A Tax Taxonomy

(Photo: Hemera)

Dan Hamermesh’s much-discussed post about taxing capital gains brought to mind my own taxonomy of taxes, so to speak, from least to most progressive:

  1. Poll tax. Everyone pays the same amount. What could be fairer than this?!
    England tried it in the late 14th century, leading in 1381 to Wat Tyler‘s Rebellion. Six hundred years later, England tried it again, leading to the Poll Tax Riots.

  2. Sales tax. Goods are taxed at a flat rate (often 17 to 20 percent in Europe, and 5 to 8 percent in various American jurisdictions). Because the wealthy spend a smaller fraction of their income on taxable goods than do the poor, this tax is less progressive than a flat income tax.

  3. Flat income tax. Everyone pays the same fraction of his or her income. This tax was the core of Steve Forbes’s platform when he ran for president in 1996 and 2000.

  4. Progressive income tax. The usual system today: Higher incomes are taxed at a higher marginal rate. In the U.S., doubts about its constitutionality were settled by the Sixteenth Amendment to the Constitution.

  5. Flat wealth tax. Wealth (net worth) is taxed at a fixed rate. If income is the flow into net worth, then wealth is its accumulation, so inequalities in income produce significantly larger inequalities in wealth. Thus, a wealth tax is more progressive than an income tax (and a flat wealth tax is probably more progressive than most progressive income taxes).

  6. Progressive wealth tax. Larger wealth holdings are taxed at a higher rate. Switzerland and France use a progressive wealth tax as part of their tax codes. This link analyzes, with lots of data, the effect of a Swiss-style progressive wealth tax (the data are from the 1980s and 1990s, so all the dollar amounts seem low to us today).

This taxonomy helps me decide how angry to be at various public costs. Even if your sense of justice differs greatly from mine, the taxonomy still can help you decide where to aim your political fire.

Here are examples:

  • Social Security taxes. It’s a flat income tax until an annual income of $110,100 (in 2012), with a rate of 12.4 percent (including the employee and employer contributions). Above $110,1000 the marginal rate is zero. Thus, it’s an anti-progressive income tax, falling on the taxonomy between a flat income tax and a poll tax — perhaps like a sales tax.

  • Insurance premiums in the American healthcare system. As a zeroth approximation, everyone pays the same amount, with different employers paying different fractions of the total of about $7000 per year per person. There are corrections to this model (individual coverage is extremely expensive, on the one hand; on the other hand, some states offer low-cost plans to residents without employer coverage), but overall it’s a poll tax. When is Wat Tyler’s rebellion coming to the American medical system?

  • Tobin tax. It’s a sales tax on financial transactions, so, assuming that financial transactions grow in proportion to wealth, it’s akin to a flat wealth tax.

  • Estate taxes in the U.S. The first $5 million is taxed at 0 percent, and amounts above this threshold are taxed at 35 percent (but these provisions change almost yearly). So it’s a progressive wealth tax.

  • Subway/bus fares. Fares are roughly the same for almost everyone, although seniors and children often pay less. So the fares are a poll tax or worse (my moral valuations are showing!): The very rich travel by limousine, helicopter, and Lear jet, not by public transport.

  • Private college tuition in the United States. It’s an expensive poll tax, mitigated somewhat by financial grant aid (I don’t count loans). However, not all educational institutions use this poll-tax model.

  • Waldorf schools in Germany or, at least, the one that friends’ children attend. To cover the portion of the costs not paid by the state, the school charges 11 percent of the family’s after-tax income, no matter how many siblings attend the school. Thus, it is a flat income tax. (See the school’s tuition table [in German].)

Have fun trying the taxonomy on your favorite taxes and charges!

Years ago on a final exam in environmental geography, I proposed that the charge for admission to Yellowstone National Park become a tiny fixed fraction of income (the Waldorf tuition model). I think I proposed 0.02 percent: $8 for a family making $40,000 per year, versus $200 for an high-level executive making $1 million per year. The professor so loathed the idea that he gave the whole exam an F, earning me my only college D. Now, however, I think that my proposal was not quite right. The public already pays for Yellowstone through progressive taxation. Thus, let the cost at the park gate be zero. That would be the only poll tax I support!


Greg

I believe that, in many cases, paying for the goods/services that you consume is the fairest way to pass along costs. Externalities (pollution, education, beautification) need to be factored into the cost. Risk pooling (insurance, pensions) is appropriate as long as it is setup in a way that holds the users and managers of the pool accountable.

