Wednesday, March 23, 2011

The Problem With Using "Decile" Divisions

Scott Hodge, both in his Senate testimony and in his followup blog post, argues that America's "top decile" (that is, top 10%) pays an uneven amount of the tax burden compared to the decile income. That is, if you take the share of taxes of the richest decile and divide it by the share of income of the richest decile, you end up with "1.35," which means that decile is paying "more than their fair share."
He then compares our top decile to the top decile in other countries to show how America's rich have a heavy burden compared to other countries.

Several problems:
1. The first is that these data provide a snapshot, not a moving picture. Since 1942 (and especially since 1982), the income share of the top decile has been climbing, and climbing fast. The first page of this pdf illustrates what I mean, and that data only is good through 1998. The last ten years have been even more profitable for the top decile (see chart "Winners Take All").

2. How does comparing the U.S. top decile to the top decile of Luxembourg prove anything? By my quick calculation, 15 of the countries listed in Hodge's chart have a total population that is lower than the population of America's top decile. What can one learn from Luxembourg's economy and tax system, when the top 10% of their population would barely fill the town of Salina, KS? While I do see Mr. Hodge's point; other "freemarket" economies have less tax burden on the top decile...I don't see how you can compare mice to elephants. Further, his chart shows a wide range of ratios, with an average of 1.11. If the chart showed 23 countries with ratios of 0.95-1.05 and the U.S. as a wild outlier at 1.35, I would see his point. But there is that range. And Mr. Hodge makes only a single sentence mention that the "U.S. top decile income share" is the third highest on the chart! Certainly, he can show that we put a tax burden on our rich here in America...but he has also shown that we also reward them handsomely. It becomes a classic chicken vs. egg question here: which came first...America's super-rich or America's tax structure?

3. Not his fault (it isn't in the scope of his article), but Hodge does not expound on the social and economic ramifications of America's tax system as is. Pages 2-4 of the previously mentioned pdf as well as that Mother Jones chart make an important point: "the top decile" doesn't paint the whole picture. Really, it's too broad a stroke to discuss both the income distribution in America as well as her tax structure. Both sources point to the surge in wealth of the top 1% in this country.

4. The data presented by Hodge does not take unemployment rates into consideration, or if it does that adjustment and ramification is hidden and not mentioned. Unemployed don't pay a significant amount of tax. In fact the unemployed (that collect benefits) are really being negatively taxed, since their unemployment income comes from previously collected tax dollars. Unemployment is grossly skewed towards deciles 6-10. And when I say grossly skewed, I mean it. This chart points to the unemployment rates across the ten deciles in America, and please note that the bottom two deciles are above 25% as of this writing, while the top decile is steady at about 1.6%. The disproportion of income tax paid makes more sense, given this context.

I think too many people have this idea that the tax burden put on the wealthy in this country is viewed by the poor as a righteous vindication. I think many in the middle class think high taxes for their (imagined) rich future selves is a punishment imposed by liberals for their having climbed the social ladder. I for one wish we didn't have to pay taxes at all, honestly. I certainly don't like spending 81 million tax dollars in one day on cruise missiles, or burning up 424 million tax dollars in the atmosphere. But the need to maintain, nay, increase the tax rate in this country is a CONSEQUENCE of our actions in the last decade. The current economic climate, like it or not, was almost entirely caused by the actions of the top decile. Letting them shoulder an "unfair portion" of the tax burden as we dig ourselves out of this recession is not a punishment, it is a moral imperative.


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1 comment:

Benjamin Dueholm said...

Also, it's just a dishonest and meaningless statistic. The calculation only includes income taxes, which are structured progressively at the federal level. Factor in our regressive forms of taxation--sales, payroll, and property--and our top decile is back in the middle of the pack in terms of their tax burden.

It's a good rule of thumb that whenever a movement conservative talks about 'taxes' he's talking about 'income taxes,' and you need to check the footnotes. The taxes that poor people pay don't count in their eyes.