Societal Slack and Progressive Taxation

By Nader Elhefnawy

Societal slack is not simply a matter of society's total resources, but specifically those resources which are both unutilized, and accessible for a given purpose, whether absorbing some shock, responding to some challenge or seizing an unforeseen opportunity.

At least according to the conventional measures, today's societies, certainly the advanced industrial ones, are wealthier than they have ever been. Nonetheless, the accessibility of that wealth is another matter, and where taxation (the capacity to bear which is an important part of societal slack) is concerned, financial and political reality has always made income distribution important.

Recent years have seen a trend toward regressive taxation, in the fashion for flat taxes and value-added taxes, and the reduction of taxes paid by corporations and people with high incomes.

The U.S. has been no exception. This may seem surprising, given the publicity afforded to figures released in recent years indicating that the collection of individual income tax has become more rather than less progressive since the 1980s, in particular a widely cited Tax Foundation analysis from last year.1 This holds that the wealthiest 1 percent went from paying 19 percent of Federal income tax to 39 percent of it from 1980 to 2005. However, the same data also indicates that their share of the nation's adjusted gross income went from 8.46 percent to 21.2 percent in the same period. This means that even as their share of the country's wealth went up 150 percent, their share of the income tax bill only went up 107 percent. In other words, the growth of their share of the wealth outpaced the growth of their share of the tax burden, implying the reverse.

Of course, one can object that the Tax Reform Act of 1986 made data from before 1987 not strictly comparable with that from later years. However, such a trend is also clearly visible in the years after that date. From 1987 to 2005, the top 1 percent's share of national income went up 72 percent, its share of the tax bill just 59 percent-indicating a regressive change, not a progressive one at that level.

The claims for the progressive character of American taxation are also, and more significantly, offset by the dramatic reduction in corporate income tax. In 1944-45, this equaled 35 percent of Federal receipts, or about 7 percent of GDP.2 While it was quickly cut after World War II, it did not fall below 20 percent of Federal receipts until 1968. Since 1981, it has never accounted for more than 11 percent of receipts, or 2 percent of GDP, save for the 1994-2001 period when it reached and sometimes slightly exceeded that level.

At the same time, social insurance and retirement receipts have accounted for much more of Federal revenue, rising from 7.6 to 37 percent of receipts (1.6 to 6.7 percent of GDP) between 1945 and 1988, a level at which they have stayed since.3 This has been especially important given that borrowing from the Social Security account has been crucial to reducing government borrowing from external sources (creating the illusion of smaller deficits than would otherwise be the case) since the Bush I administration.4

The result, especially given a picture of widening inequality, is an increased reliance of the Federal tax base on a decreasing portion of the nation's wealth. Of course, one can argue that this situation, despite its frequent characterization as somehow inherent in the logic of twenty-first century economic life, may not be that after all; and that in an emergency warranting such action, governments would alter their tax pattern to take fuller advantage of their economic bases. During World War II, for instance, the Federal government levied famously high taxes on individual and corporate incomes (which began to drop soon after, though the sharpest cuts awaited the Reagan era). Nonetheless, governments do not always succeed in adopting such policies, the division over taxes producing a crucial divide among the elite in pre-revolutionary France, among other instances. Additionally, their response in a situation where the problem that needs to be met is less obvious, slower-moving or simply more prolonged (as is often expected to be the case with many of the twenty-first century's challenges) is likely to be far more muddled.

1 See Gerald Prante, "Summary of Latest Federal Individual Income Tax Data," Tax Foundation Fiscal Fact 104, Oct. 5, 2007.
2 Budget of the U.S. Government Fiscal Year 2004 (Washington D.C.: Government Printing Office, 2003), Table 2.2, pp. 31-32 and Table 2.3, pp. 33-34.
3 Keep in mind that Social Security this year was levied on only the first $102,000 of income; while Medicare is supported by a flat tax. Social Security Adminsitration, Social Security Update 2008. Accessed at http://www.ssa.gov/pubs/10003.html.
4 One should also keep in mind that state and local taxes, not insignificant in the United States given its Federal structure, tend to be far less progressive.

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