Wednesday, October 20, 2010
Wednesday, October 14, 2009
Bruce Bartlett's new book
I'm no economist, but I'm curious to read the upcoming book (The New American Economy: The Failure Of Reaganomics And A New Way Forward) by Bruce Bartlett on the need for Supply Side Economics to take a hike. This coming from the guy who authored a 1981 book entitled Reaganomics: Supply-Side Economics in Action.
This lengthy post from Mr. Bartlett, laying out the skeletal reasons for his new book, is intriguing. I'd be more intrigued if I understood more of it. I'm getting there. In the meantime, I leave you with this tasty tidbit:
This lengthy post from Mr. Bartlett, laying out the skeletal reasons for his new book, is intriguing. I'd be more intrigued if I understood more of it. I'm getting there. In the meantime, I leave you with this tasty tidbit:
The supply-siders are to a large extent responsible for this mess, myself included. We opened Pandora's Box when we got the Republican Party to abandon the balanced budget as its signature economic policy and adopt tax cuts as its raison d'être. In particular, the idea that tax cuts will "starve the beast" and automatically shrink the size of government is extremely pernicious.
Thursday, October 8, 2009
Blog With I. Blog With Thee. Blog With Us. For I Am The Blog.
I think the fundamental point of controversy in most of the important current policy debates (which you follow at the risk of severe nausea and internal hemorrhaging) is the issue of whether, and to what extent, public sector involvement in the economy is justified on economic and/or moral grounds. Really novel insight, I know. But we need to get the obvious out of the way first.
I’d like to focus primarily, but not exclusively, on the economic dimension of the debate. Our convictions with respect to ideas of “distributive justice” and “natural rights” inevitably inform our judgments on economy policy. But I’ve always gotten the impression that these moral and philosophical beliefs are nearly “undebatable” – you either hold a certain view or you don’t. It is very difficult to convince someone who places primary importance on the sacrosanct status of property rights that their view is misguided; it is equally difficult to convince someone who believes that socio-economic equality should be our ultimate goal that they are mistaken. Presumably, however, we all have reason to want a healthy, growing, sustainable economy which provides us with a high standard of living.
Not only are the economic consequences of public sector involvement in the economy a shared concern, they also have the advantage that they can be empirically observed and evaluated – at least to some extent. Subject to certain limitations (which will undoubtedly come up in future posts), then, we should be able to have a coherent debate – based on observable facts rather than convictions, and concerning a goal we should all share.
I think it helps to break the analysis of public sector economics into two parts. The first concerns the efficiency consequences of drawing resources out of the private sector and into the public sector (i.e., taxation and public borrowing). The second concerns the economic consequences of the things the government chooses to do with those resources. Of course, both questions have been extensively studied. And though, given the limitations of social science research, one can never be certain about these things, I believe one side of the debate is far more correct than the other. I’m going to try to support that judgment over the course of my blog posts.
I’d like to focus primarily, but not exclusively, on the economic dimension of the debate. Our convictions with respect to ideas of “distributive justice” and “natural rights” inevitably inform our judgments on economy policy. But I’ve always gotten the impression that these moral and philosophical beliefs are nearly “undebatable” – you either hold a certain view or you don’t. It is very difficult to convince someone who places primary importance on the sacrosanct status of property rights that their view is misguided; it is equally difficult to convince someone who believes that socio-economic equality should be our ultimate goal that they are mistaken. Presumably, however, we all have reason to want a healthy, growing, sustainable economy which provides us with a high standard of living.
Not only are the economic consequences of public sector involvement in the economy a shared concern, they also have the advantage that they can be empirically observed and evaluated – at least to some extent. Subject to certain limitations (which will undoubtedly come up in future posts), then, we should be able to have a coherent debate – based on observable facts rather than convictions, and concerning a goal we should all share.
