America’s most affluent 1 percent now pay, on average, just 6.4 percent of their incomes in state and local taxes. But they actually pay even less than that, since they can deduct their state and local taxes from their federal tax bill. The state and local tax burden on America’s rich, after taking this offset into account, drops to 5.2 percent.

Middle-income families — to be precise, those families who make up the middle fifth of America’s income distribution — pay, after the federal offset, 9.4 percent of their incomes in total state and local taxes.

America’s poorest families pay even more. Tax collectors take 10.9 percent of the incomes of households in the nation’s bottom 20 percent, more than double the share they take from the incomes of the nation’s top 1 percent.

The Institute on Taxation and Economic Policy paper, Who Pays? A Distributional Analysis of the Tax Systems in All 50 States, covers non-elderly households. Incredibly, the study details, some states “ask their poorest residents — those in the bottom 20 percent of the income scale — to pay up to six times as much of their income in taxes as they ask the wealthy to pay.”

Surely we can all agree that it is absurd for low and middle-income Americans to have a state and local tax burden nearly twice that of the very-wealthiest Americans.  Not only is this patently unfair as a matter of justice — the low tax-burden on the wealthy has more to do with their over-representation in the political system than it does with any virtue/productivity on their part — but it’s also bad policy.  According to the CBPP, 35 states are facing budget shortfalls for the 2010 fiscal year, and while I don’t know the details in each state, I’m confident that a modest tax increase on the wealthiest residents of those states would go a long way in fixing the shortfalls without cutting needed services to poor and marginalized Americans in those states.

That said, I can also see why state-based tax increases would be a terrible idea; raising taxes is a surefire way of driving your most lucrative tax base to another, low-tax state.  Better would be for the federal government to either raise taxes on the wealthiest Americans (which I discussed here) or repeal the Bush tax cuts, which have been responsible for more than $2 trillion in loss revenue since their implementation.  Repealing the cuts (thus upping the tax burden for the wealthiest Americans to something a bit more reasonable), and using the revenue gains to fund direct aid for states makes a lot more sense and is a lot more appealing — as a matter of policy — than having the states shoot themselves in the foot by raising taxes.

I am also surprised to see that revenue from payroll taxes has essentially remained stable through the recession, and like Megan, I’m not entirely sure as to why that is (and if anyone wants to hazard a guess, I am all ears).

What’s more interesting to me though, is what this graph implies about the volatility of revenue.  Assuming that this is an accurate representation of what happens to tax revenues during a recessionary period, it seems to suggest that our most progressive taxes – income taxes – are most vulnerable to the effects of a recession, while our most regressive taxes – payroll taxes – are our least volatile sources of revenue.  And if that’s true, then it has powerful implications for progressive policies.

Since Obama entered office, I’ve gradually come to the conclusion that, above nearly everything else, progressives need to make a concerted effort to change the way we talk about taxation, in the interest of clearing the space for politicians to talk honestly and openly about raising revenue.  After all, we don’t have much of choice.  Most progressives are committed to significantly broadening the scope of the American welfare state; health care is only one part of what is a long-term effort to bring the United States more in line with our European peers in terms of what the state delivers to its citizens.  Taxation plays a critical role in furthering that project.  We simply can’t expand the welfare state without also raising dramatically more revenue than we currently do, since in the absence of any additional revenue, the United States cannot afford much beyond its current obligations (or rather it could, but it’s nice to be able to pay for what we spend).

The problem for progressives is twofold: first, we have to find a way of successfully countering the conservative narrative that taxes are unfair at best and borderline illegitimate at worst, and second, we have to find methods of taxation that are both fair and capable of raising an adequate amount of revenue.

Of the two, I actually think that the second is a far more difficult project, in part because the best solution – a value-added tax of some form – is anathema to a lot of progressives. For progressives, the VAT is simply too regressive; every imaginable form of the VAT would disproportionately affect poor, working-class and middle-class Americans.  That said, there are ways to craft a VAT as to soften its impact.  For starters, you could include exemptions for food and non-luxury clothing items, as well as use some of the revenue – Bruce Barlett estimates that a 20 percent tax could raise up to $1 trillion per year in 2009 dollars – to provide income supports for struggling Americans.  Indeed, if you buy the idea (which I do) that progressive distribution is far more important than progressive taxation, then a VAT is great by progressive standards, as the revenue generated could be used to support both a stronger safety net and significant investment into education and infrastructure.  What’s more, the stability of regressive taxes makes it more likely that you can expand the welfare state while also keeping it fiscally solvent over the long-term.

