Politics & Policy

Unpacking Progressivity

French economist Thomas Piketty
Most Americans don’t understand how “progressive” taxation works.

‘β = s/g.”

That’s the message of the hottest book in policy circles right now, Capital in the Twenty-First Century, a 700-page tome by the French economist Thomas Piketty. As explained by Piketty, this formula stands for the concept that the capital/income ratio is equal in the long run to the savings rate divided by the growth rate. “β = s/g” is a problem, according to Piketty. And one so grave that he recommends making the progressive tax code even more progressive by raising our top marginal tax rate to 80 percent. Not content with further “progressivizing” the U.S. income tax, Piketty also advocates a global progressive tax on wealth per se.

“A progressive levy on individual wealth would reassert control over capitalism in the name of the general interest while relying on the forces of private property and competition,” Piketty writes confidently.

Private property will bolt to the moon if such a tax becomes global law. Most Americans sense this, but are halted from arguing because they are not sure they understand Piketty’s formula. It’s not clear that most Americans even understand progressivity.

#ad#And that’s not an accident. You don’t have to be Machiavelli, to name a clearer foreign writer, to see that the incomprehensibility of such concepts is not incidental — it is necessary to the grander process of redistribution.

Consider the history of progressivity, first introduced on a national scale with the income tax in 1913. The idea was, and still is, that tax rates go up like stair steps, and that the last dollar earned by a wealthy man or woman is taxed at a different, higher rate than the first dollar. The members of Congress who wrote that first income-tax law set their top progressive rate at a level then deemed sky-high, 7 percent.

Over the hundred years intervening, studies have shown that generally people do think that the greater the wealth, the more dollars wealthy people should pay in tax, proportionally. But that is not a progressive rate structure. That is a flat tax. A progressive tax increases rates as you earn more, disproportionally.

Nor are many people aware that under a progressive structure the last dollar is taxed at a different rate from the first dollar. The top marginal rate is not necessarily the average rate. In the early 1980s, scholar Karlyn Keene found that many Americans, when interviewed, thought flat taxes fair. Before Keene, Walter Blum and Harry Kalven at the University of Chicago studied attitudes toward progressivity and its functions and came away, despite their liberal predilections, concluding that the case for progressivity is “uneasy.”

Politicians, and the economists behind them, simply played off citizens’ ignorance. The simple early code of 1913 became complex and, yes, more onerous.

The real question should be why Americans allow themselves to be intimidated, especially when it comes to progressivity.

Vanity of two sorts provides answers. Most Americans are unwilling to concede that they may not understand or be comfortable with long formulas and complex economic ideas. So, like the Enron audit committee, they simply nod and go along.

The second vanity involves not intelligence but a kind of Puritan pretension. No American wants to be caught appearing unfair, even if in the most fleeting snapshot. “Progressivity” sounds like “progress.” Nobody wants to be seen opposing progress, even if that progress is regress and unfair to boot.

In any case: That willed American ignorance is the single greatest reason our progressive income-tax rates have moved, at times, into the 90 percent range, up from that original 7 percent.

Worse, the attitude makes progressivity hard to undo. When you cut taxes for all in a progressive rate structure, the rich necessarily get a larger tax break because they pay a greater share of the taxes. But “larger tax breaks for the rich” are impossible to sell. A redistributive corollary: benefits for the poor. This week Paul Ryan is getting scourged because his budget cuts affect the poor more than the rich. That is because the poor get more of the benefits in the first place.

The first step to overcoming such intimidation is to encourage economists to write and talk in plain language, English or French. The second is to counter with policies in plain English, plain formulas, and plain titles. A book like Piketty’s may be called Capital. A more accurate title might be Expropriation.

— Amity Shlaes chairs the board of the Calvin Coolidge Presidential Foundation. 

Amity Shlaes is the author of The Forgotten Man and its forthcoming sequel, Great Society.

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