Taxes, Billionaires and the Actual Data

The President's recent tax and budget cuts proposal inspired me to go looking for some data, particularly given the assertion by some that "the rich just don't pay their fair share of taxes."


Well, fairness is in the eye of the beholder, I suppose (while I think it would be only fair if the Dodgers went to the World Series, since it's been so long for them, I'm sure my friends in San Francisco would disagree), but let's take a look at the data as to who actually pays what:


As of 2008 (the most recent numbers I found), the top 10% of taxpayers (by adjusted gross income) paid 69.94% of federal income taxes and the top 1% paid 38.02%.  


Now in large measure this is a function of the fact that the top 10% of taxpayers make a large share of the income; 45.6%, and the top 1% makes 17.7% of the total income, each according to the Paris School of Economics. (http://g-mond.parisschoolofeconomics.eu/topincomes/)  But the fact remains that high income earners pay a greater share of the personal income tax burden that their share of income itself would account for.


On the other hand, the bottom 50% (based on adjusted gross income) of taxpayers pays only about 2.7% of taxes paid. (Sources: www.taxfoundation.org/news/show/250.html#table6 and http://ntu.org/tax-basics/who-pays-income-taxes.html, both from IRS data)  


As to the federal tax burden on various income classes as a share of income (how deep does the tax dog bite?), as of 2007, the top 1% paid at an average rate of 29.5%, and the top 10% paid at an average rate of 26.7%.  


For comparison, the middle 20% (a reasonably good marker for “middle class”) paid at an average rate of 14.4%.  (Source: Congressional Budget Office - www.cbo.gov/publications/collections/collections.cfm?collect=13)


So, while I'll not attempt a definition of tax fairness here, the data seems to indicate that the rich pay a disproportionately high share of taxes and lose a significant portion of their income, as compared to other income classes.


Interestingly enough, a recent Washington Post Fact-Checker article (www.washingtonpost.com/blogs/fact-checker/post/obama-taxes-and-the-buffett-rule/2011/09/20/gIQAXdd0iK_blog.html#pagebreak) came to the same conclusion:


"When you add up all of the various taxes, and look at the effective tax rates, it is clear the tax system is already pretty progressive. 


Everyone pays some tax, even those who pay no federal income taxes, and the wealthiest pay a larger percentage share of taxes. 


Here’s the effective tax rate for all of the groups, according to 
the CBO:

Lowest quintile (23.4 million taxpayers), zero to $18,900: 4.3 percent

Second lowest quintile (22.4 million), $18,900-$32,100: 10.2 percent

Middle quintile (22.9 million), $32,100-$47,400: 14.2 percent

Fourth quintile (23 million), $47,400-$71,200: 17.6 percent

Highest quintile (23.6 million), above $71,200: 25.8 percent

Top 10 percent (12 million), minimum income of $98,100: 27.5 percent

Top 5 percent (5.9 million), minimum income of $134,400: 29 percent

Top 1 percent (1.1 million), minimum income of $332,300: 31.2 percent"

Finally, let's look at a chart comparing various 10-year tax revenue proposals, including the president's.  Compared to a world in which we did nothing (allowing the Bush tax cuts to expire, as current law allows), here's the chart comparing various proposals.

As you can see, the President's most recent proposal is for less of a tax increase than he proposed in April (in that sense, moving in the direction of the Republicans), as well as being less than half that of the President's Commission on the debt.

Draw what conclusions you wish, political, moral or otherwise, but the data set out above is clearly worth looking at and thinking about.

The President's Proposal

Although I’m sure more detail will emerge in the next week or so, I thought it might be helpful to share a few thoughts on the President’s proposal this morning regarding the deficit.

Political Theater

Perhaps the most important thing to understand is that the proposal is not intended to actually result in any meaningful legislation.  Indeed, the White House has admitted that, saying that the President would not be offering up any of the items tentatively agreed to this Summer with Speaker Boehner and that today’s proposal “is a vision and not a legislative compromise being crafted to garner some number of votes in the House and the Senate.” 

In other words, the proposal is not expected to actually result in the making of legislation.

What, then, is its purpose?  The answer is “political positioning.” 

This announcement can be most meaningfully read as the President’s opening move in the 2012 presidential campaign, and is intended, among other things, to position his ultimate Republican opponent as an opponent of additional taxes on the “rich,” however defined.

Legislatively, then, this is merely one proposal which the “supercommittee” will take under consideration; whether any of its elements will be incorporated in any final legislative proposal by that committee (or even whether the supercommittee will be able to reach any agreement) remains to be seen.

Phantom Savings

At least some of the proposed savings are essentially smoke and mirrors.

For example, $1 trillion of the supposed savings is attributed to winding down of the wars in Iraq and Afghanistan, which were already scheduled to be wound down.

Functionally, this is somewhat like my saying that I’ve decided to not buy that new Volvo next year, after I’d already decided a few months ago to not buy that new Volvo, and telling my spouse that I’ve just saved us $40,000.

Political credit?  Maybe.

Actual political courage and associated pain?  No.

Entitlement Shyness

Absent are any real reforms regarding entitlements, such as an increase in the eligibility ages for Medicare or Social Security. 

