Sunday, 22 January 2012

Percentages and inequality: graph of the week

I will finish the discussion over inequality with the graph I picked up from Greg Mankiw (it’s not intellectual property theft if I cite my sources, right?):




The graph shows that the US clearly has a progressive tax system, accounting for all federal taxes, not just income taxes, meaning that the burden on the rich is much higher than what some are trying to claim. In fact, during last week, there has been an interesting quarrel in the blogosphere that started with Paul Krugman writing a post on low taxes paid by the rich, using a left wing think tank as his source. However, the graph as well as the entire report, failed to include corporate taxes which put a disproportionaly higher burden on the rich, thereby biasing the conclusions. 

The mistake was quickly noticed among economists resulting with Krugman admitting his mistake, but still taking a hit on his critics. There’s a good summary of the whole quarrel by Steve Landsburg.


On a different note (back to inequality), here’s an article by Niall Ferguson from earlier this week. He praises the book “Coming Apart” by Charles Murray from the AEI, and presents with one of its passages the conservative solution to the inequality problem:
"As Murray shows, there is a conservative solution to the problem of inequality. Scrap the failing welfare programs of the ’30s and ’60s before they bankrupt America. Ensure that everyone has a basic income. Then simplify the tax code to restore the incentives that used to exist for everyone to work hard. Finally, end the state monopolies in public education to launch a new era of school choice and competition."
In short, opt for a flat income tax, with a higher tax-free allowance to fight poverty. Then restore the system of meritocracy by reforming education and may I add ending the welfare state and political cronyism. Easier said than done...  

2 comments:

  1. It would be interesting to progress this back all the way to the 1950's when there was a much higher upper marginal rate.

    My guess is that with the higher rates, the total tax paid by the top 1% was lower. Meaning that to increase progressivity you gain more by lowering rates. (naturally at some point there would be diminishing returns.)

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    1. that's true, as is predicted by the Laffer curve - the higher the tax rate, the more evasion, especially among the rich.

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