Jeff Bezos tweeted:
Yes, the United States has the most progressive tax system in the world. The top 1% pay 40% of taxes, the bottom 50% pay 3% of taxes. We can make it even more advanced by removing taxes from the bottom half. It is a small amount of total tax revenue but it means a lot to people in this group.
Unsurprisingly, a group of liberal economists rushed to attack Bezos. Answer from Gabriel Zucman:
Contrary to what you say, working class people contribute a lot to the financing of American society today. Income taxes and consumption taxes account for the largest share of revenue.
Justin Wolfers wrote:
If you count only progressive taxes US taxes, then the US system is progressive. But if you also count deferred taxes (income taxes, sales taxes, etc), it doesn’t go much further.
Bezos called for a tax cut for the bottom half to create a tax plan More progress and redistributors came out swinging-to argue that he was wrong about how progressive the current system was. Your goal. Apostates are worse than unbelievers.
But there’s a second, more interesting thing going on. To make the regression case, Zucman and Wolfers must calculate the payoffs as taxes. That directly cuts through eighty years of liberal doctrine. Since FDR, the argument on the liberal side has been that taxes paid are not taxes but contributions or premiums that entitle the payer to benefits as an “earned right.” Here is FDR to Luther Gulick in 1941:
We put those contributions in place to give donors the legal, moral, and political right to collect their pensions and unemployment benefits. With those taxes in place, no major politician can destroy my social security plan.
That makes it independent is not a historical curiosity. It runs straight through liberal social security luminaries such as Arthur Altmeyer, Wilbur Cohen, and Robert Ball, and lives on today in Nancy Altman and Eric Kingson. Social Security Works!attacking billionaires and insisting that Social Security benefits are “earned compensation.” The whole political stability of the system–the third one–depends on this framework.
So the modern left wants both ways. If the question is a termination of Social Security, FICA is a payment and benefits are received as compensation. If the question is whether the tax system is sustainable, FICA is simply a regressive tax. Choose a route.
Is there a systematic way to solve this? Yes, it also follows Jim Buchanan (see my previous post here) and Larry Summers who laid out the economics in his classic paper Some Simple Economics of Mandated Benefits. The empirical test is that wages reduce labor supply. The gap between the marginal product and the worker’s reservation wage is not an official value—it is the gap between the authorized wage and the worker’s marginal profit. Sylvain Catherine made this point in response to Wolfers:
Taxes paid are irreversible! They are mandatory contributions to a retirement plan that provide higher levels of benefit at the bottom than at the top.
Consider a forced savings plan: everyone must pay 12.4% of their income into a 401(k). Is this a tax? For someone who was going to save 15% anyway, not at all. For someone who would save 10%, 2.4% only stings. Mandatory does not mean tax. A small measure of the authorized profit is the key.
Now apply this to two payroll taxes.
Medicare (HI): Every dollar down buys zero profit. So, tax. Part A eligibility is binary–40 gets you in–and once you’re in, your benefit is whatever Medicare spends on your care. There is no relationship at the edges. (Furthermore, the green HI schedule clearly continues: 2.9% flat, rising to 3.8% above the $200K/$250K thresholds, and NIIT.)
Social Security (OASDI): 90/32/15 Basic Insurance Value points mean that a low earner gets a better return than a high earner. So the legal net worth is low and then declining; but the total number is improving. In short, OASDI is not a tax on low income earners is something the tax on the highest earners, thus the tax continues.
So: HI is a progressive tax. OASDI is a contribution at the bottom and a tax at the top. In any case, the Zucman-Wolfers framework—payroll payments as direct regressive taxes—is wrong and leaves the leftist framework that has spent eight decades building to defend these programs.
Personally, I’d prefer the real plan to the old talk—a mandatory savings plan with a close connection between minimum payments and benefits. But if the left wants to reframe Social Security contributions as taxes, and thus make Social Security all about redistribution to the poor, instead of a smart savings plan, roll the dice. Just remember that Altmeyer, Cohen, and Ball spent decades building a “gained” framework precisely because they understood it to be a structural defense against methodical inspection and encryption. Lower the frame and lower the defense. I suspect the independents at AEI and Cato will gladly take that trade but the left may regret making it for them.