I don’t expect conservatives to sign on to this project (though it’s worth noting that the United States wouldn’t be the first nation to trade conservative taxation for progressive spending), but I think it’s something they should consider.  If you believe – as I do – that the United States is on a pretty steady march towards a much stronger public sector, then we must raise revenues one way or another.  Considering the alternatives – massive tax hikes on the rich, which depending on the form they take, I’m not necessarily opposed to – a VAT is probably the best possible outcome for conservatives.

But the biggest problem with cutting the payroll tax is that it isn’t really a tax at all. A tax, by definition, is a compulsory payment for which no specific benefit is received in return. This is not true of Social Security. The vast bulk of workers get back all the money they put into Social Security in the form of a cash benefit in retirement and most get a substantial return. (See this Congressional Budget Office study.) That’s why Franklin D. Roosevelt always insisted that the money withheld from workers’ paychecks for Social Security was not a tax but a “contribution.”

And I think this – along with the fact that people like to get money – is directly related to why Social Security is an enduring, incredibly popular program.  Among many other things, part of the problem liberals face with expanding the welfare state is that it is incredibly easy to inveigh against tax increases.  And part of the reason why it’s incredibly easy to inveigh against tax increases is that there doesn’t seem to be much of a logical connection between what you pay into the system and what you get out of it.  Especially when – by and large – what you do get out of it is a little abstract; as we’re seeing in the Virginia gubernatorial race, it’s very difficult to defend proposed tax increases with cries of “what about the infrastructure!”  Very few people  make the connection between paying their income taxes and having decent roads, and even fewer people make the connection between paying their income taxes, and having clean water or clean air or a reasonably competent regulatory state.

Of course, barring some collective awakening of political consciousness among the voting public (think Childhood’s End except less telekinesis and more subscriptions to the New York Times), we’re going to be stuck with a political culture in which it is incredibly easy to drum up anti-taxation sentiment.  That said, if the Obama administration is actually cognizant of our long-term fiscal challenges (and I think that it very much is), then it will eventually have to sell a tax increase to the American public.  I think the best way to do that is to propose a tax which – like the payroll tax – has a direct relationship to benefits received.  Ideally, we would have seen something like this with health care reform: you pay a flat rate to the federal government, and in return, you are guaranteed health insurance and some level of subsidies to pay for it.

A payroll tax-style arrangement is not only simpler and less intrusive than the alternatives, but it would also help lessen the vulnerability of these reforms to demagoguery, as each voter can see the tangible impact the legislation – and the tax – has on their lives.

1) Someone should tell him to shy away from writing policy columns; not only is he not very good at them, but he has this very strange aversion to, you know, facts.

2) On that note, if Douthat had taken a little bit of time to research, he would have quickly found that despite having a progressive federal income tax, the average tax rate for the richest 400 Americans is 17.2 percent.  What’s more, the effective tax rate for the richest 1 percent of Americans is about 31 percent, which is quite low in historical terms.  Contra Douthat then, the tax code isn’t even really that progressive on the margins, in a variety of ways, it offers a whole host of breaks and deductions for the wealthiest Americans, at the expense of services for everyone else.

3) I find it very strange that Douthat would write an entire column criticizing Democrats for having yet to deliver on promises to reduce income inequality without once mentioning that said inequality has been stoked by conservative enthusiasm for massive tax cuts/giveaways for wealthy Americans.  Or, to put it more succinctly, hidebound teachers unions and illegal immigration certainly doesn’t help us tackle the root causes of inequality, but it’s extremely disingenuous for Douthat to argue that the tax code is basically irrelevant to this discussion.  It’s not.  The incomes of high earners rose dramatically in large part because we stopped taxing them.  So again, pace Douthat, the single best thing we can do to reduce income inequality – in the short-term at least – is to simply tax the rich more, either by raising marginal tax rates, reinstating the tax on capital gains, or – better yet – instituting a continuous marginal tax (which I discussed briefly here).

