Progressive Impact of Services Matters More Than Progressive Taxes

I prefer progressive taxation as much as the next liberal, but one thing I think is really dangerous to the progressive agenda over the long term is the idea, embraced by Obama and most Washington Democrats, that nobody making less than $250K should ever pay higher taxes.

If you look at how European countries do wealth redistribution, you’ll see that their tax systems are not so progressive, and in many cases are straight up regressive. The progressive transfer is all about the services.

Dylan Matthews explains how it works:

What’s going on here? Basically, all of the progressivity of our fellow developed nations’ welfare states comes on the spending side. They spend a whole lot more on transfer programs, education and health services, and other initiatives that are redistributive in impact. We, by contrast, tax progressively, and then spread the money around in a less progressive fashion.

This isn’t an accident. UC Davis’s Peter Lindert has argued in his book “Growing Public” that European social democracies were only able to develop the programs they did because they used efficient consumption taxes that didn’t lower growth as much as progressive income taxes, particularly those on capital income. European countries needed tax systems that could raise a lot of money without hurting growth, and only regressive consumption taxes fit the bill.

But in addition to troublesome growth effects, taxes on capital income and savings tend to produce taxpayer backlashes. Monica Prasad, who co-produced the above charts, has argued that countries like the United States with progressive tax codes saw a strong conservative reaction against high taxes and welfare policies, with the net effect being that the redistributive agenda lost ground. In any case, Prasad and Deng found that when the progressivity of countries’ tax codes is negatively correlated with the amount of redistribution they do. In English: The less progressive the code, the more progressive the system.

The position that nobody making less than 250K should pay higher taxes is itself a kind of anti-tax position. You’re basically conceding to the Grover Norquists of the world that taxes are a bad thing, something to be avoided, except that instead of being for reducing revenues like Norquist, you’re trying to spare as many people as possible from paying for public services. Some Democrats go even further and want to block tax hikes on anybody making less than $1 million.

The more sustainable progressive position – the one that can eventually get us all the good stuff like universal pre-K, equal spending per student, universal child-care and paid sick leave – is that all income groups should pay higher taxes than they historically have in the US, and then we should redistribute the revenue as generous public services and transfers to low earners.