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Day By Day© by Chris Muir.

Monday, January 25, 2010

Charts of the Day 

UPDATE: below. And MaxedOutMama continues the discussion here.

I repeatedly have shown that the upper income brackets pay the lion's share of Federal taxes, and also that top earners pay higher tax rates. Confirmation comes from the Congressional Budget Office, "Data on the Distribution of Federal Taxes and Household Income":


source: CBO, April 2009

The chart on the right demonstrates that only the highest income quintile pays more in taxes than its share of income, which depicts the "progressiveness" of U.S. Federal taxes. See also Tax Foundation (2007 data).

CBO also tracks historical tax data; here's the trend of total effective Federal tax rates (including income, social, corporate and excise) by income quintile from the beginning of the Reagan Administration through 2006:


source: NOfP Chart via CBO data

Note that tax rates have dropped among all quintiles, but while the top quintile rate is down only 1 percent, all other quintiles show much steeper declines--including halving the tax rate for lower quintile earners. Indeed, in 2009, almost 47 percent of "tax units" (filers) -- mostly in low income quintiles -- paid no or negative Federal income taxes.

So why do lefties claim the rich don't pay enough and want to increase top quintile tax rates? Cause, in the self-described "reality-based community," rhetoric trumps reality.

MORE:

Extensive discussion in comments, including MaxedOutMama's linking to the 2008 quintiles, and the income per-quintile.

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37 Comments:

Because they think it's gross and disgusting that the "rich" have any money left over, and they have no ability to assess the holdings of the really rich against the federal budget or federal deficit so as to understand that the only way to implement socialism is to tax themselves.

Granted, many of those lefties are college professors, but they don't know where they are in the quintiles - a lot of them consider themselves the enslaved and exploited proletariat. Especially those having a degree in feminist epistemology or queer studies or most anything to do with post-modernism. Or English.

I think we should at least raise tax rates sharply on every academic making more than 90K a year. At least 10%.

Also, since they all seem to want universal health care, I think we should immediately impose the 16% percent tax on them. When they realize they, as a houshold, are paying over 30K a year to insure two adults, the thrill will fade but fast.

PS: Obama is smarter than most of them, and that's why he made the promises he made during his campaign. He knows darned well that a prof is going to scream like his testicles are being ripped off if he knows his own taxes are going to be raised.

I guarantee you that if you talk to these people, not one in eight will be able to tell you in what quintile their household income falls. I never laughed so hard as when a discussion broke out at Volokh when they figured out that the proposed income taxes were going to hit most of them. They were a crestfallen lot, to be sure.

And for those who might read this and wonder, here are the 2008 quintiles. And yep, that means that the household incomes of the top five percent begin at $180,000, and the houshold incomes of the top 20% begin at $100,250.

By Blogger MaxedOutMama, at 5:00 PM, January 25, 2010  

What does this distribution look like if you add in state income taxes and sales taxes, public user fees, etc...?


I suspect it would look much flatter

By Blogger Thai, at 5:41 PM, January 25, 2010  

> are paying over 30K a year to insure two adults, the thrill will fade but fast.

No, they will compartmentalize it.

My aunt and uncle are "yellow dog democrats" who consistently "vote the straight party ticket" (Yeah -- how we happen to be related I'm not exactly sure. I figure someone somewhere got switched in a crib at the hospital, but I'm not sure who -- I claim it has to be in their generation, because my mother isn't that clueless). To further connect them with "academics", she's a teacher with a Masters and a 30-year history with the local school system, he's the #3 administrator of a fairly large local Community College -- i.e., both of the exact same stripe as those professors all around.

===

Now:
When property values rose (i.e., ca. 2003-2006), the taxes on their house and their two rental properties went up considerably, to the point where the two undeveloped 1/2 acre plots of land that were attached (one to the house, one to a rental unit) started getting exorbitant.

Now, the taxes in question are all locally(State/County, mostly County) established, and, around here (Florida), that's by a consistently heavily Democrat bunch of representatives.

Who received the blame for the exorbitant property taxes?

I'll allow for some potential speculation before revealing the answer... But the answer, I would suggest, is rather obvious from the data provided.

The point would be that they (the academics) won't connect the dots. Period. No ifs, no ands, no buts. You could put it onto a branding iron and mark their foreheads with it, and it still won't penetrate.

