Sorry, Ezra Klein: The ‘one tax graph you need to know’ needs more context

Sorry, Ezra Klein: The ‘one tax graph you need to know’ needs more context

By Michael Strain and Stan Veuger @ AEI (September 26, 2012)

The above graph has been floating around and receiving a lot of attention. Labeled “the one tax graph you really need to know” by Ezra Klein on his popular blog, this graph was produced by the Citizens for Tax Justice.

This graph shows the tax bill — importantly, federal and state and local taxes — as a percentage of income for several income groups. The bottom income quintile pays 17.4% of their income in taxes, while the top 1% pays 29%. The middle quintile pays just 3.8 percentage points less than the top 1%.

The point of this graph is correct: State and local taxes are much more uniform than federal taxes, so total taxes are less progressive than federal taxes. Indeed, according to Citizens for Tax Justice, in 2011 state and local taxes were actually regressive, with the bottom twenty percent of the income distribution paying a higher share of their income in state and local taxes, 12.3%, than any other income group, and the top 1% of earners paying less than all other income groups at 7.9%.

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The problem with the graph that Mr. Klein has popularized is not that it includes taxes which it shouldn’t. Instead, it excludes taxes that it shouldn’t. Which taxes does it exclude? Negative taxes, which are also called transfers. In other words, the graph includes payments from households to the government, but it does not include all payments from the government to households.

As N. Gregory Mankiw — Harvard economist and current adviser to Governor Romney — noted on his blog back in July, using data from the Congressional Budget Office it is very easy to calculate income after taxes and transfers as a percentage of market income.

Note that this includes both federal and state transfers, but only federal taxes. As we pointed out above, state and local taxes are close to uniformly distributed across income groups. So if state and local taxes were included in this picture, the bars for the lowest quintiles would be a touch lower relative to the bars for the highest quintile. But when you’re talking about 10 or 15 percentage points this hardly matters — including state and local taxes doesn’t change the qualitative interpretation.

What does this chart show? For the lowest income group, income after taxes and transfers was four times that of income before taxes and transfers. Only for roughly the top half of income earners do taxes and transfers result in an after-tax-and-transfer income that is less than their market income — for which the ratio is less than 100%.

As the next chart shows, this relationship is not perfectly stable over time, but the qualitative story is. In economic downturns, more people qualify for transfers like food stamps and unemployment insurance payments. But the significant progressivity of the system is clearly not driven by the business cycle.

In popularizing “the one tax graph you really need to know,” Mr. Klein hasn’t even artificially truncated the distribution over taxes at zero. Instead, he seems to include some transfers from government to individuals — for example, the EITC — but not others, like food stamps, Social Security, TANF, veteran’s programs, worker’s compensation, Medicaid, CHIP, and many other transfers. Not including these transfer payments is a significant omission.

…But the point remains that our tax system when properly analyzed is extremely progressive.

It is important to state plainly that in broad strokes we believe the tax code should be structured in this way: It should be the case that folks facing hard times are net beneficiaries of the government, and likewise that the most fortunate among us are net contributors.

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In this presidential election, when taxes and transfers are such an important issue, the public is best served when the media presents an accurate and comprehensive description of the realities of public policy. We wouldn’t want to argue that ours is “the one tax graph you really need to know.” Really, you need to know more than one.

What Obama’s critique of Ryan tells us about Obama’s budget plans

Desperately Seeking Middle-Class Taxes: What Obama’s critique of Ryan tells us about Obama’s budget plans

Review & Outlook @ WSJ (September 5, 2012)

Democrats in Charlotte are pounding away at the savage budget cuts that Mitt Romney and Paul Ryan supposedly favor and their phantom plan for “raising taxes on the middle class,” as President Obama puts it. The truth is the opposite, but table that for a moment. The President seems not to realize his critique is really a scorching if implicit indictment of his own time in office.

Think about his logic like this: Mr. Ryan’s House budget details a long-range plan to equalize spending and tax revenues without—ahem—raising tax rates. But if such fiscal restraint is as deep and draconian as Mr. Obama claims, then as a matter of arithmetic the White House must favor a tax increase of an equal size, or something close to it, in order to pay for the amount of government he wants to sustain.

