Cue the Noisemakers!

Cue the noisemakers! Greg Mankiw writes:

Greg Mankiw's Blog: Framing and Progressivity: ...today's CEA op-ed... will likely generate a blogosphere debate with the most heat and least light" as a result of this sentence "The president's tax cuts have made the tax code more progressive."

And Greg then cues the first wave of noisemakers:

The basic problem is that there is no single way to gauge changes in progressivity.... Consider a simple example.... A rich guy earns $200,000. A poor guy earns $20,000. At first, the rich guy pays $50,000 in taxes, and the poor guy pays $1,000. Then a new President takes office and cuts the rich guy's taxes to $48,000 and the poor guy's taxes to $800. Who is getting the better deal?

• You could say the rich guy gets the better deal: The rich guy gets an extra $2000 in take-home pay, while the poor guy gets only $200. After the tax cut, the difference in take-home pay between the two guys is larger.
• You could say the deal is evenly balanced: Everyone gets to keep an extra 1 percent of his income.
• You could say the poor guy gets the better deal: The poor guy gets a 20 percent tax cut, while the rich guy gets only a 4 percent tax cut. After the tax cut, the rich guy pays a larger share of the total tax burden.

It is impossible to say on purely economic grounds which of these perspectives is better. All of these statements are mathematically correct, even if they leave the reader with a very different impression. If you are a politician or a journalist trying to argue that this tax cut is good for the rich, good for the poor, or somewhere in between, you can do it!

The first problem with Greg's post--the first reason that Greg is generating more heat than light--is that Lazear and Baicker's op-ed doesn't say "the tax code is more progressive, even though the differences taxes generate in after-tax take-home pay have grown." What Lazear and Baicker say is "The president's tax cuts have made the tax code more progressive, which also narrows the difference in take-home earnings." They claim--a claim that I think is simply false--that the Bush tax cuts are progressive no matter what definition of progressivity you adopt.

The second problem is deeper. Let me try an analogy. I, full professor Brad DeLong, am having lunch with lecturer Dariush Zahedi today. After lunch, I presume Dariush will say we should split the bill--$10 each. Suppose I say: "That isn't fair. Berkeley pays you less (a lot less: what we do to our lecturers is shameful) than it pays me. I should lay out more cash for this lunch. How about this: I put down $5 cash, you put down $0, and we put the balance on your credit card. That would be fairer, wouldn't it?"

Dariush would then be an unhappy camper. He would think--correctly--that I was mocking him.

Back in 2000 the U.S. government was running a surplus of some $200 billion a year--a broadly appropriate fiscal policy, given the state of the business cycle and the looming health care costs dilemma. Today we're running a deficit of $300-$400 billion a year. Relative to what would be a sane, reality-based, and appropriate fiscal policy, the Bushies are putting $500-$600 billion this year on our collective national credit card. That bill will come due: somebody has to pay it. To pretend that it won't--to pretend that you can talk about the progressivity of the burden of paying for the federal government without talking about the long-run incidence of the national debt--well, that would be the equivalent of me telling Dariush that only cash matters: that when we talk about who paid for lunch, we should count only cash put down now, and we shouldn't count the fact that his credit card bill will show an extra $15 due next month.

As I said: more heat than light.

That's too bad. One can debate the appropriate stance of somebody in the government working as part of a team for policies some of which he or she approves of and some of which he or she doesn't. But we all agree that the first role of an academic is to generate more light than heat: to, whatever else he or she does, raise the level of the debate.