I think it helps to break the analysis of public sector economics into two parts. The first concerns the efficiency consequences of drawing resources out of the private sector and into the public sector (i.e., taxation and public borrowing). The second concerns the economic consequences of the things the government chooses to do with those resources. Of course, both questions have been extensively studied. And though, given the limitations of social science research, one can never be certain about these things, I believe one side of the debate is far more correct than the other. I’m going to try to support that judgment over the course of my blog posts.
Staying Sharpe
So, after a few long discussions about how much I hate blogs, I have decided to revive the old blog. For the most part, I'm just trying to memorialize my thoughts into print, but I'm also trying to hang on to whatever policy analysis skills I've ever had. I hope some of the old participants will post as well.
In the words of old Guy Woody Corngood, "Let's do this."
In the words of old Guy Woody Corngood, "Let's do this."
Two Deceptive Arguments (revised)
I've been hearing the following two conservative arguments quite a bit recently. I’d like to show that, while the factual assertions involved are true, they simply do not support the proposition they purport to.
Argument 1: The Rich Already Pay More Than Their Fair Share in Taxes (here and here)
Both articles purport to establish that our country's tax burden is already distributed progressively enough – indeed, perhaps excessively so. Both use an argument that goes something like:
“The top X% of income earners are responsible for over Y% of total Federal income tax receipts, while the bottom Z% are responsible for only 0.0003% (or some such low number).”
These facts, by themselves, do not say anything meaningful about the progressivity of the U.S. tax system. They do not reflect the distribution of any of the other taxes Americans pay, many of which are highly to moderately regressive (e.g., payroll taxes, sales taxes, gasoline taxes, tolls, property taxes, utilities taxes, vice taxes, service fees, etc.). Federal income tax receipts constitute only 45% of Federal revenues, while Federal taxes historically constitute about 2/3 (roughly 18% out of roughly 27%) of tax revenues collected at all levels of American government. That means that Federal income tax revenues constitute only about 30% of the country's total tax revenues, and the Federal income tax is one of the very few major progressive tax regimes (the Federal corporate tax, estate and gift tax, and state income taxes being the others).
In fact, 2/3 of Americans pay more in payroll taxes than they do in income tax. Social security taxes are assessed only on labor income and constitute a flat 6.2% on all income up to $102,000 (in 2008), while all capital income and wage income beyond that threshold amount are not subject to the tax. The Medicare tax is imposed on 1.45% of the full amount of a taxpayer's wage income. Once all taxes are properly included into the analysis and tax burden is represented in terms of a percentage of income instead of total dollar amount, this is what the U.S. tax distribution looks like.
This should be sufficient to establish that these numbers do not demonstrate anything meaningful about the U.S. tax system. But let’s go one step further, because there is another important flaw in this analysis. Even if we were to ignore all other taxes besides the Federal income tax, the figures would still prove nothing. Here’s why. Consider a "fictitious" society called the Reagan Republic comprised of A, B, C, D, and E. This society is characterized by enormous concentration of wealth and an explicitly regressive tax burden:
A makes $2 million a year and is taxed at 15%; A will pay $300,000
B makes $200,000 a year and is taxed at 20%; B will pay $40,000
C makes $75,000 a year and is taxed at 25%; C will pay $18,750
D makes $45,000 a year and is taxed at 30%; D will pay $13,500
E makes $20,000 a year and is taxed at 35%; E will pay $7,000
This society will pay a total of $379,250 in taxes. Despite the fact that the tax code is explicitly regressive, the following statements are true:
The top 20% provide 79.1% of government revenues
The top 40% provide 89.7% of government revenues
The bottom 60% provide 10.3% of government revenues
The bottom 40% provide 5.4% of government revenues
The bottom 20% provide 1.8% of government revenues
So even under a regressive tax code, the well-off can pay the vast majority of tax revenues. But as you can see, this is not because the rich bear a higher proportionate burden, but simply because their incomes are so much higher. So this argument essentially allows conservatives to leverage a major failure of the economic policies they support – the extreme economic inequality they have helped create (see Figures 1-8D)
– to support the proposition that the U.S. tax system is already progressive enough. This is ironic to say the least.
