How much tax should the rich pay? | The Economist

Henry, let's talk about the history of progressive  taxation over recent decades. Governments across. the rich world have been implementing extra  extraordinarily progressive policies. You've. been writing a piece with our colleague Callum  Williams about this. Tell us what's been going. on and what's what's changed over time. There's  a narrative out there that says in the late 20th. century the welfare state was rolled back.  Uh government shrank. We had Thatcherism and. Reaganism and uh you know we lived in this  neoliberal small government environment. But.

that's not what the figures on redistribution  show. The figures on redistribution show that. we've got steadily more of it. So, if you look  in the United States in 1979, the bottom fifth. of earners received 32% of their market incomes  in transfers from the government. today on the. latest uh figure uh from the Congressional Budget  Office that's 72%. And the top 1% pay a higher. average rate of federal income tax now than they  did in 1979, albeit not the highest over the over.

over the period. And so we we've had much more  redistribution in America now, one counterpoint. to that is of course that inequality has gone up  when you look at people's earnings. So we've got. a chart on this again showing the CBO data that  show what inequality measured by the Genie index. the common measure of inequality has done before  and after taxes and transfers. And you can see.

that steady upward trend in the dark red line  in inequality before tax and transfers. What. you can see in that pinker line beneath is that  after tax and transfers inequality has been much. flatter and we're sort of towards the higher end  of the historical range there. So this greater. redistribution in America over the long term has  lent against this increase in inequality arguably. pretty successfully. Then when you look in the  rest of the rich world it's gone even further. especially since 1990. You have inequality going  up in the in the 80s but since 1990 inequality.

after tax transfers it's generally gone down in  the rich world. And this has been particularly. acute uh in Europe and especially in Britain. And  we have a chart here of British uh incomes over. the past uh decade or so. And it shows income  growth at different positions in the income. distribution 10 25 75 90. You can see as you go  up uh the income distribution the income growth. people have seen uh really goes down. And that's  because British income taxes have become a lot.

more progressive. A lot more redistribution has  gone on. And indeed inequality in the UK if you. look after taxes and transfers is now lower than  it was in 1986 which pretty extraordinary given. the uh narrative about ever rising inequality  that you hear in lots of places. So uh we have. have been calling this on and off the Robin Hood  economy. It's simply the case that governments are. doing more redistribution uh than they used to.  And like I said, America is sort of offsetting.

rising inequality in Europe. It's going swinging  the pendulum. the other way and you've got falling. inequality in many places. What I will say is that  here of course we're looking at income. We're not. looking at wealth and that what we're really doing  is is looking at the whole income distribution or. perhaps the top 1%. We're not going up to the  really stratospheric end which I'm sure we'll. uh get on to. Uh so we're not talking about  very very complex uh tax evasion by extremely. wealthy people. But you know it's simply not true  that the top 1% of American taxpayers have been.

benefiting from these extraordinary wheezes.  In fact, in America and elsewhere, governments. are becoming way more dependent on the top of  income distribution uh to pay their income tax. uh uh bills. And that's partly because naturally  if your share of income goes up, your share of the. tax take goes up. But it's also because of the  increased pro progressivity in many tax codes. When you look at the cut overall in the US, the  top 1% pay uh 27% of federal taxes against 20% of.

uh total income. So it doesn't look like a lot of  evasion is going on there that really helps them. That's very interesting. And give us a sense of  who falls into that top 1% of earners. What sort. of income levels are we talking about? I'm not  sure exactly where the threshold is on the latest. data. It will be something like uh $600,000 for  a household, something like that. you're talking. uh lawyers, bankers, but also in the US doctors  who are heavily have have much higher salaries.

than elsewhere in the world partly because of the  degree of regulatory protection medicine enjoys in. the in the US. So you're talking the standard sort  of high earning professions, you're not talking. about the super rich. So what is the right level  at which the rich should be taxed? Now, we asked. um our subscribers a poll question and um the  question was, "Do the top 1% of earners pay. the right amount of tax." Uh 69% said no, they  pay too little. Um 13% said they pay too much.