By Blogger OBloodyHell, at 6:29 PM, January 25, 2010  

> What does this distribution look like if you add in state income taxes and sales taxes, public user fees, etc...? I suspect it would look much flatter


Thai, do you have an actual basis for this claim, or are you just pointlessly denying your reasoning its proper passage through the oubliette of ridiculous assertions?

By Blogger OBloodyHell, at 6:50 PM, January 25, 2010  

Thai - no way. Add in property taxes and state and local taxes, and you get a steeper curve (on average). You've also forgotten a bunch of other subsidies; many lower-income US citizens get negative taxation when you figure it all in.

Property taxes are the real wild card - some older people have abruptly found themselves living in mansions without ever having had to move!

The state trend for sales taxes has been to remove necessities (such as food and medicine) from the taxable list. Over the last couple of decades, that has further shifted the lower quintiles' share of taxes down.

What's hurting the lower quintiles (and they ARE hurting) are wages, which have been stagnant to declining in many areas, and medical costs, which are related both to aging and to cost-shifting of public insurance to the uninsured/private.

The regressivity of the sales tax is one reason why I would never want to see a national sales tax in the US.

State income tax rates vary widely. Here's a state-by-state summary.

High tax states have 9-11% as their top income tax rate. Low tax states have 3-5%. Then there are a few with no income tax, and quite a few with middling taxes.

When the top federal rate goes back to 39.6%, here are some samples:
CA: 39.6% + 10.5% = 50.1%.
NJ: 39.6% + 10.75% = 50.35%
HI & OR: 39.6% + 11% = 50.6%

If the income is mostly from wages, of course there is 7.65% on top of that for many earners, or the extra Medicare tax (no limit).

So marginal tax rates in many of the states that are high income are already quite comparable to those in many European socialist republics. What is different is that US sales taxes are, on the average, much lower, so lower income US citizens pay less.

And that's another thing progressives just can't grasp - the only way you can have a socialist system is to impose high tax rates on the average taxpayer.

How does a CA (which has a high sales tax as well as a high income tax) compete if federal income taxes are increased substantially? I don't know. NJ has medium-high sales taxes, high income taxes, and exceptionally high property taxes. They are committing fiscal suicide as we discuss this. They cannot come out of it.

Now, if you raise the SS wage limit to unlimited, as has been suggested to stem the SS deficit (both Medicare and SS are now in deficit), you are going to be pushing 60% marginal tax rates in quite a few areas without any NEW tax increases. That is past the norm in many European countries.

By Blogger MaxedOutMama, at 7:30 PM, January 25, 2010  

Mom

Ugh, that is scary! :-(

Thanks

By Blogger Thai, at 7:36 PM, January 25, 2010  

Not to dwell on it, but Carl is right on this one. Progressives who believe that the difference between the US and Europe is that the US has lower income taxes for the wealthy are mired in ignorance. The US has a lot of tax breaks which will inevitably be lowered (such as tax-exempt bonds), but income taxes for individuals are very comparable for the higher earners.

Most European countries also have lower corporate tax rates than the US.

What's really different between the US and most of Europe are the taxes paid by the lower income brackets, which are MUCH, MUCH higher in Europe.

Take a look at Germany.

By Blogger MaxedOutMama, at 7:40 PM, January 25, 2010  

Mom,

Being personally in the group of Americans that makes a living from my own labors, I hear your point.

Though to be fair I would also say that at some level the difference between income tax and other forms of taxes are meaningless to me (though I readily admit this is not true in the short term).

Yet it is also true that the corollary to all these taxes is an economy now more than 50% controlled by some iteration of government- indeed conflict between government entity A and government entity B has become a real issue.

If it helps, I am not in favor of this at all.

So thanks for answering a question I have had for a very long time.

Be well

By Blogger Thai, at 8:03 PM, January 25, 2010  

Thai - I agree with you. Our policies of spending have surely blurred the distinction between income taxes and SS/Medicare taxes. I don't see a difference between those, really.

But there is a difference in sales tax. We have a LOT of people living on very constrained incomes. I am adamantly against piling the extra burden on those people.

In my opinion, we should be careful about overall rates, but cut many tax breaks. Broadening the BASE of taxation will give us more revenue and perhaps more growth in the long run.