The nearby chart dramatizes this reality. It shows the accumulation of outstanding debt as a share of the economy in the modern era. This is debt held by the public—the kind the country has to pay back to bond investors, and not the IOUs that one part of the government owes to another part. These debt projections are highly speculative, and faster economic growth would do a great deal to mitigate them. But we offer them to help readers compare the Ryan and Obama budget visions.

For reference, the top line shows the Congressional Budget Office’s “alternative fiscal scenario,” which it considers the most realistic prediction if current tax and spending policies continue. In that model, debt grows two times as large as GDP by 2037 and the economy crashes. Not good.

Barely better is Mr. Obama’s 2013 budget, which is the second line from the top. The White House purports to “stabilize” the deficit and therefore the debt boom over the next decade. After four consecutive $1 trillion-plus deficits and a more than 70% leap in publicly held debt since Mr. Obama’s inauguration, that’s a pretty modest goal.

But even discounting the usual accounting gimmicks that the White House uses to show this “stability,” check out the fine print. There, the document concedes that beyond 2022 “the fiscal position gradually deteriorates” and the deficit “continues to rise for the next 75 years, and the publicly held debt is also projected to rise persistently relative to GDP.” In other words, Mr. Obama’s budget does not change the spending and debt trajectory.

Even in this best-case scenario by Mr. Obama’s own lights, debt soon exceeds the 112.7% debt-to-GDP high-water mark in 1945, incurred to win a war for civilization across the world.The U.S. would now be taking on a larger liability—well above the 90% ratio that most economists consider the general boundary between safety and crisis—simply because the political class refused to modernize the entitlement state that drives the debt.

Mr. Ryan’s budget, as shown by the third line, would gradually reduce debt by 36% relative to the status quo by the end of the decade, by 59% in 2030 and 80% less by 2040. No question that requires reforms that by conventional political standards are large.But that’s because they’re commensurate with the magnitude of the fiscal problem.

Mr. Ryan’s major contribution has been to expose the illusion that Mr. Obama’s re-election campaign rests on: pretending that raising taxes on a few thousand “millionaires and billionaires” can fund an ever-growing government.

The shaded wedge represents the smallest possible tax increase Mr. Obama would need to achieve the same fiscal balance as Mr. Ryan—except that, in his budget, spending would be at a quarter of the economy and climbing fast. And that’s by the White House’s own most optimistic projections. The reality will be far messier.

Every time Mr. Obama warns about Mr. Ryan “gutting” this or that “investment,” what he’s not saying but is unavoidably implying is that taxes must be far higher to finance this spending. Assuming he can read the budget tables, he knows the government has made promises it cannot mathematically keep—but he hopes nobody notices.

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The researchers looked at how high income-tax rates would have to rise in the top two or even three tax brackets to lower debt to sustainable levels under something akin to CBO’s alternative fiscal scenario. They conclude that even if the top rates hit 100%, the budget “cannot achieve the debt-reduction targets in some or any of the target years.” Though conceding that near-total confiscation is “completely unrealistic,” they report the results anyway “to indicate the infeasibility of achieving a high debt-reduction target simply by increasing top individual income tax rates.” And this is from economists who favor higher taxes.

Another way of putting it is that the rich aren’t nearly rich enough to finance Mr. Obama’s spending ambitions. Sooner rather than later, Washington will come for the middle class, because that’s where the real money is.

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Another resource: America’s real long-term fiscal problem: The federal government has become a gigantic wealth-transfer machine

Romney’s Tax Plan Can Raise Revenue

Romney’s Tax Plan Can Raise Revenue: IRS data show that limiting deductions for high earners would more than cover the dollars lost by reducing income-tax rates 20% across the board

By Martin Feldstein @ WSJ (August 28, 2012)

Mitt Romney’s plan to cut taxes and offset the resulting revenue loss by limiting tax breaks has been attacked as “mathematically impossible.” He would reduce all individual income-tax rates by 20%, eliminate the Alternative Minimum Tax and the estate tax, and limit tax deductions and loopholes that allow high-income taxpayers to reduce their tax payments. All this, say critics, would require a large tax increase on the middle-class to avoid raising the deficit.

