Income Taxes Are Probably Becoming More Progressive

We still don’t know what kind of “fiscal cliff deal” we’re going to get, or when we’ll get it, but I agree with those who think it will probably include an extension of the Bush tax cuts for incomes under some level. Much of the current haggling has to do with whether or not that level is $250,000 or $1 million or somewhere in between.

If this happens, it means the income tax rate will become more progressive than it already is, as higher-income folks see higher tax rates and everyone else’s stay the same. This will be difficult to reverse; can you imagine later trying to sell either a tax hike for everyone except the rich or a tax cut only for the rich?

Such an increase in progressivity would be slightly good for the deficit, and good for my current personal finances, but I’m not sure it’s sustainable policy.

The federal income tax rate is already very progressive. If you adjusted current tax rates around a $2.49 gallon of milk, the bottom 40% or so would get milk for $0 (or even less), while the top 1% would pay over $109 per gallon. Obama talks about “asking” the rich to pay a “little” more, but I’m not exactly clear where that ends; if we get rid of their Bush tax cuts, could we turn around and “ask” the rich to pay a “little” more again? If current progressive levels aren’t good enough, just how much more progressive should income tax rates be?

I suppose I could see an argument that “tax inequality” should increase because income inequality has increased; if the top X% is earning a greater percentage than before then maybe they should pay a greater percentage than before. But if you think increasing income inequality is a problem, I wonder if such reactions would only encourage that cycle rather than slow it down.

I don’t think the bottom half of America is as lazy as conservative cliches suggest, but incentives still have effects, especially at margins. How steep can you make the hill before too many at the bottom don’t feel like climbing up and too many at the top don’t feel like staying up?

Slate had a long piece the other day about the Georgia state government’s “war against the poor.” I think I was supposed to feel bad about all the welfare these people aren’t getting, but I couldn’t help but marvel at the bigger picture of how pervasive the culture of dependency has become. Unemployment insurance, food stamps, housing assistance, cell phones, etc, etc… how did people survive before all this stuff anyway?

I think you can believe there are a lot of people who need help and don’t want to take advantage of a system and still believe that such a system is unsustainable, especially if it isn’t really enabling people to stop needing help. I suspect Georgia’s collapsing welfare system has given the marginal incentives for rising above it to some with the capacity to do so, but I’m not sure there’s evidence that it’s making the citizens more prosperous overall, either (for example, Georgia’s unemployment rate of 8.5% in November still ranks #42.)

Conservatives might say that just proves too many people have become so comfortable with dependency that they don’t want to live without the system. Liberals might say that just proves we need such a system because too many people are too weak, sick, or under-privileged to ever live without it. System or no system, too many people seem to stay at the bottom. There are no easy answers, but I doubt that the steepening of the income hill would help.