But not, never, NO, regressive taxation. The social problems it will create, and the unfairness make that the worst possible option. Take, for example, a couple with a fairly high income but very high medical costs or, new immigrants or disadvantaged people. If you raise lower-level taxation, the burden on these types of households will be very unfair. Indeed, it would prevent immigrants from moving up the ladder. We ought to preserve social mobility; the social problems many European countries are facing are really due to their regressive taxation schemes. Yes, they get medical care, and it's usually pretty good, and everyone is eligible for basic subsistence payments - but you have third-generation immigrant families still living in publicly-subsidized apartments; it is terribly hard to accumulate capital.

One of the reason many persons and households that are really wealthy pay so little in taxes is that they have a lot of tax-sheltered income built up. I favor changing those exclusions, and implementing progressively higher taxation based on the income. So, for example, if a household has 10K of tax-sheltered income, let it go. But 20K should pay 10% on that, 30K should pay 15%, 40K should pay 20%, 50K should pay 25%. This would raise the effective tax rates for genuinely wealthy people such as Teresa Heinz Kerry (who was paying about 12-13% on income from one trust). That's not right.

If we dump the burden on the truck drivers we will come to passionately regret it a generation from now.

By Blogger MaxedOutMama, at 8:48 PM, January 25, 2010  

But I am a little unsure as to your endgame from all that

At some fundamental level, I don't really see any difference between a system which is 100% controlled by a government and one which is 0% controlled by a government, It is kind of one of those "a rose by any other name does not smell as sweet" issues.

And yet to me personally, they do not smell the same. I do not want a system under 100 (or even 50% control) by one (very diverse) entity and I guess I feel this way as I am not happy with HOW we are spending our money as a society this way.

I think we can do a lot better- again I realize this is only from my particular moral viewpoint of how I would like to see our world constructed.

Yet if I read you correctly, you too do not like the smell of our current rose, yet raising ANY taxes ANY WAY AT ALL, still increases the percentage of our economy under the control of government.

Or am I reading you wrong?

Are you saying cut but maintain progressively for reasons of social cohesion at this lower taxation level?

I am fine with this, it is kind of a tweedledumb-tweedledee that does smell better to me.

Either way we have painful decisions

By Blogger Thai, at 9:03 PM, January 25, 2010  

Oops, typo!

I meant to say

... to me personally they DO NOT smell the same.

By Blogger Thai, at 9:04 PM, January 25, 2010  

No, I got it right the first time.

... I think I am going to make an appointment with the ophthalmologist. ;-)

Be well

By Blogger Thai, at 9:06 PM, January 25, 2010  

M_O_M, great links and analysis, thanks!

Thai, some thoughts for now: private enterprise creates wealth; government can only redistribute it. Since the former is not a zero-sum game, it is preferred. And taxation checks the velocity of exchange and thus curtails growth.

Apart from that, I'm keen to hear M_O_M's reply.

By Blogger Carl, at 9:24 PM, January 25, 2010  

Carl, the entire world's economy is nothing but one massive redistribution system so I am not sure your distinction between private vs. public is all that meaningful.

Further, creating wealth is more zero sum than you might imagine, though I certainly agree your definition of "creating wealth" is not zero-sum.

Yet definitions do have the rather funny property of never quite holding still when you try get to their most atomic level- I am sure any good lawyer knows this inside and out. ;-)

By Blogger Thai, at 9:53 PM, January 25, 2010  

Thai - no, technically the economy is not just a redistribution system, though by now I think we all have dark suspicions about the role those banks "too big to fail" are really playing. At any rate, I do.

But farmers create something - food. They can't keep producing it for less than it costs to to produce it, so it doesn't go for free, but they do create value that wasn't there. And when I wander in to SuperDoc and he treats me, and I don't go blind or wind up sitting drooling in a corner, an economic asset is saved (consider the investment in my education, etc). When I go to the store and buy a pair of jeans or a coat, I am buying something that was made from scratch, even if many hands touched the cotton, thread, cloth, buttons etc to create it.

As to your question about government control, my basic focus is to try to carve out as much INDIVIDUAL freedom as possible by spreading burdens as widely as possible.

We have to pay the costs for the basics, and for all the money we have spent (much of it not wisely). If we don't, as a society we will all lose a lot of freedom.

But we should strive to create a tax system that maximizes individual freedom rather than promises to people, aside from the basics. Widening a tax basis can collect needed revenue while still leaving much more individual freedom to most individuals who are paying the taxes.