4) And finally, I wonder how Douthat explains away northern Europe’s high economic growth rates and robust welfare state?

The New York Times – as is its wont – has a pretty good editorial on the need for higher taxes in the age of Obama:

But, sooner than he may prefer, Mr. Obama will have to face up to what he has so far avoided: the need to raise taxes broadly to rein in deficits.

The deficits are not of his making. Some two-thirds of the $9 trillion shortfall resulted from policies that predate his administration; most of the rest is the cost of policies that both parties consider necessary, like continued relief from the alternative minimum tax.

But when he inherited the burden of the budget mess, Mr. Obama also inherited the responsibility to clean it up. Neither economic growth nor spending cuts will be enough to fix the projected shortfalls. Nor is there enough to be gained by confining tax increases only to families making more than $250,000 a year, a campaign promise that Mr. Obama still says he will keep. [...]

The question then is not whether taxes must go up, but when, how and how much.

I’ve made this point several times here and on my own blog, but it’s worth reiterating: fiscally, our current path is completely unsustainable without either significant cuts in spending or significant increases in revenue.  Seeing as how the former isn’t particularly likely (and seeing as how I’m pretty much on board with an expanded welfare state and more comprehensive benefits), the only real option we have – at least in the short term – is to raise taxes.  And while I understand that a significant revision of the tax code is a near political impossibility (though there might be some hope for a progressive consumption tax), there is quite a bit of low-hanging fruit with regards to ways we can raise revenue.  Here are a few of the more obvious ones:

• “Infinite tax brackets”.  I kind of elaborated on this on my own blog a little while ago, but basically, the idea is that you can use computers to adjust the tax rate for every marginal dollar past a certain point.  So, for instance, if incomes of $500,000 are taxed at 45%, each additional dollar after $500,000 is taxed at 45.00001%, 45.00002%, etc. etc.  I don’t think it’s a stretch to say that you could raise enormous amounts of revenue this way, and rhetorically, it sounds much more palatable than a single 70% marginal tax rate for the super-wealthy. You’d have to change the name though.
• Standardizing alcohol taxes.  Here’s the National Journal: “In the same report, the CBO suggested that standardizing federal taxes on alcoholic beverages to 25 cents per ounce of alcohol would increase revenue by $60 billion over 10 years. Currently, different types of alcoholic beverages are taxed at different rates: 21 cents per ounce of alcohol in distilled spirits, 10 cents per ounce of alcohol in beer and 8 cents per ounce of alcohol in wine.”  What’s more, as Matt Zeitlin points out, a sin tax targeted at alcohol would significantly reduce consumption among heavy drinkers, which in turn, could reduce the assault rate by as much as 20%.
• “Soda taxes.” Broadly, these would simply be taxes on any beverage containing a certain amount of sugar per ounce, and could be expanded to include food as well.  Here’s the National Journal again: “According to a Congressional Budget Office report released in December, a national excise tax of 3 cents per 12 ounces of sugary beverage — that’s 3 cents for a can of Coke or 5 cents for a 20-ounce bottle — would yield $50 billion over 10 years, while potentially reducing overall health care costs because of the link between sugar intake and health conditions like diabetes and obesity.”

Even ignoring the first point, these minor changes in taxation would yield well over $100 billion over ten years, which would put a healthy dent into the cost of health care reform.  I know that most of you aren’t particularly amenable to tax increases, and would prefer to see smaller government.  But, to put it bluntly, that simply isn’t going to happen.  Conservatives as well as liberals have been fairly enthusiastic about expanding the scope of government, and I don’t expect that to change anytime soon.  The real question, in my view, is how do we make government work as effectively as possible?  Especially, as seems to be the case, if we’re going to have an expanded welfare state as well as a substantive presence on the international stage.  And the obvious first answer – I think – is that we need government to be fiscally responsible, and to have that, we simply need more revenue.

Also, I love Soul Train.