1: Excluding transfers to describe effective tax rates is absolutely nonsensical. Consider the retired person that collects a few thousand each month from social security with little to nothing in the way of market income. If this person spends most of his income (social security/transfer) and pays sales taxes on this or to pay property taxes, Lane’s so-called method would have us believe that his so-called effective tax rate would around 100%. Clearly this is utter nonsense. Likewise, it doesn’t make any sense to include one person’s health insurance [ private health insurance = market income ] and exclude another persons [ public health insurance = transfer] — both directly contribute to their overall well being and allow them to direct their other (e.g., cash) income towards other pursuits like food and entertainment.

You can NOT reasonably tally sales and property taxes without also accounting for a large share of transfers that gives them the money to spend this in the first place.

If we want to measure the ability of each household to pay taxes, his method fails.

If we want to measure what relative burden each quintiles actually bears on net terms, this measure also fails.

2: He totally fails to mention the fact that poorer households are a lot bigger than the richer ones in terms of the number of individuals in each (Tax Foundation does their quintiles by HOUSEHOLDS). In fact, the poorest is almost TWICE as large on average as the richest. The fact that many poorer households have more mouths to feed and shelter is going to drive up their state and local taxes significantly. It’s silly to ignore the effect behavior has on this stuff–especially for a so-called sociologist.

3: His closing statement that taxes do “very little to alter the market distribution of income” also fails reason and mathematical analysis. If the so-called rich weren’t paying such highly progressive income taxes most of these transfers wouldn’t even be possible. Likewise, if the poorer people weren’t huge beneficiaries of “net” transfers, they wouldn’t have the money in the first place to pay the few taxes they actually do pay.

“Social Security taxes should be progressive not regressive because there is no LOCK BOX.”

I couldn’t agree more. I hope Obama follows through on his promise to apply to payroll tax to incomes in excess of $150k. That would at least be a step in the right direction.

2) These gross tax rates leave an important economic incentive aspect of taxes to still be known: the marginal tax rate. SocSec taxes of 12.4% stop at $106,800 so income earners past this point get a reduction from this but then the income tax rate goes up. It means that the lower income people are not properly incentivized to work as too much of their income is taxed away. Social Security taxes should be progressive not regressive because there is no LOCK BOX.

Figuring for cash flow seems to be fundamentally different than judging the progressiveness of tax rates, but maybe I’m wrong.

I’ll go back to my final example, would that mean you think the most revealing analysis should show Familes A and B to pay the same?

I do have a question about the first chart — it just seems very funny to me that the most representative depiction of the relative tax burden of Americans would have the 2nd poorest quintile paying more than the lowest quintile.

I suppose what chart is most telling depends on what question we are trying to answer:

Do we care about the tax burden/outtake of the individual relative to his financial standing/intake (e.g., all incomes, including transfers)?

Or, do we care about the tax burden of the individual relative to his intake from wages and investment income particularly?

I understand that Lane prefers the the latter because it preserves the purity of the tax rate assessment, but this rings a little hollow for me. The fact that some income is guaranteed and tax free (gov’t transfers) doesn’t seem enough to merit exclusion from the denominator. To me, this appears to be systematically excluding a type of income that deliberately augments a group’s income without forcing them to pay taxes on it.

So, once again, do we care about the relative tax burden on dollar EARNED or dollar ACCUMULATED?

Put specifically, if Family A makes $10, gets $5 dollars in government transfers, and pays $2 in taxes, should we say that his effective rate is lower or higher than Family B, which makes $12, gets $0 in transfers, and pays $2.40 in taxes.

They pay the same 20% effective tax rate given Lane’s preferred model. In the second model, the first family pays 13%.

The second characterization seems more fair to me, but I’m open to persuasion.