Careful analysis shows this is not the case.

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To avoid the resulting uncertainties, I decided to analyze the Romney plan using the most recent IRS data, which is based on tax returns for 2009 and published in the current issue of the IRS quarterly publication. (Although 2009 was a low-income year because of the recession, using that year is preferable to looking back to some earlier period.)

Consider first the cost of the 20% reduction in all tax rates. The income-tax revenue in 2009 before all tax credits was $953 billion. Of this, $49 billion was from taxing dividends and capital gains at reduced rates that would not be subject to further reductions. So the 20% reduction applies to $904 billion and would produce what Washington tax analysts call a “static” revenue loss—that is, the revenue loss if the lower rates didn’t cause taxpayers to change their behavior—of $181 billion.

But past experience shows that taxpayers do respond to lower marginal tax rates by acting in ways that increase their taxable incomes: increasing work effort, receiving more of their compensation in the form of taxable cash rather than untaxed fringe benefits, and spending less of their income on tax-favored forms of consumption that are deducted or excluded in calculating taxable income. More specifically, history shows that a tax cut that raises the after-tax share of earnings that an individual keeps by 10% raises taxable income by about 5%. This implies that the revenue loss from the 20% tax cut would be $148 billion, not $181 billion.

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…It only requires knowing if enough revenue could be raised from high-income taxpayers to cover the $186 billion cost.

The IRS data show that taxpayers with adjusted gross incomes over $100,000 (the top 21% of all taxpayers) made itemized deductions totaling $636 billion in 2009. Those high-income taxpayers paid marginal tax rates of 25% to 35%, with most $200,000-plus earners paying marginal rates of 33% or 35%.

And what do we get when we apply a 30% marginal tax rate to the $636 billion in itemized deductions? Extra revenue of $191 billion—more than enough to offset the revenue losses from the individual income tax cuts proposed by Gov. Romney.

This does not mean eliminating all deductions. My preference would be to retain all deductions but to limit their total tax benefit to a moderate percentage of each taxpayer’s adjusted gross income.

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Since broadening the tax base would produce enough revenue to pay for cutting everyone’s tax rates, it is clear that the proposed Romney cuts wouldn’t require any middle-class tax increase, nor would they produce a net windfall for high-income taxpayers. The Tax Policy Center and others are wrong to claim otherwise.

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The Romney Hood Fairy Tale

The Romney Hood Fairy Tale: The false, invented analysis behind Obama’s tax claims

Review & Outlook @ WSJ (August 7, 2012)

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By the way, even the Tax Policy Center admits that “we do not score Governor Romney’s plan directly as certain components of his plan are not specified in sufficient detail.” But no matter, the study plows ahead to analyze features of the Romney plan that aren’t even in it.

The heart of Mr. Romney’s actual proposal is a 20% rate cut for anyone who pays income taxes. This means, for example, that the 10% rate would fall to 8%, the 35% rate would fall to 28% and all the brackets in between would fall as well. The corporate tax would fall to 25% from 35%.

The plan says these cuts would be financed in a revenue-neutral way. First, by “broadening the tax base,” which means reducing or eliminating tax deductions and loopholes as in the tax reform of 1986. The Romney campaign doesn’t specify which deductions—no campaign ever does—but it has been explicit in saying that the burden would fall most on higher tax brackets. So in return for paying lower rates, the wealthy get fewer deductions.

Second, the Romney campaign says it expects to increase revenues by increasing the rate of economic growth to 4%, up from less than 2% this year and in 2011. (Separately from tax reform, but clearly relevant to budget deficits, Mr. Romney says he’d gradually reduce spending to 20% of the economy from the Obama heights of 24%-25%.)

The class warriors at the Tax Policy Center add all of this up and issue the headline-grabbing opinion that it is “mathematically impossible” to reduce tax rates and close loopholes in a way that raises the same amount of revenue. They do so in part by arbitrarily claiming that Mr. Romney would never eliminate certain loopholes (such as for municipal bond interest), though the candidate has said no such thing.