Rick

I won't nitpick FICA, but private insurance, buses, and higher education are all voluntary with a price tag attached, just like any other service. How is that a "tax"? Is buying food a tax? Is rent or mortgages a tax? It makes for very sloppy nomenclature.

nobody.really

I share this concern. If I buy a hotdog from a vendor, do a pay a "price" or a "tax"? I sense Mahajan would say that the answer depends on whether the vendor is a private actor or the state.

I'm not entirely opposed to this understanding -- but then, to understand the progressive/regressive nature of the transaction, it would seem to be necessary to look not merely at what is paid but also at what is received. After all, if government offered college educations for $1, but only accepted the children of aristocrats, would Mahajan call that "progressive" because the program took money only from rich people? You need to consider both the quid and the quo.

A propos, the Economist argues that European taxes tend to be quite regressive when viewed in isolation -- but quite progressive when viewed in conjunction with the social welfare state that the taxes make possible. See http://www.economist.com/node/2553322

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Bill Harshaw

You skipped the all-important real estate taxes which support local government and schools.

FYI, the Park Service now sells a lifetime pass to seniors for a one-time fee: used to be Golden Eagle but now is "Interagency Senior Pass" (also one for those with disability).

Joe Dokes

Real Estate taxes are simply a form of wealth tax.

nobody.really

I would characterize a real estate tax as a consumption tax -- or a displaced income tax.

If I rent my home to someone, I deliver housing services to my renter; I receive rent payments which I must report as income, and upon which I may be liable for tax. If I rent my house to MYSELF, then I receive the housing services, and I receive the (now implicit) rental revenue stream. Ideally, I'd be subject to the same tax regime regardless. Because we have difficulty taxing implicit revenues, we substitute a property tax regime.

Joe

Not sure I agree with your taxonomy. "Progressive" isn't necessarily defined the way you define it, for one; you seem to organize it with wealth redistribution in mind, but the rich are not the only ones with wealth. Retirees would be very hard hit by a non-exempted wealth tax, for example; if I have $1MM in the bank as my retirement fund, intended to give me $50k/year from 65 to 90 assuming some reasonable but low rate of return, I'm hardly rich, but I have a lot of 'wealth'.

Secondly, a sales tax - or rewritten as a 'consumption' tax - is by no means nonprogressive, if implemented properly. You can have a 'flat sales tax', which is indeed nonprogressive, but just as easily you can have a progressive sales tax. We already have this now; food, drugs, other necessities are exempted or taxed at a very low rate in many states, as well as rent and similar expenditures that are a significant portion of a poor or even middle class person's budget (25-33% of most). If you look at what people actually pay sales tax on, I suspect you'd find that even now it is a fairly progressive tax, at least on the lower end.

When it becomes less progressive is when you have people who invest a lot, which is also exempted; but that just identifies one of the failures of the term 'progressive'. It only measures one axis, and measures all wealth/expenditures/income on that one axis. Take two people with net income of $1MM last year. One spends $800k on boats, houses, cars, whatever, plus normal living expenses (ie, normal purchases not really 'luxury' goods), and saves/invests the rest; the other spends $100k on luxury goods, $50k on normal living expenses and invests the rest. The first person pays a 10% sales tax on about 750k and 1% on 50k, while the second pays 10% on 100k, 1% on 50k. Is your tax progressive or not? Person A looks progressive (he pays a high percent of tax, 8.1%, compared to a poor person who pays 0% on one third of his income, 1% on around one third of his income and 10% on one third, so around 3.4%) while person B looks regressive (paying only 1% on average). So is it a progressive tax or a regressive tax? How about, it's a good tax - it takes 'excess' money from the person who's just throwing it around, and doesn't take as much from the person who is investing it, which is better for the economy.

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Mike B

First you forgot to distinguish sales taxes and value added taxes of the type popular in Europe. Yes they are similar, but the difference is worth distinction. Second, most private schools implement a form of progressive income tax. Very few students pay sticker price, instead only those with high income are charged the full tuition with most other students getting some form of discount.

nobody.really

I also vote for adding a note about consumption taxes, such as the Value Added Tax (VAT).

But Mahajah would want to be careful to distinguish between flat consumption taxes and progressive consumption taxes, such as David Bradford's X Tax. See http://www.amazon.com/Progressive-Consumption-Taxation-X-Tax-Revisited/dp/0844743941

MarkB

The wealth tax seems like a great way to discourage saving. Under the current system, even a person of moderate means can become reasonably wealthy through a lifetime of self-sacrifice and saving. It would be heinous to disincentivize this. (My moral valuations are showing, too!)

Joby Elliott

"Tobin tax. It’s a sales tax on financial transactions, so, assuming that financial transactions grow in proportion to wealth, it’s akin to a flat wealth tax."

