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."

Wondering

Being a Californian and thinking recently of San Francisco and the Berkeley City council, I've always thought it remarkable (i.e. worthy of remark) that the classical U.S. and Western European "liberal" is so enamored of national governments having a significant and ever-expanding, if not predominant, role in society.

After all, the experience of the 20th Century was largely that the greatest threats to individual liberties (and to life) came in societies in which governments took total control of not only the state (and often the economic) sectors, but also of the details of daily life - the Soviet Union, Nazi Germany, Fascist Italy and Communist China.  Whether one labeled those governments as Left or Right is probably irrelevant; the results were totalitarianism and horror.

So, why is it that "progressives," (the re-branded liberals, post the Mondale/Ferraro disaster) do not approach government expansion with the same concerns as conservatives?  

After all, probably far more liberals (defined for these purposes as those opposed to limits on free speech and religion, supporters of alternative or minority political parties, advocates of unfettered artistic expression and alternative social structures, such as Socialism, etc.) went to their deaths in the Soviet Gulag and the Nazi death camps, than ever did economic or political "conservatives."  

The correlation between governments that controlled almost all of a society, and the horrors of the 20th Century, is not perfect but it is very clear.

I'd think that the more cogent criticism of government expansion is not that of many conservatives: that it is costly, inefficient, likely to produce unintended consequences, destroys or punishes individual initiative and creativity, etc., all of which is often true, but that it is, from the lessons of history, a clear threat, and arguably the most potent one, to individual liberties (Ayn Rand's argument, after she moved from Soviet Russia to the U.S.)

A man from Mars might wonder why, then, today's liberals/progressives are not in the forefront of those concerned with an ever-expanding role for government in our society.

Your thoughts?

Texas, Job Growth and Recommendations from the Dallas Fed

As Governor Perry emerges as a serious contender for the Republican nomination, attention has been focussed on job creation in Texas, which the Governor is expected to make a centerpiece of his campaign.

 While analysis of Texas' job creation record, and the Governor's role in it, assigns a number of causes to Texas' success, only some of which might be credited to the Governor, I thought it would be interesting to look into the views of the President and CEO of the Dallas Federal Reserve Bank, including the issue of whether the jobs created are mostly low paying, and his recommendations for action in Washington.  I've slightly re-arranged the order of his presentation, to flow a bit better for our readers.

 His full presentation will be found at www.dallasfed.org/news/speeches/fisher/2011/fs110817.cfm and relevant excerpts are set out below, along with the usual charts.  (Data matters!)

"Here is a chart that displays nonagricultural employment growth by Federal Reserve Districts over the past 21½ years, using the employment levels of 1990 as a base of 100 and tracing job creation through June.

 

 Nonagricultural employment growth in Texas has compounded at an annual rate of 1.95 percent over 21½ years; that of California at 0.57 percent; and New York’s at 0.19 percent. If you are interested in the output of their workers over this same period, the compound annual growth rate of Texas GDP is 3.6 percent; California’s is 2.59 percent; and New York’s 2.06 percent.

There are several ways to calculate Texas’ contribution to national job creation from June 2009 through the end of June 2011. One is to look at the number of jobs created by all 50 states, including those that have lost jobs since the nation’s anemic recovery began. Using this metric, through June of this year Texas has accounted for 49.9% of net new jobs created in the United States.

Another way to calculate Texas’ contribution to job creation is to lop off those states that have continued losing jobs and consider only those that have positive growth in employment these past two years. Using this metric, Texas has accounted for 29.2% of job creation since the recession ended.

This raises the obvious question―what kind of jobs are being created in Texas? Here are two charts that might help you form an opinion.

 

 

[DEH note: Seasonally adjusted national median weekly earnings were $756 in the 2011 Q2, lower than that in Texas - Dept. of Labor, Bureau of Labor Statistics - www.bls.gov/news.release/wkyeng.nr0.htm] 

The most jobs in Texas have been created in the educational and health services sector, which accounts for 13.5% of Texas’ employment. The second-most jobs have been created in the professional and business services sector, which accounts for 12.5% of the Texas workforce. The mining sector, which includes support activities for both mining and oil and gas, employs 2.1% (yes, two-point-one percent) of Texas’ workers. 

In the second chart, you will see that these jobs are not low-paying jobs. The average weekly wage in the education and health services sector is $790; in the professional and business services sector it is $1,117; and in the mining sector, the average weekly wage is $2,271. Together these three sectors account for 68% of the jobs that have been created in Texas in the past two years.

I should point out that in 2010, 9.5% of hourly workers in Texas earned at or below the federal minimum wage, a share that exceeds the national average of 6%.

