Rangel’s Redistribution

Greg Mankiw points out that, according to the Tax Policy Foundation, the net effect of the Rangel tax reform would be to transfer cash from the top 1% of earners to the next 3%. (Hat tip: Instapundit.) Those earning over $500,000 would pay more; those making $75,000-500,000 would benefit, and especially those making between $200,000 and $500,000. Those earning less than $75,000 would be little affected. The benefit to the $200,000-500,000 group is almost entirely due to the elimination of the Alternative Minimum Tax.

As Mankiw writes,

Thus, as a first approximation, the plan increases the progressivity of the tax code by redistributing income from the very rich (e.g., CEOs, hedge fund managers, superstar athletes and actors) to the upper middle class (e.g., doctors, lawyers, congressmen).

Given the incidence of the AMT, I would add, the transfer is primarily to the upper middle class in metropolitan New York, Washington, San Francisco, and other large cities on the coasts. At least, that’s true given current patterns. The $200,000-500,000 group is better off under Rangel’s proposal, despite reversal of the Bush tax cuts and a 4% surtax, only because the AMT is projected to increase its impact on this group severely. In other words, they wouldn’t be better off than they are now; they would be better off than they are slated to be if nobody does anything to adjust the triggers of the AMT.

Such a transfer probably decreases inequality overall, and could be justified on Rawlsian leximin grounds. Nevertheless, given the nature of the transfer, distributional considerations seem minor compared with potential effects on economic growth. Something that has a trivial effect on the bottom 75% of earners and little effect on the bottom 96% strikes me as hard to justify on purely distributional grounds. Others may not share that intuition—but if many do, that’s an argument against leximin or similar accounts of justice.

This problem is likely to affect not only the Rangel reform but any tax reform. As a result of the 1986, 1993, and 2003 reforms, the bottom 50% of earners pay little income tax (only about 4% of the total). It also almost impossible, therefore, to structure a tax reform any longer that has a significant effect on the bottom half of the income distribution. For those who share the intuition mentioned above, that means it’s almost impossible at this stage to argue for any tax reform on distributional grounds.

One thought on “Rangel’s Redistribution

  1. Its not really about the economic effect. What average taxpayer follows what class revenue comes from? Its the target of the legislation, the rich. Rangel and supporters can point to their intent to soak the perceived rich hoping to appease their voters.

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