Based on this invention, they then postulate that Mr. Romney would have to do something he also doesn’t propose—which is raise taxes on those earning less than $200,000. In the Obama campaign’s political alchemy, this becomes “Romney Hood” and a $2,000 tax increase.

The Tax Policy Center also ignores the history of tax cutting. Every major marginal rate income tax cut of the last 50 years—1964, 1981, 1986 and 2003—was followed by an unexpectedly large increase in tax revenues, a surge in taxes paid by the rich, and a more progressive tax code—i.e., the share of taxes paid by the richest 1% rose.

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So on four separate occasions what TPC says is “mathematically impossible”—cutting tax rates and making the tax system more progressive—actually happened. Hats off to the scholars at TPC: Their study manages to claim that what happens in real life can’t happen in theory.

The TPC analysis also fails to acknowledge how highly dependent the current tax system is on the very rich. As the Tax Foundation explains in a recent report based on CBO data: “The top 20 percent of households pay 94 percent of federal income taxes. The bottom 40 percent have a negative income tax rate, and the middle quintile pays close to zero.”

This reality is treated as a state secret in Washington because it refutes Mr. Obama’s campaign theme that the rich are undertaxed. The same crowd that has been howling that the rich don’t pay their fair share of taxes now touts a study concluding that cutting taxes will only benefit the rich. Well, which is it?

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Harvard economist Dale Jorgenson recently testified before the Senate Finance Committee that “a tax reform similar to the Reagan effort of 1986” would raise economic output over the long term “by $7 trillion in 2011 dollars.”

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The Tax Policy Center’s claim that it’s impossible to make the numbers add up is also refuted by President Obama’s own Simpson-Bowles deficit commission report. The Romney plan of cutting the top tax rate to 28% and closing loopholes to pay for it is conceptually very close to what Simpson-Bowles recommended.

And here’s the kicker: Simpson-Bowles assumed that the top rate could be cut to 28%, loopholes could be closed, revenues as a share of GDP would rise to 20% and the deficit could be cut by close to $1.5 trillion. The difference is that the Romney plan caps tax revenues at about 18% of GDP so that taxes don’t have to rise on the middle class. If Mr. Romney’s numbers don’t add up, then neither do those in the bipartisan Simpson-Bowles plan that the media treat as the Holy Grail of deficit reduction.

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The great irony is that the candidate most likely to raise taxes on the middle class is Mr. Obama. He could raise every tax on the rich he proposes and still not come up with enough revenue to finance the increases in spending he wants in a second term. Where do you think he’ll turn then?

The rich pay more than their fair share

The rich pay more than their fair share

By Phillip Klein @ Washington Examiner (July 11, 2012)

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…When all federal taxes are included, the top 1 percent paid 22.3 percent of taxes in 2009, compared to the bottom 20 percent, who paid only 0.3 percent of the taxes. That means that the proportion of taxes paid by the top 1 percent is 74 times the amount paid by bottom 20 percent. In 1979, the top 1 percent was only paying seven times as much in taxes as a share of all taxes collected.

Some may counter that the rich pay a lot more because they earn a lot more. But even factoring in income inequality, wealthier Americans still pay a disproportionate amount in taxes. The top 1 percent, who as we see above paid 22.3 percent of all federal taxes in 2009, earned only 13.4 percent of income in the U.S. that year. The top 20 percent, who earned 50.8 percent of income, paid 67.9 percent of taxes. In contrast, every other income group paid a lower share of taxes than they earned in income.

Ernst & Young study: Tax hikes on wealthy are a job killer

Ernst & Young: Tax hikes on wealthy are a job killer

By David Harsanyi @ Human Events (July 18, 2012)

Though we approach the fiscal cliff, President Obama has based much of his campaign on allowing Bush-era tax hikes on the wealthy to expire in the name of “fairness.”

In the name of basic economics, however, we have to deal with reality. And in a new study, Ernst & Young finds that increasing tax rates on wealthy taxpayers would have a substantial and sustained negative impact on the economy.

The study, commissioned by a number of business groups including the National Federation of Independent Business, finds that 2.1 million business owners would be subjected to higher rates, most of them through partnerships, LLCs and S-Corporations. The results aren’t pretty.