Raising taxes upon a top tier of earners (most of whom invested a great deal in education, incurred a lot of debt, and are highly valuable to society) to such a level that government basically controls their lives is a very different proposition. Inevitably it creates a stagnant society. Government funds the things it sees to be valuable, but there's a catch:

Governments do not have imagination and creativity. No government could have conceived of the uses of a personal computer, created Apple, created Microsoft, or evolved cell phones (which have proven to be a godsend to developing economies due to their very low implementation cost). You have to leave personal scope and an open economic system to let people experiment, or you devolve toward a somewhat feudal society.

That is why I too think that the levels of taxation I described earlier on the top quintile are a dead end. And the very last thing you want to do is prevent those individuals who have the drive to climb the ladder from climbing, so you can't take it out of the bottom tier. Carl has spent a lot of time demonstrating the fact that income brackets in the US change for most of us over the course of our lives. We do have significant social mobility.

The solution is to cut some of the tax breaks and also cut some of the middle class subsidies. I do not think the government should necessarily be paying for all the things it is doing for people who are middle class, and I am horrified at the corporate subsidies which are being poured out from the congressional largesse. In many ways, our problems are self-inflicted and could be addressed with a dose of common sense.

By Blogger MaxedOutMama, at 11:00 PM, January 25, 2010  

re: production of real things.

I understand all you are saying and completely agree- I think my point is being lost though I prefer to let it go as it is really more philosophical than anything else.

re: lowering taxes on top tier earners

This would either have to be accompanied with one of the following:
A. Spending cuts- creates a smaller government as % GDP
B. More borrowing
C. More taxes on someone else- e.g. the middle class or poor?

So at some level this is still zero sum. Depends on the perspective you use to define zero sum.

re: "In many ways, our problems are self-inflicted and could be addressed with a dose of common sense. "

Amen. On this you and I completely agree

Thanks for your wisdom and please be well

By Blogger Thai, at 11:39 PM, January 25, 2010  

Thai - it may be that economists are completely acculturated to figuring things as a time series, and most people are not.

While generating tax revenue at any one moment means balancing revenues and expenditures, so your point above is correct, the choices one makes in doing so can have very different consequences over time.

And in general, not taking so much of any stream of revenue that it chokes incentive to generate more revenue creates more revenue over time.

This is an economic reality having to do with risk, expected return, and retained return.

By Blogger MaxedOutMama, at 7:36 AM, January 26, 2010  

Please forgive me that I do not follow your last point.

By Blogger Thai, at 7:47 AM, January 26, 2010  

In other words, Thai, wealth creation is a positive feedback mechanism when properly instituted and rationally taxed.

The creation of wealth only leads to the creation of still more wealth, as a reasonable proportion of the wealth gets fed back into the "wealth creation machine". Taxes divert the feedback away from the inputs of the wealth machine, and so reduce the output at the creation end, and can, in fact, kill the machine's output if they divert too much of it.

MOM -- I think one issue that is causing economic confusion all around is that economists have not yet impressed me as grasping the very critical differences between real property and intellectual property -- and the vast percentage of new "real" (as in actual, not physical) wealth in this nation is coming from IP and/or services. We are in much the state as things were in 1905-1910, when the industrial revolution was in full swing and economists just barely understood the processes by which things were transitioning from an ag economy to an industrial one.

The differences between an IP&SE(Based on IP and services) and an IE(based on manufactured goods) are greater than those between an IE and an AE(based on food production) -- because IP is very, very different in key properties from either food or manufactured goods.

...(continued)...

By Blogger OBloodyHell, at 8:33 AM, January 26, 2010  

First and foremost is the fact that the creation of IP is almost entirely front-loaded as to cost. While you have to build a factory to make goods, each successive good DOES have a nontrivial additional cost to make. IP is not thus encumbered, as, once digitized, it can be duped for pennies on the million. Additionally, and even more critically, when I sell you my IP, I retain the original. Hence, I have not really "lost" the thing I created, but given you "infinite access" to it. I can sell it to anyone else who wants it at no real additional expense. Its value has nothing to do with "scarcity" at all, once created. It is essentially impossible to "steal" IP, since I cannot deprive you of its use. What is "stolen" is the nominal opportunity to receive compensation from me for your access. That's not irrelevant but it's not the same thing as stealing a physical item itself (hence the rising of the term "piracy" to differentiate the action from theft). Your opportunity to "sell" me access might not even exist -- if the price you demand isn't within my bounds, or interest, in paying, then such opportunity is nonexistent, and thus nothing is stolen at all.

