August 8, 2011

What Goes Up... Taxes

Justin Katz

The other day, I made reference to the possibility that having an economy calibrated to two-income households, rather than the one-income households that were once the norm, is a hindrance on entrepreneurial ventures. Yes, if one spouse's attempt to create a business fails, the other spouse's income remains, but in the current marketplace, both incomes are necessary.

Since the effective doubling of the workforce, the market has adjusted household expenses, especially big-ticket expenses like housing, to the new normal income level. In an interesting spin-off discussion, Todd Zywicki ntoes that leading the big-ticket inflation is taxation:

Here's the key problem in Caldwell's argument: note his list of increased expenses for household "big necessities: mortgages (up 76 percent), cars (up 52 percent), taxes (up 25 percent), and health insurance (up 74 percent)." The problem is that while it is an accurate representation for mortgages, cars, and health insurance, that the expenses increase by that percentage, it is not for taxes. For the other expenses it is the percentage increase in dollars spent on those expenses. For taxes, however, the 25% increase is actually the percentage increase in the percentage of income spent on taxes. So the 25% is not how many more dollars go to paying taxes, it represents the household’s change from paying 24% of its income in taxes to 33% of its income in taxes–a change of 25% in the percentage of income dedicated to taxes, not a change of 25% in spending on taxes. I swear I am not making this up: I have attached to the bottom of this post the full excerpt from this book where this is done. And, again, I have laid this out in considerable detail previously here.

What this means is that once taxes are converted to an apples-to-apples comparison–percentage change in dollars instead of percentage change in percentage–household spending on taxes actually increased 140%, not 25%. The entire two-income trap, therefore, is actually a two-income tax trap, as I noted in my Wall Street Journal commentary on this awhile back.

Zywicki overstates when he declares that taxes constitute the "entire two-income trap." Even if taxes were the only expense to increase at all as a percentage of income, that wouldn't change the fact that it now takes two incomes to cover expenses that used to take one. That said, conservatives certainly aren't averse to arguing that we need to shrink government in both its activities and its expense.