry, "He's a guy, Jerry, a guy." Now, if Derek Jeter wants a ride to the airport though, I am there.

[Lord]

The corporate income tax is the largest tax loophole by far. The rich use it to shelter their income. If someone wants to simplify the tax system, lets abolish it and make corporations use the individual income tax. They would scream bloody murder.

[Lord]

I do wonder though if we should consider payroll taxes not as taxes but as benefits. Those at the low end benefit from them more than they pay.

[anne]

Oh, Mark, this is a splendid post, especially as I am reminded of Derek in the course of it :)

[Mike]

I take offense that you call me and my family a servant of the wealthy. It is my experience that smarter, more creative, more risk taking and confident people are more wealthy than I can ever imagine being.

All my college education did for me was point out how much less I seemed to know than my peers and professors - and put me in over $20,000 of debt.

Many of my friends are activists - and Mr. Webb you sound like many of them - for they tell me the same thing you are telling me.

Why must I be a pariah or a fraud or some other thing for pointing out the fact that I am not wealthy and I don't beleive it's because there hasn't been enough redistribution? This really is an age old question and I don't mean to rehash all of this stuff here. However, I do think it would worthwhile to explore why I make Mr. Webb gag.

I am a social worker in Missoula, MT - I chose to live out here because it is beautiful. If I were not willing to do lots of paperwork and spend many hours with discouraged youths I do not see that I have many skills that would earn me much more money. Sure, I might work at the Home Depot - but I am never going to open a financial services company; I am never going to open a small business (I have no idea what I could sell); I am never going to get lucky in the markets; so what other way am I supposed to feel about my lot? I have few skills that many of you possess and I am upset that there is precious little I can do to certifiably augment them.

My family and I do make a nice bit of money doing small favors for wealthier neighbors. I have a degree in history from the U. of M.

Why does my background make me a former democrat or sophomore libertarian? I claim to be neither. I thought this was a post on progressive taxation anyway? I wanted to get people's thoughts on why things like this are the focus of so much debate when it seems clear to me that there would be so many better ways to make poor people better off. Instead, I am told I make people gag and that I am an ideological hack. I think that affirms my original point. Nobody is going to take any of us seriously if we continue in this way.

Sadly,
Mike

[Mike]

Anne,

Are you and Bruce for real? I mean, you are staring right down your noses at me and my family. What do you want me to do, take a video of my existence for you?

How can you claim to want to help people less fortunate than me but then treat people the way you do.

Real classy.

[anne]

Oh well, I should not play so, but the questions here are largely what is the extent of inequality, is it increasing, if increasing then why, what might be done to lessen the increase if that is what is found and if increasingly inequality is found a problem. Having health care through work is essential in limiting inequality, but 47 million Americans, mostly adult and mostly workers, do not have health care. What then?

[Bruce Webb]

"I take offense that you call me and my family a servant of the wealthy."

Be offended. You effectively claimed that your neighbor was buying your wife's pottery because he felt sorry for her, apparently out of some sort of noblesse oblige. If you don't want to be called a servant stop acting like one. (Hope your wife doesn't read economists view, because if I were her and read that I would be seriously pissed).

"It is my experience that smarter, more creative, more risk taking and confident people are more wealthy than I can ever imagine being." This is quite a different thing from claiming that wealthy people on the whole got their money from having these traits.

You freely chose to take up a career in public service, in social work no less, in a part of the country that while beautiful is not currently an economic powerhouse. Which in my world would make you a hero but in your world seems to have convinced you that you are a talentless drudge.

Well I am sad too. Sad for you.

[anne]

Right, I was out of line and I am sorry. The reason for the focus on inequality and the causes however is that there are continual effort to deny inequality is a significant issue or policy driven if significant.

[anne]

No; there is a problem, if inequality is not important than there is no issue, if important, than where does it come from and what might be done to lessen it. Well, we could offer free or near free schooling at public universities. The question however would be can we afford this and how to afford this. We could offer catastrophic health insurance nationally. Adding to school affordability, beyond asking students to take on debt, and providing for catastrophic health care coverage, suddenly change living standards and prospects. What is the problem then?