And while the numbers in my example were cherry-picked to prove my point, perhaps my assumed numbers are not so far off (see this and this and this and this).
Argument 2: The U.S. Economy Displays an Amount of Social Mobility Consistent with the Idea That It Is A “Meritocracy” (also see this)
The WSJ editorial relies on the findings of a Treasury Department study to try to show that “social mobility is alive and well” in the United States. The study used the following method:
“[It] examined a huge sample of 96,700 income tax returns from 1996 and 2005 for Americans over the age of 25. The study tracks what happened to these tax filers over this 10-year period. One of the notable, and reassuring, findings is that nearly 58% of filers who were in the poorest income group in 1996 had moved into a higher income category by 2005. Nearly 25% jumped into the middle or upper-middle income groups, and 5.3% made it all the way to the highest quintile.”
These findings are not particularly robust to begin with. But they're even less useful than they appear.
First, look at the way the study was conducted. Consider a college educated business major still making $28,000 at 26 at a company in Champaign IL, but who later gets an MBA and makes $200,000 at 45 as a VP of Marketing in Chicago. Or a 28 year old who works at Starbucks before figuring out that what they want to do is to get a masters in education and teach in a North Jersey school district (where they may start at >$50,000, and can go up to as high as $100,000). Or a son of privilege who does not work between 25 and 35, but rather lives off of the support of his parents or a trust (both of which would be counted as gifts and therefore not included in income) but later gets a gig as a token board of directors member on his father’s company’s board and earns dividends and capital gains off of inherited financial assets. Or a law student who has an adjusted gross income of $14,000 at the age of 27 but whose income will increase substantially once he starts working next fall (i.e., me). All of these people could very plausibly be counted in the lowest quintile during their low income years, and in the highest quintile during their later higher income years. But this isn’t “social mobility” at all. It merely reflects individuals' earnings life-cycles. All of the hypothetical people given above may be, and most likely are, the children of middle class (or higher) families.
Consequently, it is more appropriate to gauge the level of social mobility by comparing a group of people’s socio-economic status to that of their parents. Studies (1, 2, 3) that use this method consistently show that the United States exhibits a low level of social mobility relative to its first-world peers, countries which invariably have stronger welfare states and more "socialist" policies. Thus, conservative “meritocrats” must somehow account for the strong empirical implication that social democracy is more conducive to social mobility than free market capitalism.
A few more points should be made. The study only counted tax filers. Many very low income people (including the domestic chronically poor and immigrant laborers) do not file income tax returns (Table 3). These people are not counted at all, so the study totally ignores some people at the very bottom – people for whom we know the prospect of social mobility is the most far-fetched (p. 27). This feature will also bump down people whose income may not seem extremely low (like the hypothetical people I mention above) into the “lowest quintile” group, the group whose subsequent earnings form the crux of the study’s supposed implications. Furthermore, the statement that “the after-inflation median income of all tax filers increased by an impressive 24% over the same period,” paints a very misleading picture of reality. Overall median income growth has stagnated over the last 40 years (an average annual growth rate of about 0.54% from 1967-2008) despite significant increases in total family hours worked (an average annual growth rate of a little less than 0.75% from 1979-2002). Moreover, mobility may not necessarily represent the workings of a meritocracy. Indeed, some annual earnings variation may in fact reflect an undesirable degree of volatility in people’s incomes that it is attributable not to meritorious behavior (or the lack thereof), but instead to unforeseen financial disruptions. See Jacob Hacker’s The Great Risk Shift.
Perhaps it is fruitless to point out these (somewhat distressingly obvious) errors in reasoning of the WSJ editorial writers, but I do encounter these arguments frequently, and it will be handy for me to have this post on hand to counter them.
