Pottow & Zywicki: Together at Last!

Prof. Todd Zywicki, with whom some Credit Slips readers might be familiar, had an interesting editorial in last week’s Wall Street Journal called “The Two-Income Tax Trap.” I wanted to alert readers to it in part because it is intriguing and in part because it is something on which Todd and I find some agreement.

It’s not a complicated argument. Taking a page from Prof. Elizabeth Warren and Ms. Amelia Tyagi’s playbook, Todd takes stock of what expenses have gone up over the past few decades as a second spouse has entered the work force. Todd’s point is that one of the biggies is taxes, in part because of our progressive tax structure. Thus when gross income increased 75%, tax expense increased 140%. I will call this his “positive” point. He makes an important contribution by underscoring the effect of a second earner’s income being treated by a higher marginal rate. 

Before moving onto the normative point, a quick substantive comment: Todd uses the marginal tax rate as a shorthand – to maximize precision, one should probably use the effective tax rate, which will dampen the distinction somewhat. But I’m OK with shorthand.  I'm just flagging for number crunchers.

And also a quick stylistic point: Todd’s editorial could be read as implying Elizabeth/Amelia were derelict in not reporting these tax numbers. I don’t think so. I think they were just netting out taxes (as they say) to do apples-to-apples comparison of “disposable” income, so we could basically see whether consumers were getting greedier.  (I also think the numbers are there in an endnote, but it's been quite some time since I read the book.)  Thus I don’t think Todd’s commentary should be seen as a criticism of their book, but rather an extension of it.

Now, onto the normative. Todd concludes that this large increase in the tax burden engendered by a second earner should serve as a call for flatter taxes. Here, I’m more agnostic. I haven’t thought through the issue that much. I suppose if income redistribution (an end which I support) could be guaranteed through other means, then surely it’d save some costs to flatten out the income tax code. So I might be with Todd all the way. But I’d probably have to think more on this normative issue before I gave him my full support. But for now, I’ll settle for agreeing with him on raising an interesting positive point.

Comments

[Ken Houghton]

All of the data I've seen--admittedly, no so extensive as you or Prof. Zywicki--indicates that the tax bite comes when those who need it least (i.e., two high-earners) are both working. Which reveals, of course, the reason to use marginal tax rates instead of normative ones in presenting data--if you want to argue that there is a major burden being thrust upon those who have the most disposable income (and are taxed at higher marginal rates under a progressive income tax system).

So I trust you'll forgive me if I take a call for "flatter" taxes as "tax those who can least afford it more."

If the two incomes together total the median household income, the marginal rate is rather lower than if the couple is pulling $250K per year. Which is as it should be (since it costs significantly more to defend the property rights of those $250K/year households than it does to defend the $43K/year ones.

Don't get me wrong; I'm all for a tax break if I can get one, and recognizing the second earner's work as beneficial is certainly a step in the right direction.

But when the call is for "flatter" taxes and the rates used are marginal, it may not be a sleight-of-hand to give upper-income tax breaks but that's certainly the way to bet.

[arundlet]

Any thoughts about Del. Supreme Court's affirmance of Trenwick on 8/14 and how it should be interpreted with Gheewalla?

[Peter C. Fessenden]

There has been a flurry of letters to the WSJ editor, reflecting views that are not nearly as complimentary to Professor Zywicki as your posting.

[John Pottow]

I'm not sure if this link will work, but for the curious, here are the responses I saw:

http://online.wsj.com/page/2_0048.html

[Scott Skillman]

With Zywicki, it is all about the proposal at the end! i.e "It has been reported, although I don't know anything about it myself, that some women have recieved welfare benefits for which they were unqualified. Therfore, we should dump the entire program!" This sham of an excuse for the flat tax ignores a very plausible method of dealing with the issue through the use of witholding modifications and regular adjustment of the standards to allow for inflation, which has pushed the some of middle class into higher brackets. Lord help us if Zywicki justifies doing to the tax code what he helped do for the bankruptcy code.

[Mahlon]

Scrap the income tax and move to the Fair Tax. It's extremely progressive and provides incentive for earning and saving more.