I think that's a bit of a stretch. It's akin to a sales tax (applied to the buying of currency). It's just applying a sales tax to something that has normally been exempt from sales taxes (maybe because it's a transaction primarily engaged in by rich people).

Eric M. Jones.

If every single man, woman, and child on Earth paid a "Stupid Tax" that would be $700 Billion. Now why does that number seem familiar?

aepxc

How about a tax with the basis being set by consumption (as in a sales tax) and the rate being progressively set by the level of wealth (relative to median)? The higher above the median you are, the more things cost.

Setting present-day logistical difficulties of implementing such a tax aside, of course...

Steve

Not that hard. Have finaincial institutions report net contributions/withdrawals. Income - Net contributions = Taxable consumption. Now just apply a progressive rate.

Gary

To complicate matters, there are different versions and rates of these taxes at different governmental levels such as state sales, income, property, estate, and use taxes (or fees and tolls).

Larry

To label things such as bus fare and private college tuition taxes, and implicitly arguing that it would be better for the government to set fares according to one's income and force private colleges to do the same, would take us considerably farther down the road to socialism.

Chops

Mahajan displays exceptional (willful?) ignorance in characterizing "insurance premiums in the American healthcare system" as a poll tax.

First of all, it's not a tax - it's a cost for insurance, which in turn covers services. In addition, there's a great deal of latitude in the cost of plans. Due to the anachronistic employer-based system, not all employees have much choice - but some of us do. Those who pay higher premiums get more services.

Second, the poor receive tons of help paying for healthcare. The injustice of a poll tax is that it takes away the widow's mite. But in the U.S., Medicare and Medicaid have between 45 and 50 million enrollees each. Assuming little overlap, that's almost a third of the population.

There's a lot to criticize about the U.S. healthcare system, but premiums are not a tax, and they don't seize the widow's mite.

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If Mahajan still isn't convinced, he should look up the 1382 AD English revolt due to the government's failure to provide free, 21st-century healthcare to all citizens.
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(Hint: he's still looking).

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Saif

I consider myself as progressive as anyone, but I keep finding myself needing to point this out: for Social Security, the $110,100 limit (in 2012) applies both to taxable income AND BENEFITS. No benefits are paid out on income over $110,100 in 2012, which is a progressive measure -- those with less income are getting a greater percentage of it replaced at retirement. So a progressive benefit is being funded by a regressive tax in a manner that cancels itself out.

One could make the argument that Social Security should redistribute wealth -- i.e. that we should tax those with higher income at a higher rate, or on a higher base, to pay for the benefits of those with lower income. That's a separate argument entirely, though -- the current system is "fair". What's not fair is all the hoopla surrounding Social Security's impact on the federal balance sheet and budget. People need to chill out, realize that Social Security isn't going anywhere anytime soon, and focus on fixing other aspects of the federal budget so that we can preserve Social Security.

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Caleb B

Estate Taxes should be labeled The Death Tax.

Pay taxes on income, on capital gains, on purchases, on property, on everything your whole life...then when you die, pay taxes again!

Let's also have a birth tax to go with it. The government hands your parents a bill at birth and everything you make goes to the government until the bill is paid in full. It'll be based on how rich your parents are...sounds fair, right?

Mark

Real estate taxes. There are many different modes in use even within the US and it all comes down to valuation.

The type everyone in the US knows about is residential real estate which is based on a fixed rate on a valuation determined by a survey of recent sales transactions and estimated values. It had been regressive because people who lived in high valuation increase districts during the housing bubble needed ever increasing other income to keep up with their tax bills. That pattern has abated with the housing meltdown.

The type that business owners are familiar with is the income based valuation, i.e. the amount of rental or business income achieved from the property. This is particularily interesting today as farm income is way up and residential surveyed value is way down. Farmers real estate taxes are increasing dramatically as homeowners in the same area are getting a small break.

There are many other forms related to tax incentives I have heard of but am unfamiliar with.

The real estate tax in Switzerland is very unique. Homeowners are taxed on the imputed rental value of the property they own. So, if a homeowner could have rented out their home to a renter for 3,000 CHF per month (roughly $3,000, a typical rental rate for an apartment in Zurich), the annual 36,000 CHF are added as taxable income. The costs of improvements and maintenance are deductible in full. Effect: Swiss real estate is hideously expensive. Swiss homeownership is the lowest among advanced economies (about 35%). Swiss owner occupied homes are incredibly well maintained and fancy. The Swiss home improvement industry never runs out of work to do. Swiss homeowners would rather spend their money on improvements than give it away as tax.

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