 Despite the fact that Texas has severely limited social services and an education system that faces great challenges, people and businesses have been picking up stakes and moving to Texas in significant numbers over a prolonged period.  It should be noted that in the last census, Texas gained population and congressional seats, while California’s population growth and congressional representation was static and New York’s was diminished. 

 Jobs have been created for American workers in Texas in several different sectors, not just in the oil and gas and mining sectors. People have taken those jobs of their own free will, even though the jobs may not measure up to the compensation levels everyone would like. 

 And yet Texas, like all states, is subject to the same monetary policy as all the rest: We have the same interest rates and access to capital as the residents of any of the other 49 states, for the Federal Reserve conducts monetary policy and regulates financial institutions under its purview for the nation at large. From this, I draw the conclusion that private sector capital and jobs will go to where taxes and spending and regulatory policy are most conducive to growth.

 In a cyberized, globalized world, those with the means to create jobs will gravitate to those places that provide the best prospect for a return on the investment of the abundant capital on business’ balance sheets or available to them in the marketplace or from eager bankers. Just as many people and firms within the United States have relocated to Texas from other states, investment will flow to countries anywhere in the world where it is most welcome.

Our fiscal authorities must not only figure out the way to contain the nation’s runaway deficits and public debt accumulation, but they must do so in a manner that is competitive with others who seek access to our money, and do so in a manner that does not pull the rug out from under the meager recovery we are experiencing. 

The Committee of 12 and the president have an awesome task. Essentially, they must reboot our entire system of economic incentives and come forward with an updated tax and spending and regulatory regime that incentivizes businesses to invest in the United States and create jobs for American workers rather than gravitate to foreign shores. And they must do so in a manner that avoids engaging in a race to the bottom, but rather, puts us back on the path to ever higher achievement of prosperity.

. . . [T]he ugly truth is that the problem lies not with monetary policy but in the need to construct a modern, appropriate set of fiscal and regulatory levers and pulleys to better incentivize the private sector to channel money into productive use in expanding our economy and enriching our people. 

Those with the capacity to hire American workers―small businesses as well as large, publicly traded or private―are immobilized. Not because they lack entrepreneurial zeal or do not wish to grow; not because they can’t access cheap and available credit. 

 Rather, they simply cannot budget or manage for the uncertainty of fiscal and regulatory policy. In an environment where they are already uncertain of potential growth in demand for their goods and services and have yet to see a significant pickup in top-line revenue, there is palpable angst surrounding the cost of doing business. According to my business contacts, the opera buffa of the debt ceiling negotiations compounded this uncertainty, leaving business decision makers frozen in their tracks.

I would suggest that unless you were on another planet, no consumer with access to a television, radio or the Internet could have escaped hearing their president, senators and their congressperson telling them the sky was falling. With the leadership of the nation―Republicans and Democrats alike―and every talking head in the media making clear hour after hour, day after day in the run-up to Aug. 2 that a financial disaster was lurking around the corner, it does not take much imagination to envision consumers deciding to forego or delay some discretionary expenditure they had planned.

Importantly, from a business operator’s perspective, nothing was clarified, except that there will be undefined change in taxes, spending and subsidies and other fiscal incentives or disincentives. The message was simply that some combination of revenue enhancement and spending growth cutbacks will take place. The particulars are left to one’s imagination and the outcome of deliberations among 12 members of the Legislature.

Now, put yourself in the shoes of a business operator. On the revenue side, you have yet to see a robust recovery in demand; growing your top-line revenue is vexing. You have been driving profits or just maintaining your margins through cost reduction and achieving maximum operating efficiency. You have money in your pocket or a banker increasingly willing to give you credit if and when you decide to expand. 

But you have no idea where the government will be cutting back on spending, what measures will be taken on the taxation front and how all this will affect your cost structure or customer base. 

Your most likely reaction is to cross your arms, plant your feet and say: “Show me. I am not going to hire new workers or build a new plant until I have been shown what will come out of this agreement.” 

Moreover, you might now say to yourself, “I understand from the Federal Reserve that I don’t have to worry about the cost of borrowing for another two years. Given that I don’t know how I am going to be hit by whatever new initiatives the Congress will come up with, but I do know that credit will remain cheap through the next election, what incentive do I have to invest and expand now? Why shouldn’t I wait until the sky is clear?”

It will be devilishly difficult for businesses to commit to adding significantly to their head count or to meaningful capital expansion in the United States until clarity is achieved on the particulars of how Congress will bend the curve of deficit and debt expansion.

Only Congress, working together with the president, has the power to write the rules and provide the incentives to correct the course of the great ship we know and love as America. I hope you, as the voters who put them in office, will demand no less of them."