"Adam O'Neill" at The Lowest Deep objects to my characterization of some of his comments in an earlier post related to the administration's plan to make out-of-pocket health care expenditures tax deductible. Here, from his new post, is his summary of the issues:
Me: "The key is the phrase 'percentage tax reductions...' One would like to think that health care spending would be measured in more absolute and egalitarian terms."
Altig: "Whether policy ought to be more "egalitarian" is not the sort of thing that economists can speak to with any degree of authority -- our training gives us absolutely no special status for making value judgments."
If my comments were normative I would agree, but they were not intended to be; Economists mean something very specific when they call a tax change 'progressive' and the persistent practice of the current administration and its adherents of mis-labling regressive tax cuts as 'percentage-wise progressive' is disingenuous.
Our disagreement revolves around the statement that "Economists mean something very specific when they call a tax change 'progressive.'" I thought the issue was largely closed in a classic article appearing in the 1948 edition of The Journal of Political Economy, Richard Musgrave and Tun Thin:
... the concept of "increased" or "decreased" [income-tax] progression is ambiguous. In fact, the results depend entirely on how the degree of progression is measured.
Musgrave and Thin go on to identify four possible measures of progressivity. One of those measures holds that a tax policy is progressive if the tax rate rises with income (a property usually referred to as marginal rate progression). This is exactly the situation O'Neill describes in his numerical example.
A tax cut of $150 for someone making $20,000 represents an income tax cut of 10% ($150/$1480). A smaller percentage tax cut of 5% to someone making $1,000,000 amounts to around $16,000 in dollar terms.
O'Neill does not like this definition of progressivity.
The tax cuts for low income families are large percentage-wise not because the numerator (the tax cut) is large, but because the denominator (their current income tax) is small.
Conflating "greatest help to those most in need" with "the highest percentage tax cuts go to the lowest income Americans" might make sense in a world where people paid for goods and services in 'percentages', but the fact is that Americans buy things with dollars. The distributional consequences of tax changes should be measured in kind.
I repeat: A-OK. Adam has every right to argue that the "distributional consequences of tax changes should be measured in kind." But the phrase should be is, here, a decidedly normative position. It is fine to disagree, but it seems to me that the concept of progressivity used by the advocates of the administration's policy is entirely standard. It does no service to the debate to characterize it as dishonest.
Having said that, I repeat again: The Lowest Deep post on this subject is an articulate exposition of a view contrary to the Bush proposal, and it does highlight important facts about the distributional consequences of that proposal. It is worth reading for that reason.
(Thanks to Terri Kitchen for the heads-up.)