[Mike]

"Adding to school affordability, beyond asking students to take on debt, and providing for catastrophic health care coverage, suddenly change living standards and prospects."

In my view this would only nominally help. That's the problem. It still wouldn't enable me to be as productive as others. Bruce apparently is an expert on social security. How would giving me health care enable me to perform the analysis he does over at his site? It essentially wouldn't. No think tank or policy firm or college or anyone for that matter would pay me to analyze social security for them - and that is what I am trying to say.

So, why do I then have to stick it to my neighbors?

[anne]

Offering insurance to those with no health care insurance, would allow for far more individual and family security no matter the occupation. Where is there the problem, unless the problem is we are not willing to pay for the health care of anyone others than ourselves. I have no idea what "sticking it to neighbors" might entail, however. What is the point, that health care is of no worker significance, other than for workers who already have health care? Fine, then no health care, no pensions, no minimum wage, no income tax credits, no progression in tax rates....

[Bruce Webb]

"When he has extra dollars, he buys the pottery that my wife makes - and believe me he does not need any of it."

Mike re-read that sentence. In fact re-read the whole comment. You offer no detail about where you are located or what you do. For all I knew you could have been anywhere. Then you spring the "I am a social worker in Missoula thing".

Frankly that is an old troll trick. Start with a generality, then introduce the specifics that allow you to be poor put on Mike the Social Worker. How dare we elites pick on a guy in the heartland. Dude for all I knew you could have been posting from next door.

Maybe you can't open a financial services company. Well neither can I. I dropped out of graduate school with those same loans you had but at the age of 36. A year and a bankruptcy later I started as an entry-level clerk with the County. Two years later I was able to move up quite a bit to the Planning Department where I spent the next ten years developing skills in property. And guess what I just took a job as the Property Development Specialist for a financial services company. And I expect to do rather well here.

Bankrupt at 37, but still owing $13,000 in student loans. Personal debt free with substantial equity at 50. From pretty much the same starting point as you. How did I do it? Well not from whining:

"No matter what you do for me, I will never ever become upper-middle or high income. I even wasted thousands of dollars at college and that is not helping me get by. It's nobody's fault..."

Dude if you were 58 and just laid off from GM with no education you might have a point. But near as I can see (since you are still carrying student loans) you are young or youngish and college educated and have access to the internet. Try learning something and working hard, the dollars will follow - if you let them.

You po'mouth yourself and then get insulted? If you don't want ridicule, don't invite it. Because this is pretty weak:

"And for gosh sakes, I truly do feel better off when my neighbor has more money"

Don't forget to tug your forelock when the squire drives by.

[Ken Houghton]

Mark - Keep in mind when you link to an NBER paper (especially) that many of us do not have NBER access.

As Tom noted a bit ago, is there another copy available from, say, Saez's working papers? Like, say, the first one under "Empirical Tax Studies" which includes spreadsheets as well?

[anne]

If, by the way, the idea is be a financial analyst or accountant, then go to school again, but how nice going to school again would be if the cost was minimal. If being a public employee is pleasing, then be a public employee and hopefully have a union strong enough to assure employees fair wages and benefits. Fortunately, public employees generally have better wages, benefits and protections than comparable private employees.

[anne]

Bruce, you are always fair even when you are annoyed. No matter, be annoyed. I think your argument was fair and helpful, though in an annoyed sort of way.

Also, about being unable to learn what everyone else seems to learn, I have all sorts of trouble with pdf format documents and I have been shown how not to have such trouble. So, I had reference print the paper for me as usual and possibly I will learn how not to be afraid of pdf in time.

[anne]

No; these pdf papers are just not friendly enough on-line. This is a real Internet format complaint for me.

[Mike]

Queen Anne and Count Bruce

Through hard work and perseverance I hope to someday have the opportunity to suckle at the bosom of your awesome knowledge. May that milk provide me with some of your wit, charm and tact as well.

It's been a pleasure being demeaned and criticized by you both.

I still, however, have yet to see a reasonable explanation as to why the progressivity of the tax system affects people like me. Why are we all obsessing on that?

