Tax Truth Depends on How You Read the Numbers

Liberals are saying that the tax legislation is tilted toward the rich. Conservatives are denying it. In large part this isn’t an argument about what the numbers are; it’s a disagreement about how to characterize the same numbers.

That disagreement might be easier to see by looking at a simple example: a government with two taxpayers. One makes $100,000 and the other $50,000. They live under a progressive tax code: The high earner pays 20 percent, and the low earner 10 percent. The government finds a way to economize, and cuts both bills by 10 percent.

Is this a fair tax cut? Does it make the tax code more progressive, make it less progressive, or leave its progressivity unchanged?

Before the tax cut, the high earner paid $20,000 in taxes and the low earner $5,000. So the high earner paid 80 percent of all tax dollars and the low earner 20 percent. Afterward, the high earner will pay $18,000 and the low earner $4,500. The proportions are unchanged: The high earner still pays 80 percent of all taxes, the low earner 20 percent, and each gets the same percentage of the tax cut as they pay. By this measure, the tax cut has not affected progressivity.

Consider another measure. Before the tax cut, the high earner’s after-tax income is $80,000 and the low earner’s is $45,000. Afterward, the high earner has $82,000 and the low earner has $45,500. The high earner’s after-tax income has increased by 2.5 percent, and the low earner’s has increased by 1.1 percent. Before, the high earner’s after-tax income was 78 percent higher than the low earner’s; afterward, it’s 81 percent higher. By this measure, the tax cut has made the tax code less progressive.

Which measure is the right one? It depends on what’s valuable about progressivity. If the purpose of a progressive tax code is to divide the burden of government so that rich people pay a larger percentage, then the new code serves it equally well as the old one. If the purpose of progressivity is to make society more economically equal, on the other hand, it doesn’t. The new tax code makes the country a little less economically equal.

Any proportional cut in a progressive tax code’s rates will have this effect. The progressive code slightly reduces income inequality. A proportional reduction in all taxes weakens its inequality-fighting power.

It’s not surprising that liberals tend to think about progressivity in terms of economic inequality and conservatives in terms of the burden of government. Thus a lot of liberal analyses of the tax cut emphasize that it generally raises after-tax income more for high earners than for low earners. Conservative analyses tend to point out that lower earners will generally see their tax bills decline by the same percentage that higher earners will (and sometimes will see them drop more).

Ramesh Ponnuru is a Bloomberg View columnist. He is a senior editor of National Review and the author of “The Party of Death: The Democrats, the Media, the Courts, and the Disregard for Human Life.” To read more of his reports — Click Here Now.