CEPR - Center for Economic and Policy Research

Multimedia

En Español

Em Português

Other Languages

Home Publications Blogs CEPR Blog Casey Mulligan on Big Government

Casey Mulligan on Big Government

Print
Written by John Schmitt   
Thursday, 02 December 2010 11:02

University of Chicago economist Casey Mulligan has a post on the New York Times Economix blog comparing the US and French tax systems. He argues, correctly, that the US tax system is almost certainly more progressive than the French tax system.

Our tax system is more progressive than most European systems because we raise a lot of government revenue through a progressive federal income tax. Europeans meanwhile rely much more heavily on regressive payroll and value-added taxes.

But, beyond that simple economic observation, Mulligan makes claims that are innaccurate and misleading.

The first problem is that Mulligan looks at only one side of the ledger –taxes– and not the other –government expenditures. What matters to people is not their income after taxes, but rather their income after taxes and transfers (including government services such as health care). Europeans, rich and poor, pay higher taxes than we do here, but they also receive much higher levels of government transfers, from more generous unemployment insurance benefits to subsidized day care to universal health care. These transfers, in cash and services, are generally highly progressive. The net result is that the European tax-and-transfer systems are substantially more progressive than our tax-and-transfer system, even though our tax system, on its own, is more progressive than the typical European tax system.

We have our own experience of this phenomenon in the United States with Social Security. The payroll tax used to finance Social Security is fairly regressive. Every worker pays Social Security tax at the same rate (12.4 percent, employee plus employer contribution) on the first $106,800 earned, and then no tax at all on earnings above that cutoff. As a result, in percent terms, the Social Security tax rate paid by workers making more than $106,800 per year is lower than the rate paid by, say, a worker earning the federal minimum wage (about $14,500 per year for a full-time, full-year worker). Nevertheless, Social Security is a strongly progressive program once the progressive retirement benefits (and survivor and other benefits) are factored in.

A second problem with Mulligan’s piece is that it subtly suggests that the choice Americans face is between big but regressive (in a fiscal sense) government, on the one hand, and small but progressive (again, in a fiscal sense) government, on the other.

Within our own system, the “big” federal government is financed overwhelmingly by progressives taxes (the federal income tax), while our “small” state and local governments are financed largely (and increasingly) by regressive taxes (such as sales and property taxes). In the United States, “smaller” government is the threat to our progressive tax structure, not “big” government.
And, of course, Mulligan’s conservative political allies have pushed relentlessly to reduce the progressivity of the federal tax system. Conservatives have, for example, long championed replacing the progressive federal income tax with a single-rate “flat-tax” that would likely be highly regressive in practice. If they have their way, we won’t have a small, but progressive, tax system; we’ll just have small and regressive.

This article originally appeared on John Schmitt's blog, No Apparent Motive.

Comments (0)Add Comment

Write comment

(Only one link allowed per comment)

This content has been locked. You can no longer post any comments.

busy
 

CEPR.net
Support this blog, donate
Combined Federal Campaign #79613
budget economy education employment Haiti health care housing inequality jobs labor labor market minimum wage paid family leave poverty recession retirement Social Security taxes unemployment unions wages Wall Street women workers working class

+ All tags