Argument 1: The Rich Already Pay More Than Their Fair Share in Taxes (here and here)
Both articles purport to establish that our country's tax burden is already distributed progressively enough – indeed, perhaps excessively so. Both use an argument that goes something like:
“The top X% of income earners are responsible for over Y% of total Federal income tax receipts, while the bottom Z% are responsible for only 0.0003% (or some such low number).”
These facts, by themselves, do not say anything meaningful about the progressivity of the U.S. tax system. They do not reflect the distribution of any of the other taxes Americans pay, many of which are highly to moderately regressive (e.g., payroll taxes, sales taxes, gasoline taxes, tolls, property taxes, utilities taxes, vice taxes, service fees, etc.). Federal income tax receipts constitute only 45% of Federal revenues, while Federal taxes historically constitute about 2/3 (roughly 18% out of roughly 27%) of tax revenues collected at all levels of American government. That means that Federal income tax revenues constitute only about 30% of the country's total tax revenues, and the Federal income tax is one of the very few major progressive tax regimes (the Federal corporate tax, estate and gift tax, and state income taxes being the others).
In fact, 2/3 of Americans pay more in payroll taxes than they do in income tax. Social security taxes are assessed only on labor income and constitute a flat 6.2% on all income up to $102,000 (in 2008), while all capital income and wage income beyond that threshold amount are not subject to the tax. The Medicare tax is imposed on 1.45% of the full amount of a taxpayer's wage income. Once all taxes are properly included into the analysis and tax burden is represented in terms of a percentage of income instead of total dollar amount, this is what the U.S. tax distribution looks like.
This should be sufficient to establish that these numbers do not demonstrate anything meaningful about the U.S. tax system. But let’s go one step further, because there is another important flaw in this analysis. Even if we were to ignore all other taxes besides the Federal income tax, the figures would still prove nothing. Here’s why. Consider a "fictitious" society called the Reagan Republic comprised of A, B, C, D, and E. This society is characterized by enormous concentration of wealth and an explicitly regressive tax burden:
A makes $2 million a year and is taxed at 15%; A will pay $300,000
B makes $200,000 a year and is taxed at 20%; B will pay $40,000
C makes $75,000 a year and is taxed at 25%; C will pay $18,750
D makes $45,000 a year and is taxed at 30%; D will pay $13,500
E makes $20,000 a year and is taxed at 35%; E will pay $7,000
This society will pay a total of $379,250 in taxes. Despite the fact that the tax code is explicitly regressive, the following statements are true:
The top 20% provide 79.1% of government revenues
The top 40% provide 89.7% of government revenues
The bottom 60% provide 10.3% of government revenues
The bottom 40% provide 5.4% of government revenues
The bottom 20% provide 1.8% of government revenues
So even under a regressive tax code, the well-off can pay the vast majority of tax revenues. But as you can see, this is not because the rich bear a higher proportionate burden, but simply because their incomes are so much higher. So this argument essentially allows conservatives to leverage a major failure of the economic policies they support – the extreme economic inequality they have helped create (see Figures 1-8D)
– to support the proposition that the U.S. tax system is already progressive enough. This is ironic to say the least.
And while the numbers in my example were cherry-picked to prove my point, perhaps my assumed numbers are not so far off (see this and this and this and this).
Argument 2: The U.S. Economy Displays an Amount of Social Mobility Consistent with the Idea That It Is A “Meritocracy” (also see this)
The WSJ editorial relies on the findings of a Treasury Department study to try to show that “social mobility is alive and well” in the United States. The study used the following method:
“[It] examined a huge sample of 96,700 income tax returns from 1996 and 2005 for Americans over the age of 25. The study tracks what happened to these tax filers over this 10-year period. One of the notable, and reassuring, findings is that nearly 58% of filers who were in the poorest income group in 1996 had moved into a higher income category by 2005. Nearly 25% jumped into the middle or upper-middle income groups, and 5.3% made it all the way to the highest quintile.”
These findings are not particularly robust to begin with. But they're even less useful than they appear.