[Mark Thoma]

Ken - yes I generally try and link to a version on the author's web page and almost always do. For some reason, probably time - don't recall - I didn't do that this time.

What I did was to open the pdf in Adobe Professional. You can then highlight the table, right click, and choose download as a table to Excel. From there, the graphs were easy to construct.

NBER papers should be free.

Here's an open link to the paper.

[anne]

Perfect, finally I was able to copy the paper directly to email. Thanks, this link was simple and fast.

[cm]

Mike: In every functioning society, those with more resources have always been expected to pitch in more. "Noblesse oblige" is not quite unrelated to that, while not precisely the same thing. The problem in much of the world, and perhaps more so in the US, is that a large part of taxes is put towards purposes questionable or generally not to the benefit of the general public, i.e. too much of the "pitching in more", if at all, goes to frivolous military ventures and corporate welfare. People like you describe are not sticking it to their neighbors. The special-interest waste of public resources sticks it to everybody who is a net payer, and perhaps even many net receivers.

[anne]

"I still, however, have yet to see a reasonable explanation as to why the progressivity of the tax system affects people like me."

Taxes allow the government to do stuff, from insuring a defense to providing a public education. The question is what is fair as a tax system in allowing us to do stuff even for people like you. Of course, you might prefer a system in which you ask your wealthy neighbors to provide health insurance in change for rides to the airport. Ask nicely so as not to impose, but as a social worker, what a social worker, funded by taxes you are of course already imposing if your neighbors pay taxes. However, you are playing and I took a while to learn the game. Phooey.

[Mike]

Anne,

You continue to dodge the question. CM thank you for a reasoned response.

yes, it is expected that the rich "pitch in more" but Anne has not even addressed the fact that the rich already do pitch in more.

And if the goal of government is to have taxes fund things that are in the public interest, I don't see how focusing on how progessive the tax system is, is the right way to do this. Again, CM makes a nice point. Taxing the wealthy even more will probably give them more political clout, it will strengthen and embolden their interest groups and if it raises more revenue will allow even more money to go to the corporations that pay the higher taxes and into the things you demeaning above.

So keep thinking I am playing a game when I am trying to be serious. Your contempt for reasonable discourse makes you no better than those you lift your nose at.

Again, thank you CM for engaging me.

[reason]

Mike,
I'm sorry but it seems to me you started the snark.

And it is an interesting issue to look at just how progressive the system is (and was) in order to see how fair it is. If more good things need to be done (or paid for at last) and the rich are getting a better deal than the middle class, well maybe marginal tax increases could be fairly directed to them. If they really are being soaked, then sorry you cop some more.

[cm]

Mike: The original presentation focuses only on part of the tax picture. One theme that is not much discussed is that much of the progressivity is in "earned" income. In practice there are many loopholes for financial (e.g. capital gains) and corporate activities, which are more available to larger players/earners because certain advantaged activities have overhead costs and only make sense at a certain scale. When you make a good salary you are asked to pay up, but few of the truly rich are rich from that.

Also compare the old adage "the first million is always the hardest".

And note, we are talking about *legal* maneuvers, not cheating.

[anne]

Then, tax the wealthy less and they will have less influence and all will be well because the wealthy are so generous anyway and pitch in more than, well, more than.... With a regressive tax system the influence of the wealthy should be reduced to zero in no time. Play on.

[Mike]

CM makes an excellent point.

So close all the loopholes. Eliminate the current tax system and replace it with something simpler. And restructure the payroll tax system. I pay 15.3% just like everyone else in payroll taxes. And it cuts off at $100,000. The payroll tax burden is probably a much larger share of the overall tax burden for people making under $xx,000 - so where is all of the discussion about how to undo this injustice?

Simply increasing marginal tax rates on the rich will not remedy these injustices.

And Anne, you really impress me with how little respect you have for your fellow humans. Rich people are greedy and they run the world and they don't share like you want them to. And taxing them more under the current system is going to change any of that? Dream on. There are a million and one solid ideas that could reduce the perverse nature of avarice and selfishness in some of our fellow citizens that makes you so unhappy - but you seem unwilling to explore any of them.