Note that the President has already cut $500 billion from Medicare as part of ObamaCare by proposing cuts to providers that may not be sustainable and might, if enacted, cause a shortage of providers. 

Nor is the President asking the rich to pay more for their care, by means-testing Medicare benefits.

Also absent are any discussion of other Medicare reforms, such as increased efficiencies, enhanced cost control through competition, etc.

All in all, while the proposal may be an interesting political document, it reflects little of real substance from a legislative standpoint, and may only have, at best, a marginal impact on the supercommittee’s deliberations.

The International Unpopularity of Government Spending Programs

While the wisdom of government spending programs can certainly be debated, even among academic experts (see the prior post), it's fascinating to learn that such programs' unpopularity is not limited to American voters.


See the chart below from the Economist magazine (original sources: The German Marshall Fund and the OECD - June 2011.)  


The poll results show clear support for austerity over spending, at least in developed countries which may actually have the choice.

The Reliability of Proposed Economic Programs and Reality

It's an often unspoken article of faith among liberals that government economic programs, especially those designed to resuscitate an entire economy, can be effectively designed and delivered in such a way as to actually achieve the desired results.


After all, if your goal is to "solve" some large scale problem, and your solution involves spending very large resources, then you want to be able to make the case that you can, and will, actually generate successful results and have done so, as advertised, in the past.


Now this may be a fairly easy case to make is some areas.  After all, the Weather Service does a decent job of predicting and tracking hurricanes, the CDC does well in dealing with disease outbreaks like swine flu, etc.


But the results, and the efficacy of these proposals, seem to be a lot more doubtful as we get away from technical/scientific areas and into broad areas of social policy, such as economic issues.


For example, in 2009, the Administration told us that the stimulus program would keep unemployment at or below 8%; in fact, unemployment has been at or above 9% in 26 of the 30 months since the original stimulus was enacted.


We can also easily recall the recent Sloyndra scandal, involving a Federal investment of more than $500 million in a "green" industry player (a solar manufacturer), which may now have to be written off.


Now we learn of a study out of George Mason University by researchers Garett Jones and Daniel M. Rothschild revealing that only about 42% of the workers hired by entities receiving stimulus funds were unemployed at the time, and over 47% of those hired were already working at other firms and merely transferred to the firm receiving stimulus funds.  


In addition, about 2/3 of the organizations already had plenty of work to do before receiving stimulus funds.  


As the researchers note:


"This is far from the ideal prescribed by Keynesian macroeconomics. In the Keynesian ideal, spending should be targeted toward the slack sectors, and workers should overwhelmingly be hired away from unemployment lines. 


Instead, the direct job-to-job shifts for ARRA-receiving organizations were similar to the average job-to-job shift rates in the U.S. during normal economic times."


(The full report is at: http://mercatus.org/sites/default/files/publication/Did_Stimulus_Dollars_Hire_The_Unemployed_Jones_Rothschild_WP34.pdf)


So, what's the lesson?


It may be simply that those proposing large scale and expensive government programs have the burden of presenting clear and convincing evidence that the proposal will actually produce the results claimed, such as preventing a double-dip recession (a very difficult case to make if the proposal is enacted and the feared event never happens - who knows what would have happened if it was not enacted?) or that the economy will be magically turned around.


Given the record, a dose of healthy skepticism seems warranted.

Sources of Economic Distress

I felt that the following was a very good non-partisan overview of some of the sources of our current economic condition, and that our many readers might enjoy seeing it - the full article is at www.theatlantic.com/business/archive/2011/09/welcome-to-the-zerocovery/244478/, with additional source material at www.theatlantic.com/magazine/archive/2011/09/can-the-middle-class-be-saved/8600/.


The highlights are mine.


"In the aftermath of a financial crisis, families and businesses cut back, and any growth in spending depends on the infusion of new cash. Either exports rake in that dough or the government prints and borrows it. We're not a country that lives and dies by exports, which means that we rely of government to act as a stopgap insurer for an economic conflagration. For two years, the federal government expanded dramatically to help states and families. In the last year, the stimulus has dried up and Congress has spent more time discussing how to cut spending than how to create jobs.

But I don't want to lay this problem at the feet of the House of Representatives. Government represents 20 percent of the economy. That's a big slice, but don't confuse it with the whole pie. 

What's weighing on the recovery is what has weighed on the economy for the last decade -- perhaps the last four decades.  Competition from technology and foreign countries has driven a culture of productivity at most large companies which has led to strong profits at the cost of fewer jobs. This is not evil-doing, just a reality. 

Corporations have every right to seek higher returns and the cost of labor is relatively high in the U.S. Consumers are enjoying the fruits of cheaper goods. But cheaper information and manufactured goods means fewer dollars to pay the people to produce those goods. Productivity cuts both ways.This Great Recession has corresponded with a Greater Recession for the middle class -- captured so brilliantly by Don Peck in his cover story last month.

It didn't start with the Tea Party, or Obamacare, or the credit crunch, or even the Bush administration. It's older and bigger than all of that. 

And unless we figure out, together, whether it's possible for find or create not only thousands but millions and millions of good-paying jobs for the majority of the country that doesn't have a graduate degree or didn't get lucky with their career choice, everything else is band aids."