According to Ernst & Young, economic output would grow 1.3 percent in the long run, costing $200 billion in today’s economy. Employment would fall by another 0.5 percent in the long run, costing the economy around 710,000 fewer jobs in today’s economy.

In addition, capital investment would fall by 2.4 percent in the long run. Wages would fall by 1.8 percent, “reflecting a decline in workers’ living standards relative to what would have occurred otherwise.”

And that’s just the start.

The study states that “real long-run economic consequences for allowing the top two ordinary tax rates and investment tax rates to rise in 2013. This policy path can be expected to reduce long-run output, investment and net worth.”

It’s True: Corporations Are People

It’s True: Corporations Are People; What else could they be? Buildings don’t hire people. Buildings don’t design cars that run on electricity or discover drug therapies to defeat cancer

By Jack and Suzy Welch @ WSJ (July 15, 2012)

Here’s a new party trick. Want to be accused of being a member of a satanic cult? Like to be called the kind of person who would steal candy from a child, or harm a puppy and start a forest fire—all in the same day? Do you want to be described as evil, heartless and stupid?

Then just do this: Offhandedly mention in public that you agree with Mitt Romney—and that, yeah, you think corporations are people.

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“Mitt Romney tells us, in his own words, he believes corporations are people. No, Mitt, corporations are NOT people,” she pronounced. “People have hearts. They have kids. They get jobs. They get sick. They love and they cry and they dance. They live and they die. Learn the difference.” The audience went wild.

What nonsense.

Of course corporations are people. What else would they be? Buildings don’t hire people. Buildings don’t design cars that run on electricity or discover DNA-based drug therapies that target cancer cells in ways our parents could never imagine.

Buildings don’t show up at a customer’s factory and say, “We won’t leave until we solve your inventory problem.” Buildings don’t encourage their employees to mentor inner-city kids in math and science. Buildings don’t fund homeless shelters in Boston or health clinics in Rwanda. People do.

Corporations are people working together toward a shared goal, just as hospitals, schools, farms, restaurants, ballparks and museums are. Yes, the people who invest in, manage and work for corporations are there to make a profit. And yes, corporations may employ some bureaucrats, jerks, cheapskates and even nefarious criminals.

But most individuals working in corporations are regular people, people just like you and your friends and neighbors. People who want to make a living and want to make a difference.

And while they’re doing that, people in corporations do indeed love and cry and dance. If you don’t know that, you’ve never been part of a team that has pulled together over coffee and late nights and shouting and laughing and created something amazing to hit a deadline. You’ve never been in the room when a longtime client says it’s not working anymore and she’s taking her business to your biggest competitor. You’ve never sat in the lunch room when someone runs in and says the new medical device that no one thought had a chance, the little heart valve or something like it that every engineer in the place has been working on for two years, has just passed its first human clinical trials with flying colors.

In such moments—moments that happen every single day—you can see and hear and feel that corporations are people. That’s all they are.

This fact is so obvious that there can only be one conclusion drawn when we hear the pronouncement, “Corporations aren’t people”—that it’s doublespeak. That is, when people say that corporations aren’t people, what they really want to say is, “Business is evil.”

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Obviously, we’re not in that camp. We know capitalism isn’t perfect. But free markets are the best system there is to provide opportunity to those with an idea, or simply the motivation to work their butts off to make their lives better. We also know capitalism can spawn bad behavior; greed is part of the human condition and always will be. That’s why regulations and controls exist, as they should.

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If that’s what you want, we can’t change your mind. But in your efforts, stop hiding behind words. Corporations are people. If you want to put an end to corporations, at least say what you mean.

Speaker Boehner Releases List of 88 Economists Who Agree Obama Tax Plan Will Hurt Small Business & Further Damage Economy

Speaker Boehner Releases List of 88 Economists Who Agree Obama Tax Plan Will Hurt Small Business & Further Damage Economy

Press Release (August 2, 2012)

House Speaker John Boehner (R-OH) today released a list of 88 American economists who warn that the looming January 1 tax hike supported by President Obama and congressional Democratic leaders – which independent accounting firm Ernst & Young says will hit thousands of small businesses and cost the U.S. more than 700,000 jobs – will hurt the economy and must be stopped before it goes into effect.