You want to eliminate the influence of the wealthy in politics? Why not advocate election lotteries and term limit all elected officials? Why not advocate an expansion in the number of congressional seats? Why not advocate abolishing politically established borders? And so on.

What gives?

[anne]

Well, possibly I am being too dismissive. The payroll tax is flat till the salary cap is reached, then only the 2.9% portion for Medicare is taxed, so the payroll tax is flat to regressive. Removing the cap, would make the tax flat. Using the additional revenue from removing the cap to fund Medicare however would be an attractive possibility for me, especially if there are pressures to moderate health care cost increases. There you have suggested a meaningful change in tax structure that would be gently redistributive.

[anne]

Here though we are talking about tax structure fairness again, and tells me such a discussion is interesting and important. By the way, late study tells us that actually wealthy and the wealthiest of individuals are relatively less and not more generous than middle class individuals.

[anne]

http://delong.typepad.com/sdj/2006/09/the_stakes_in_t.html

September 15, 2006

Matthew Yglesias:

"What we should be debating is why technological and economic progress has done so little for most Americans, and what changes in government policies would spread the benefits of progress more widely. An effort to shore up middle-class health insurance, paid for by a rollback of recent tax cuts for the wealthiest Americans -- something like the plan proposed by John Kerry two years ago, but more ambitious -- would be a good place to start."

[anne]

Tax structure can really make a difference, but if 47 million Americans with no health insurance do not matter then tax structure is of no account. There is a choice to be made.

[Movie Guy]

anne - Matthew Yglesias:

"What we should be debating is why technological and economic progress has done so little for most Americans, and what changes in government policies would spread the benefits of progress more widely. An effort to shore up middle-class health insurance, paid for by a rollback of recent tax cuts for the wealthiest Americans -- something like the plan proposed by John Kerry two years ago, but more ambitious -- would be a good place to start."

anne,

You are attributing the above quote to the wrong party. Matt was quoting another individual.

[anne]

Good grief; that was Matthew Yglesias quoting Paul Krugman of course. Thank you for the correction, I evidently have stopped thinking.

[dryfly]

There is another side of progressivity that needs consideration - the political. One thing progressive taxes do is 'redistribute wealth'. Truncate the top a bite at a time.

If done well the redistribution goes to the lower income segments in ways that actually benefit them & society as a whole... education, health care, infrastructure like potable water, rural electricity, public works and such.

If done poorly redistribution ends up in the bureaucracy - wages for shuffling paper & greasing palms.

But in both cases a progressive tax code clips the ability of the wealthiest to use ALL of their great and often growing wealth to build political fortresses entrenching themselves even further... preserving their wealth generation after generation and excluding others.

And entrenchment & fortification are major concerns to the seriously wealthy. The one thing entrenched oligarchs fear more than government & taxation are entrepreneurial insurgents attacking their market positions. That is the one force that really can eat their lunch.

Progressive tax codes generally favor the insurgents... especially those with generous depreciation allowances... because few start-ups generate a lot of income (so pay little tax) and if they do generate 'income' much of it has to be reinvested (and then depreciated) to sustain the growth.

The established families & their interests are pretty much cash cows - little depreciation & quite a lot of income. In a progressive tax code environment it gets pretty hard to live like kings - generation after generation - and only clip coupons. At some point they actually have to work again to rebuild the wealth.

Easier to buy gov't and have it clear away hurdles for the wealthy so they stay wealthy and set up additional hurdles for the insurgents to have to clear so they don't easily threaten.

I've often criticized the Bush tax cuts as not being 'pro-growth' at all but rather being a 'wealth preservation' act. I'm a small businessman & entrepreneur and there was NOTHING in those cuts spurring me to do more, work harder, or invest. Believe me - I've worked the numbers - nothing there.

But under the Bush cuts if I already had a lot of money and received interest on it, I would have paid less taxes than before Bush, whether I invested more of it or not. How that helps society I don't know.

There are ways to give tax incentives for people to take chances - eliminating progressivity isn't one of them. progressivity coupled with aggressive depreciation provides both a 'carrot' and a 'stick'. You need both.