On April 15th this year, Angry Overeducated Catholic posted on a subject dear to all of us (on April 15th at least): the Income Tax. By way of some simple math (actually simpler than that needed to complete a 2007 Schedule D), a flat tax with a single or at most two rates, and sufficiently high exclusions, becomes progressive in the “traditional Democratic sense.” My subsequent post explored some considerations involving the taxation of capital gains, for which, I might point out, AOC’s methodology would also provide an acceptable solution. Angry New Mexican in his comment suggested that we ‘crunch some numbers’ to see if this would be revenue neutral.

Since I am more than slightly interested in living to witness the elimination of the IRS, and the tens of thousands of pages of incomprehensible tax code, I decided to research the problem myself. Interestingly, multiple others have looked at income distribution, taxation and policy impact. Just to reference a few:

Income Distribution: Stagnant or Mobile?
Further Analysis of the Distribution of Income and Taxes, 1979-2002
Income, Earnings, and Poverty Data From the 2006 American Community Survey
Income Mobility in the U.S. from 1996 to 2005
U.S. Treasury Distributional Analysis Methodology (1999)
Census Bureau: Source and Accuracy of Estimates for Income
Current Population Reports: Income, Poverty, and Health Insurance Coverage in the United States: 2006
Income Inequality in the United States, 1913-2002 (Berkeley)
Federal Reserve Bank of Minneapolis Quarterly Review, Vol. 21, No. 2, Spring 1997,

What I was after was (a) a source of data for the income distribution in the United States; (b) the current revenue from the income tax; and possibly (c) the revenue broken down as ordinary income vs. capital gains. I figured that these base data would allow me to apply AOC’s methodology and see what rates would be needed to provide a revenue neutral model. (By the way, the Census Bureau has a wonderful tool called the DataFerrett that allows you to import data from various web based databases: the DataWeb.)

Unfortunately, after looking through the various papers, including a very good one from Berkeley—Income Inequality in the United States, 1913-2002 by Thomas Piketty, EHESS, Paris and Emmanuel Saez, UC Berkeley —hardly the bastion of conservative fiscal policy—, I am forced to conclude that a fair, progressive (or otherwise), revenue-maximizing income tax is not at all likely. The problem is that the strategic objective of the income tax is not to be revenue-maximizing, not to be fair in any sense, and not to be particularly progressive, although these are certainly the words mouthed by politicians. The primary motivation for today’s bizarre income tax policy is quite simply “income redistribution”.

The first clue is in the source papers themselves where the economic distribution of income appears as a principal part of the title in many documents. The problem is that some people cannot look at a person who is making more than a specific amount and not see an inherent evil. It doesn’t matter how many jobs, or how much wealth for everyone this income generates, only that any one person, corporation or entity, is “indecently wealthy” or has “wind-fall profits”. And in the case of the Oil Companies (Shell, BP, Exxon, etc.) it’s not about what the percent profit-to-revenue is, but only the absolute dollar amount. Big companies have big revenues and consequently big dollar profits — that’s a consequence of ‘big’. As a percent of revenue, Oil profits are in the 7% range which is hardly excessive. In fact, your typical corner ice-cream store probably generates a higher percentage profit than this.

The same with high net worth individuals, CEOs of corporations, and others with high dollar market driven compensation. It’s a simple fact that the market sets the value of the compensation — Congressional limits on the deductibility of CEO compensation (at $1 million) only forced the creation of other forms of compensation. But this goes whooshing by the hair of the typical redistributionist — inherently evil is any compensation over $1 million.

But how does this ‘redistributionist’ philosophy result in the morass of current tax regulation? After all, there are ( I presume —er, hope) some Senators and Congresscritters who have a brain. I can only conclude that the redistributionist philosophy has permeated the policy environment and legislative ‘language’ to the extent that most reasoned tax policy writers throw up their hands in disgust; and if they can’t fix the damn thing at the base through fundamentals, then at least they can carve out a little loophole for their constituents providing some relief from the redistribution. The result is the current mess.

The redistributionist philosophy also dovetails nicely with the ability to ‘take’ from those who have and redistribute to those the Congress deems worthy — i.e., to those who will support their bids to remain in power. It’s so nice to deliver benefits and charity when you personally don’t have to bear the cost.

Alas…

“The American Republic will survive until the day the Congress discovers it can bribe the people with the people’s money.” -Alexis de Tocqueville .

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