Don Boudreaux vs. E.J. Dionne on Taxes [Hint: they're both wrong]

Dionne writes about it here.

Don responds here with:

"E.J. Dionne argues that rich Americans are “undertaxed” (“In American politics, stupidity is the name of the game,” July 29). He quotes the Congressional Budget Office to explain why: “the gaps in after-tax income between the richest 1 percent of Americans and the middle and poorest fifths of the country more than tripled between 1979 and 2007.”

Mr. Dionne’s view of “undertaxed” is odd. The IRS reports that in 2007 (the latest year for which data are available) the top 1 percent of taxpayers in the U.S. paid 40.4 percent of the total income taxes collected by Uncle Sam. This percentage is well above the 24.8 percent of the income-tax burden borne by this group in 1987, the year after the 1986 tax reform. Moreover, the top 1 percent of taxpayers now pay more federal income taxes than do the bottom 95 percent combined!*

If taxes are the price we pay for government services – rather than booty to be extracted simply because someone is unusually wealthy – then Mr. Dionne’s conclusion that rich Americans are undertaxed overtaxes credulity."

* See the Tax Foundation’s Scott Hodge. (New IRS data should be released any day now.)"

I respond to Boudreaux in the comments with:

It seems to me that both of you are looking at the wrong numbers to answer this question.

Shouldn't we be looking at the effective tax rates for each percentile, and then arguing about which makes more sense?

Dionne looks at after-tax income, which only seems relevant to me if you think of the tax code as a mechanism for egalitarianism and income redistribution. Perhaps this is one component of how we could think about taxes, but I think it takes a back seat to revenue raising. The primary purpose is revenue raising - if we want to incorporate some egalitarianism in how that gets done with a progressive tax code, that's fine. But by looking at the after tax income first, Dionne puts the cart before the horse.

Don looks at the share of revenue paid by different percentiles. But this also seems entirely meaningless to me unless you know how much each percentile earned. After all - even if we had a flat tax, you would see the share paid by the wealthiest 1% growing without any adjustment in the tax code whatsoever!!! Would the conclusion be that we should make the tax code MORE regressive in response? Obviously not.

Dionne gets the denominator right and Don gets the numerator right, but both of them on their own are wrong - and they're wrong in a way that reinforces their ideological stances.

The right questions are: (1.) what do the effective tax rates look like, (2.) what is sufficient to finance the government we want, and (3.) what is a fair way to distribute the burden.

Those three questions are acrimonious enough - we don't need to confuse issues even more by using misleading statistics the way that Dionne and Don do.

Now that I look at Dionne's actual article rather than Don's rendition of his article, I see that he does actually talk about tax rates, albeit briefly. What he still doesn't do is talk about the comparative tax rates across income percentiles. The richest of the rich pay lower tax rates than they used to. He says nothing about other percentiles, or whether middle-income tax payers have experienced a similar decline. That's the information you need for an informed opinion on this issue.

UPDATE: The data are in - you can scroll down to some comments by Bill, who provides the data, and my response which provides the analysis. I worked with the data in excel for a while and just summarized what I found. I'll write it up as a full-fledged blog post here tomorrow morning. This is the kind of productivity that can result from peer review.

UPDATE 2: Ya, scratch that - I'm not going to blog about it. You can still go see the analysis in the comment section. Here's my newly emerged concern: percentiles aren't income groups. Its easy to demonstrate that the richest 1% as a percentile increased their relative share of the burden of revenue raising over this period, with a substantial jump from the Bush tax cuts. But what does a percentile really tell you? The richest one percent could be twice as rich one year as the next. What you really need is to compare it for income levels not income percentiles. That's not in the tables I saw, so I'm not going to work at it. The fact still remains that Don Boudreaux and E.J. Dionne were both using a bad measure to make their points.