Spending cuts, tax hikes, reforming the tax code and balancing an out-of-control budget are becoming more prominent as the race for the GOP presidential nomination heats up and the deadline for the Congressional Super Committee came and went without a solution. One issue, though, which has gone largely unmentioned but underpins almost everything, is the “new progressivity.” The changing nature of progressivity in the United States has fundamentally impaired and distorted the collective political decision-making process. No long-run solution can avoid this profound change.
Vertical equity, the precursor to progressivity, held that households (or individuals) should pay more in taxes as their income increased. Progressivity evolved to demand that taxes increase in greater proportion than a household’s income. In other words, progressivity means that as a household’s income increases, taxes should take a proportionately greater share.
There is a new formulation of progressivity emerging and it is one that has and will continue to distort democratic decisions. This new definition of progressivity divides citizens into two groups: one that contributes to taxes and one that doesn’t. Put simply, progressivity is no longer about households contributing proportionately more as their incomes increase, but rather that a vast amount of households should bear no tax burden while a few households shoulder almost the entire burden.
Federal tax data corroborates the emergence of this new progressivity. According to the Tax Policy Center, in 2011 some 46 percent of Americans will pay no federal income tax, the single largest and most visible source of revenue for the federal government.
There are, however, other taxes such as payroll and corporate income taxes to consider. According to the same analysis, the bottom 40 percent will earn 12.2 percent of income in 2011 but contribute just 2.8 percent of federal taxes.
Contrast what the bottom 40 percent contribute to the burden placed on the top 20 percent. In 2011, the top 20 percent will earn 54.6 percent of income but pay almost 70 percent of total federal taxes. The proportions are even more skewed for the top 1 percent: 16.8 percent of income while paying 25.6 percent of federal taxes.
The redistribution becomes even more pronounced if federal spending is included. Most federal spending is either focused on lower-income groups (entitlements) or designed to benefit the population as a whole (e.g. defence). When one considers the redistributive nature of federal spending coupled with the asymmetric burden of taxes, it’s clear that a small group of contributors (top 20 percent) carry the burden for the majority of Americans.
This new progressivity has deep implications for both current and future political decision-making. In the past, political decisions, whether in support of a new or expanded program, were based on some semblance of the costs and benefits for individual households and voters. Specifically, voters weighed the anticipated benefits of a new or expanded program compared to the expected costs.
If enough voters were convinced that the benefits accrued to them exceeded the costs, then the party or candidate supporting the program likely attracted sufficient votes to win election and implement the proposed initiative. The reality of elections is admittedly much more complicated and almost always based on a broad spectrum of issues rather than one single proposal. This framework, however, allows us to understand the democratic risk that emerges from the new progressivity.
The new progressivity means that few households incur any costs associated with new or expanded programs. Thus the democratic decision for these households is markedly different than in the past. Now, programs with very little if any broad benefits can still garner significant support in part because so many households expect to incur no costs from the introduction or expansion of the program. Such political calculus means that there is a permanent, and indeed growing, group of Americans demanding more government irrespective of the efficacy of the underlying programs.
This represents a significant barrier to reform. Many of the changes required to overcome today’s problems — such as the short and long-run deficits, the mounting debt, and the solvency crisis of Medicare, Medicaid and Social Security — will be difficult to achieve because of the skewed burden for government programs from the new progressivity. Simply put, for better political decisions now and in the future, American households have to have skin in the game. To do so means fundamentally reforming both the tax system and many spending programs.
Jason Clemens director of research at the Canadian-based Macdonald-Laurier Institute and an adjunct scholar with the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Permission to reprint in whole or in part is hereby granted, provided that the author and the Center are properly cited.