and 18% thought the level was about right. Now,  Henry, I'm going to ask you to place yourself on. this spectrum here. Do you think the tax system  is too progressive or not progressive enough? Oh, well, you're really putting me on the spot. you  know, uh I think the problem with trying to say. what the ideal rate, top rate of tax is that  you're just sticking your finger in the air. Uh and everyone likes higher taxes on people who  are higher earning than they are. Basically, it's.

everyone's rough intuition uh for what the tax  system should be. And even if you buy the idea, which I would, that all else equal, you want  lower inequality. I also think there's a certain. unhealthiness to society if it's we want to pay  for all these things but we always want other. people to pay. I think that's indicative of zero  sum thinking. I think there's essentially no rate. at which you could top set the top rate of tax on  the highest earners that preserves some degree of. inequality where the left wouldn't say come back  and say we want it higher still. And yet there's.

no obvious limiting principle. It doesn't really  seem to be that public opinion limits you here. because tax on the rich basically poll well. I  I economics and I wrote a column on this which. I anyone who read the newsletter advertising the  show will have seen the link to doesn't really. provide an answer. It's highly uncertain uh where  you start distorting things. And I don't think the. principle either should be we should go after  the the rich for as much as we possibly can and.

only stop once we deter uh economic activity. I  think that, you know, people to a degree have uh. uh have have a right to their income. Obviously,  they have property rights. Uh that conceptions. of fairness shouldn't just be about equality.  It's also about uh rewarding effort, hard work, and talent. It's about getting out what you  put in. Fairness means more than just equality, whereas the left talks about it tends to be  just equality. So, I know I've dodged your. I've dodged your question there. Uh, but I'm sort  of polls typic subscriber base isn't unusual in.

that response, but I don't think it would look  radically different if the top rate of tax were. 10 points higher. I think the polls would look  look the same and I find that uh disquiting. Um, that that all makes sense and I I forgive you for  dodging the question. It was a it was a tough one. Mike, what's your what's your reaction to the  poll? I will say um you know, anyone who thinks. our readers are the sort of neoliberal vanguard,  look at that. I'm surprised by how sort of I I. don't know ordinary I'd say the answers are there.  Um, you know, and and representing the the 13% or.

potentially the sheriff of Nottingham here in  my answer, but I I do think that the taxes on. the rich are probably in aggregate uh at the very  least high enough. Um, I don't personally think. the goal of redistribution simply because a pot  of income exists is is a good social goal. Um I. think it's completely reasonable to decide on a uh  minimum standard of living some sort of uh basic.

level of which people shouldn't fall below and  aspire to reach that but simply because someone. who is rich earns lots of money that that money  should be redistributed I I don't agree with. So. that for me is the sort of ethical side of it. I  think people should be beyond a reasonable social. goal uh be allowed to keep what they make. I think  the other thing for me is that all of the talk. about taxing really high incomes especially I mean  taxing wealth is in economic terms not a good idea. in the first place but when I think about a tax  structure basically ideally you would tax things.

that are uh bad in themselves and you're trying  to discourage. So you tax things like like rents. of various types, you know, monopoly activities,  then consumption is a pretty good thing to tax. And I'd be very happy for the consumption of rich  people to be taxed at pretty steep rates if you. could design some sort of progressive consumption  tax to do that. Income a little bit below that. because it funds investment and consumption.  So you're you're hitting with a fairly sort of.

you're hitting the barn door in doing that. Some  of it's good and some of it's bad. And then the. worst thing to tax basically is is investment and  and wealth as a proceed of that because you want. people to invest to grow the economy to provide uh  that sort of productivity growth. And I think by. focusing too much on the incomes of really really  rich people, you're filtering the tax system into. that bucket which is clearly not one of the better  ones. Um so I think yeah, for me it's not the best.

thing to do ethically. I I don't really see  the argument. I think it is just a a grab on. a group of people that um people think are sort  of deep pocketed and the money will just go on. forever and it's not a particularly effective  uh way of having running a tax system either.