Jonathan Chait has a great article on Paul Ryan in New York Magazine, which includes an important quote from anti-tax adovcate Grover Norquist: "We don’t need a president to tell us in what direction to go. We know what direction to go. We want the Ryan budget... Pick a Republican with enough working digits to handle a pen to become president of the United States.” Earlier in the year Thomas Mann and Norman Ornstein walked readers of the Washington Monthly through what it would look like to have a Republican House, Senate, and president -- and the likelihood that they would pass the Ryan budget through reconciliation.
One of the centerpieces of the Ryan budget's Path to Prosperity is tax reform. The tax overhaul will cut tax expenditures (without naming any) while also reducing the current set of six tax brackets to just two. One bracket will have a tax rate of 10 percent and the other will be 25 percent. Here's a question: should we think of these two rates as a special form of a flat tax? Would this budget be the end of progressive taxation in the United States?
There's an excellent 1908 book called Progressive Taxation in Theory and Practice (you can download a copy at that google books link). Written by Edwin Robert Anderson Seligman for the American Economic Association, it set out to catalogue every argument in history for and against progressive taxation as well as proportionate taxation (or what we'd now call a flat tax). While walking through all the arguments, he has to classify a set of arguments that aren't strictly either -- something he calls "degressive taxation."
Degressive taxation is where you have two tax rates: Below a certain income it is one rate, and above that income it is a second, higher rate. Typically it is a zero rate of taxation for income below the poverty line, and a flat, proportionate rate for income above that.
Arguments for degressive taxation were very common in 18th century Europe. The French political economist François Véron Duverger de Forbonnais argued in 1758 that "the object of taxation is the preservation of property; and property is nil if it does not afford subsistence. Hence, the physical subsistence of every family is a privileged part of all income. Only the surplus above this minimum can be assigned to the public for the support of government." Zero taxes for incomes up until poverty, flat tax above poverty.
Dean Woodward put the argument even more strongly in 1768. "Before we begin to tax any income for the poor, we must deduct from it as much as is requisite to purchase for the possessor and his family the absolute necessaries of life. No man can be bound to give to another what is essential to his own subsistence. To this every man has the exclusive right on which the very claim of the poor is founded."
Even though it isn't a flat tax across the entirety of income, as there are two distinct tax brackets, none of these people viewed their project as one of progressive taxation. Lord Auckland, debating England's first income tax in 1799, exempted 60 pounds for taxation as the minimum of subsistence but rejected progressive taxation "because of the implied inference, that because a man possesses much, therefore more shall be taken from him than is proportionably taken from others." As Seligman noted, surveying the arguments, "in degression the ideal is proportional taxation, although a concession is made, through lower rates or exemptions or abatements, to the poorest classes who ought theoretically to pay the same rate but who are deemed to be unable to do so."
How Does The Ryan Plan Stack Up Against the 18th Century?
I think it is fair to characterize the Ryan plan as, in its ideal, a degressive taxation plan. A low rate for those with little and a flat tax for everyone else. There are a few things that complicate this picture. It isn't clear where the 10 percent bracket ends and the 25 percent bracket starts (the 25 percent bracket now runs from $35,351 - $85,650 for singles, so in theory the 10 percent could run from $0 to $35,350). As James Kwak and many others point out, the numbers don't work -- this would be a major tax cut for the rich and a major tax hike for the working and middle classes.
However, would people making poverty wages pay ten percent under the Ryan Plan, or zero percent? People working for poverty wages now don't often pay income taxes because of the Earned Income Tax Credit (EITC). But would Ryan look to cut the EITC tax break? As this fantastic New York Times chart shows, some sets of tax expenditures tilts to the 1% and some tilt to the bottom 40 percent:
Refundable tax credits, like the EITC, benefit the bottom 40 percent of Americans. The preferential treatment of capital gains and dividend income benefits the top 20 percent, especially the top 1%. Ryan is clear that he wants to give capital gains and dividends even better treatment. But will he look to cut the EITC, making those in poverty pay more? It's not clear from anything I can find. As Tim Noah writes, Eric Cantor looks pretty set on getting those who pay nothing in income tax to pay something, and cutting the EITC is the way to do that.
Looking further afield, Yuval Levin's big article "Beyond the Welfare State," the intellectual firepower (Committee on Social Thought-trained) justifying something like the Ryan Plan, mentions only three exemptions "worth keeping" after the conservative new dawn: "retirement savings (which are far preferable to universal cash benefits to retirees), a unified child tax credit (to encourage parenthood and to offset the mistreatment of parents in the tax code), and the charitable-giving deduction (since a reduction in government's role in social welfare must be met with an increase in the role of civil society, which should be encouraged)." Nothing specifically targeted for supplementing the incomes of those making poverty-level wages.
Which also means that at the turn of the 21st century, after centuries of economic growth, the conservatives in the United States are looking at tax policy potentially far more regressive at a conceptual level toward the poor than classical liberals in the mid 18th century. Forget so-called moderate Republicans of the Eisenhower-era; can we just get a handful of 18th century tax scholars in the Republican party?