First, look at the way the study was conducted. Consider a college educated business major still making $28,000 at 26 at a company in Champaign IL, but who later gets an MBA and makes $200,000 at 45 as a VP of Marketing in Chicago. Or a 28 year old who works at Starbucks before figuring out that what they want to do is to get a masters in education and teach in a North Jersey school district (where they may start at >$50,000, and can go up to as high as $100,000). Or a son of privilege who does not work between 25 and 35, but rather lives off of the support of his parents or a trust (both of which would be counted as gifts and therefore not included in income) but later gets a gig as a token board of directors member on his father’s company’s board and earns dividends and capital gains off of inherited financial assets. Or a law student who has an adjusted gross income of $14,000 at the age of 27 but whose income will increase substantially once he starts working next fall (i.e., me). All of these people could very plausibly be counted in the lowest quintile during their low income years, and in the highest quintile during their later higher income years. But this isn’t “social mobility” at all. It merely reflects individuals' earnings life-cycles. All of the hypothetical people given above may be, and most likely are, the children of middle class (or higher) families.
Consequently, it is more appropriate to gauge the level of social mobility by comparing a group of people’s socio-economic status to that of their parents. Studies (1, 2, 3) that use this method consistently show that the United States exhibits a low level of social mobility relative to its first-world peers, countries which invariably have stronger welfare states and more "socialist" policies. Thus, conservative “meritocrats” must somehow account for the strong empirical implication that social democracy is more conducive to social mobility than free market capitalism.
A few more points should be made. The study only counted tax filers. Many very low income people (including the domestic chronically poor and immigrant laborers) do not file income tax returns (Table 3). These people are not counted at all, so the study totally ignores some people at the very bottom – people for whom we know the prospect of social mobility is the most far-fetched (p. 27). This feature will also bump down people whose income may not seem extremely low (like the hypothetical people I mention above) into the “lowest quintile” group, the group whose subsequent earnings form the crux of the study’s supposed implications. Furthermore, the statement that “the after-inflation median income of all tax filers increased by an impressive 24% over the same period,” paints a very misleading picture of reality. Overall median income growth has stagnated over the last 40 years (an average annual growth rate of about 0.54% from 1967-2008) despite significant increases in total family hours worked (an average annual growth rate of a little less than 0.75% from 1979-2002). Moreover, mobility may not necessarily represent the workings of a meritocracy. Indeed, some annual earnings variation may in fact reflect an undesirable degree of volatility in people’s incomes that it is attributable not to meritorious behavior (or the lack thereof), but instead to unforeseen financial disruptions. See Jacob Hacker’s The Great Risk Shift.
Perhaps it is fruitless to point out these (somewhat distressingly obvious) errors in reasoning of the WSJ editorial writers, but I do encounter these arguments frequently, and it will be handy for me to have this post on hand to counter them.
Friday, September 26, 2008
SDI and Average Annual Productivity Growth in North America, "Old" Europe, and Oceania, 1980-2006
Source: OECD Factbook 2008. http://titania.sourceoecd.org/vl=4937052/cl=16/nw=1/rpsv/factbook/
SDI and Intergenerational Mobility
The only countries for which the right data were available were:
UK {0.502, 0.001}
USA {0.300, 0.087}
France {0.623, 0.258}
Germany {0.482, 0.515}
Sweden {0.821, 0.658}
Canada {0.456, 0.887}
Finland {0.681, 0.915}
Norway {0.687, 0.944}
Denmark {0.784, 1.001}
x = SDI 2.0
y = Intergenerational Mobility (Scaled)
Source: http://www.economicmobility.org/assets/pdfs/EMP_American_Dream.pdf, p. 9.
Note: scaled scores are derived from each country's relative mobility statistic (i.e., the extent to which one's parents earnings predict one's own earnings). The scaling formula is [(country's statistic - minimum statistic)/(maximum statistic - minimum statistic) + 0.001]. 0.001 is added to each scaled score to avoid scores of zero, which screw up the nonlinear regression equations.
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