The big takeaway seems to be that Ryan's uncle is Mike Barnicle's cardiologist -- who knew? In other news, everyone on the panel seemed smitten with Ryan, with the exception of Hendrik Hertzberg of the New Yorker. (Surprise, surprise.) Hertzberg brought up David Leonhardt's column yesterday, which points out that, "Over the last 30 years, rates have fallen more for the wealthy, and especially the very wealthy, than for any other group. At the same time, their incomes have soared, and the incomes of most workers have grown only moderately faster than inflation."
Leonhardt's observation -- that tax rates for the wealthy have been falling at the same time their incomes have been rising -- reminded me of Fox Butterfield's terminal confusion over the fact that crime kept falling as incarceration rose. Maybe the two phenomena are related. As Greg Mankiw points out: "What if the increase in their pretax income is in part attributable to the tax cuts? David seems to be treating pretax income as exogenous to tax policy, whereas there is good reason, both theoretical and empirical, to think that it responds to policy."
Leonhardt's picture is also incomplete. Let's not forget that as marginal rates on, say, the top 10 percent have fallen, their share of individual income tax liabilities has increased, from 48.2 percent in 1979 to 72.8 percent in 2005. As the CBO put it in the report I just linked to: "High-income households have a disproportionate share of comprehensive income and pay a disproportionate share of federal taxes." That's a victory for progressivity in the income tax code.
To be clear, I am not suggesting that we are now on the wrong side of the Laffer curve and that cutting taxes will increase revenue. And I will be the first to admit that we don't really know the relevant elasticity for the upper tail of the income distribution. But I am suggesting that it is a mistake to presume that changes in marginal tax rates have little effect on reported pretax incomes.
Maybe if we taxed middle class families less, or at least more efficiently, we would see their pretax incomes rise as well. Instead, we are moving in the opposite direction, raising taxes on the wealthy starting in 2011 and contemplating a middle-class tax hike (the VAT) to fund a government that seems to have no limit. Remember that as you wait on line at the post office today to mail your return.
Update, 9:50 a.m. The original version of this post referred to a certain former New York Times crime reporter as "the late" Fox Butterfield. From what I can tell, Mr. Butterfield is very much alive. My mistake.
Last year’s unsurprisingly dismal budget numbers contain a surprising revenue story. While overall federal revenue fell precipitously, payroll tax revenue barely dipped at all. This divergent tale of two taxes has one conclusion but many implications. America’s tax system, decidedly tilted toward upper income earners, is precariously balanced. It is not only volatile in economic downturns – it is unsustainable long term.