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The impact of Senator Elizabeth Warren’s (D-MA) student debt relief plan on different income groups has drawn much discussion. A recent Brookings Institution study asserted that “a quick analysis finds the Warren proposal to be regressive.” However, the data presented in the Brookings study actually paint a mixed picture – under the correct economic definition, the plan is regressive throughout much of the income distribution, but is strongly progressive at the high end of the distribution.
A spending program is progressive if its benefits fall relative to income as income rises. To evaluate the Warren plan’s progressivity, the table below presents the Brookings study’s estimate of each income group’s share of the plan’s benefits, the group’s share of after-tax income, and the ratio of the benefit share to the income share. (The Brookings study used 2016 data and computed the benefits as the reduction in annual loan payments; the income shares were estimated for 2016 by the Urban-Brookings Tax Policy Center, using a somewhat different income definition. Details may not add to totals due to rounding error.)
|Income Group||Benefit Share (%)||Income Share (%)||Ratio|
|Bottom 20 percent||4||4.9||0.8|
|Second 20 percent||10||9.9||1.0|
|Middle 20 percent||20||15.2||1.3|
|Fourth 20 percent||38||21.6||1.8|
|Next 10 percent||23||14.3||1.6|
|Top 10 percent||4||34.2||0.1|
The Warren plan is regressive throughout much of the income distribution, as benefits rise relative to income from the bottom 20 percent to the fourth 20 percent. However, benefits fall relative to income for the next 10 percent. Benefits plunge relative to income for the top 10 percent, making the plan strongly progressive at the high end of the distribution. The plan gives smaller benefits relative to income to both the poorest and richest Americans, while giving larger benefits relative to income to those in between. It also should be noted that the combination of the plan and the high-rate wealth tax that Senator Warren would use to pay for the plan is clearly inequality-reducing.
Many commentators assume that a spending increase is progressive only if the dollar value of benefits fall as income rises. Although that view is intuitively appealing, it is incorrect.
Everybody agrees that a tax increase is regressive if tax payments fall relative to income as income rises, even if the dollar value of the payments rise as income rises. If somebody making $10,000 pays $100 and somebody making $100,000 pays $500, the tax is regressive. Tax cuts and tax increases must be treated consistently — a tax cut is progressive if an offsetting tax increase would be regressive. So, a tax cut is progressive if the tax savings fall relative to income as income rises, even if the dollar value of the savings rise as income rises. If somebody making $10,000 gets a $100 tax cut and somebody making $100,000 gets a $500 tax cut, the tax cut is progressive.
Consistency also requires that spending cuts be judged on the same basis as tax increases and that spending increases be judged on the same basis as tax cuts. Otherwise, simply relabeling a spending change as a tax change — for example, turning a spending program into a refundable tax credit — could magically alter its progressivity. Moreover, a spending increase that exactly offset a regressive tax increase could itself be regressive. So, a spending increase is progressive if its benefits fall relative to income as income rises and a spending cut is progressive if its burdens rise relative to income as income rises. If a spending program gives $100 to somebody making $10,000 and gives $500 to somebody making $100,000, the program is progressive.
Like Senator Warren’s proposed wealth tax, her debt relief plan has many potential problems. However, the data do not support the sweeping conclusion that the plan is regressive.
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