Monday, May 08, 2006

Framing and Progressivity

In today's CEA op-ed, the sentence that will likely generate a blogosphere debate with the most heat and least light is this one: "The president's tax cuts have made the tax code more progressive."

The basic problem is that there is no single way to gauge changes in progressivity. As a result, people can take the same set of numbers, look at them from different angles, and reach very different conclusions.

Consider a simple example (which I used in a fall ec 10 lecture). There are two people. A rich guy earns $200,000. A poor guy earns $20,000. At first, the rich guy pays $50,000 in taxes, and the poor guy pays $1,000. Then a new President takes office and cuts the rich guy's taxes to $48,000 and the poor guy's taxes to $800.

Who is getting the better deal?
  • You could say the rich guy gets the better deal: The rich guy gets an extra $2000 in take-home pay, while the poor guy gets only $200. After the tax cut, the difference in take-home pay between the two guys is larger.
  • You could say the deal is evenly balanced: Everyone gets to keep an extra 1 percent of his income.
  • You could say the poor guy gets the better deal: The poor guy gets a 20 percent tax cut, while the rich guy gets only a 4 percent tax cut. After the tax cut, the rich guy pays a larger share of the total tax burden.

It is impossible to say on purely economic grounds which of these perspectives is better. All of these statements are mathematically correct, even if they leave the reader with very different impressions. If you are a politician or a journalist trying to argue that this tax cut is good for the rich, good for the poor, or somewhere in between, you can do it!

The lesson: Be careful when you read debate about the progressivity of the recent tax changes. The conclusions that a commentator reaches depends on how the issue is framed.