Obama: Tax ‘the Rich’

Obama: Tax ‘the Rich’

By Michael Tanner @ National Review (July 11, 2012)

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By some counts, this represents the 25th time the president has rolled out this proposal — something to keep in mind the next time he warns against “refighting the battles of the past” over something like repealing Obamacare. Regardless, repetition hasn’t done anything to improve either the policy or the president’s truthfulness in describing it.

First, the president’s definition of wealthy is a little shaky. It turns out that the “millionaires” he refers to in his speeches are actually individuals earning $200,000 per year and couples earning $250,000 — about 2.5 million Americans. While $250,000 is a lot of money in many areas of the country, in high-cost regions such as New York City that earning category would include a teacher with 22 years of service married to a police captain. The president’s definition of “rich” would also include some 750,000 independent and small businesses that do not pay income taxes as businesses; instead, their taxes are paid through the owners’ individual tax returns. We are not exactly talking Warren Buffett here.

Moreover, many Americans earning less than $200,000 are likely to suffer collateral damage from this tax increase. For example, the president’s proposed tax hike on capital gains is likely to reduce the value of 401(k) funds that millions of middle-income Americans rely on for retirement. And the business taxes will drive up the prices of goods and services, not to mention costing jobs. Given current unemployment rates, it seems especially hard to think of any reason why raising taxes on small businesses would be a good policy.

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The current tax code is already highly progressive. The wealthy pay a far higher effective tax rate. After all deductions and exemptions are included, the rich pay roughly 24 percent of their income in taxes, compared to 11 percent on average for all taxpayers. The rich, it would seem, already pay more than their “fair share.”

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Finally, the president is disingenuous in suggesting that revenue from the higher taxes would be used to bring down the deficit and balance the budget.

Balancing the budget isn’t rocket science. All that is required is for revenues to grow faster than spending. According to the Congressional Budget Office’s alternative budget scenario, revenues will grow over the next several years, as a result of such natural factors as population growth and a return to more normal levels of economic activity, from their current 15.8 percent of GDP to 18.5 percent of GDP by 2022 — even if the Bush tax cuts are extended in their entirety. Even without a tax hike, the government will have a lot more money.

In fact, it will have so much more money that it isn’t even necessary to cut spending in order to balance the budget. If spending were simply held constant in inflation-adjusted terms, a growing economy would reduce federal spending to 18.3 percent of GDP by 2022. Thus, we could balance the budget with no tax increase whatsoever.

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Because the president wants to increase spending even faster than he wants to increase taxes. President Obama’s proposed tax hike would raise roughly $65 billion in 2013. At the same time, the president proposes to increase spending next year by $202 billion. The tax hike would pay for only 32 percent of the proposed new spending. Or put it another way: Over ten years, the new taxes would cover roughly half of the $1.6 trillion in new subsidies and Medicaid spending under Obamacare.

That means that not a penny of Obama’s proposed tax increase would, in fact, go toward reducing the budget deficit, let alone paying down the debt. Rather, every cent of the tax hike would go toward paying for increased federal spending.

And it is that spending, and the bigger and more intrusive government it represents, that is the real burden on the economy and the American people. President Obama’s tax hike is just a symptom of the big-government disease.

Federal Tax Rates & A Fair Share

Federal Tax Rates & A Fair Share

Political Math (April 12, 2012)

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I love this chart because I think it summarizes so many important things very easily. We can immediately get the scope of how much the top 1% makes, (it’s a lot) but also easily see that they pay more as a % of the tax burden than they make as a % of the national income. We can see that the US tax system is actually fairly progressive, with the top 20-10% paying the closest to a “fair share” (if by fair you mean every dollar made is taxed at an equal proportion to all income as a whole).

Warren Buffett is an anecdote, but one that has been repeated so often that many people think that the rich, as a whole, don’t pay very much in taxes. This chart shows that this is entirely untrue. When viewed through the lens of effective taxation (which is a very appropriate lens to use) the top 1% of income earners pay a much higher rate on their income than any other income group.