BUT THE REALLY WEIRD PART is that society benefits from piracy. Some people DO get this. The Grateful Dead did it, as did the band Phish and Peter Gabriel...

When Photoshop, costing hundreds of dollars, is pirated by a college student (who almost certainly would not pay the asking price), said student learns to use the program and thus adds to Adobe's ability to sell the product, as opposed to some competing product. If he uses it, even unpaid, to produce some artwork that he then can sell, then he AND society gain from that... and while Adobe ought to get some part of that recompense, they certainly aren't OUT money from the pirated copy itself. If the student becomes proficient enough at it, if they begin to make serious money using it, then the real likelihood is that they will purchase a copy at some point.

I guess the key point being made here is that the lack of real understanding of all this distorts the economic mechanism all to hell and gone because the existing payment/redistribution processes don't properly sync with the individual, corporate, or societal benefits of IP. The system needs a lot of analysis and a complete overhauling. The difference should be not unlike the transition from a barter economy to a money economy, frankly. Because I'm not sure that money is a good mechanism for tracking something with infinite redistributability.

By Blogger OBloodyHell, at 8:34 AM, January 26, 2010  

Another relevant element to what I note above is that I'm honestly curious about what the real societal (worldwide) benefit is to US IP creation. I believe there is a hell of a lot more of it than is realized, and that part of that comes from piracy and part of it from undervaluing society's interests in IP itself.

I'd lay odds that, if such a valuation WAS properly formed, then the actual "balance of trade" between the USA and other nations would be a net surplus overall.

Things are going to get weird before they get fixed, though -- there are all too many vested interests looking to, as John Perry Barlow put it, "rearrange the deck chairs on the sinking Titanic of IP law", for things to get fixed without a major set of disruptive events.

"We live in interesting times".

By Blogger OBloodyHell, at 8:42 AM, January 26, 2010  

Oh, and by the way -- existing Copyright law is DEAD -- D - E - A - D -- DEAD.

It is considered a truism that "The internet treats censorship as noise and routes around it". That's less true than people realize with the modern internet (it's possible for censors to hide stuff so people THINK it's not there when it is), but, if you know something IS out there, and DO want access to it, then there ARE ways to get to it almost always.

Now, consider:

Censorship is someone saying "This we deem dangerous, therefore you may not have access to it"
Copyright is someone saying "This you have not paid for, therefore you may not have access to it"

Both are about controlling access. Enable one, you enable the other.

And if it is, indeed, a truism that "The internet treats censorship as noise, and routes around it", then what does it do for copyright-as-control?

Right -- it routes around it.

Hence, you shut down a scanner of Playboy images, and a hundred other scanners take his place (This Happened).

You shut down Napster, and Gnutella, EDonkey, Kazaa, Morpheus, Livewire, Bittorrent spring up... then shut down EDonkey, and EMule springs up (This Happened).

You cannot control access without draconian measures and punishments... and even then, you're likely to fail.

The current mechanism is either going to assist the creation of a worldwide fascism along the lines of Orwell or it's going to be dismantled.

Because anything that can be used to restrict access to "pirated" material can also be just as effective at restricting access to banned material.

By Blogger OBloodyHell, at 9:20 AM, January 26, 2010  

OBH - very good points, but I'd like to try to explain some basics for other readers' benefit.

Thai, going back to Adam Smith we have understood that there is a difference in types of spending in an economy when considered OVER THE SPAN OF YEARS. In Smith's time, the difference was largely investing in stock. In our time, the problem is more complex, as OBH points out.

But the basic mechanism is one that dominates all sorts of economies. Spending devoted to means of production or production creates larger total economies as the years go by, whereas spending devoted purely to consumption does not - at the very best, you get a stagnant economy.

Take a farmer. It is a capital intensive business upon which our very lives depend. The capital required for farming can be split into different types of spending. First would be for the annual expenses - seed, inputs (fertilizer, herbicide, pesticide). That has to be paid every year. But farming as we practice it is very efficient and very mechanized, and those huge pieces of machinery used to till, plant, amend, treat and harvest are exceedingly expensive.

Many different countries over the years have tried to control what the farmer can get for the harvest under the theory that the cheaper food is, the better it is for the average person. And they have almost uniformly produced higher food costs over the period of 5-10 years, and sometimes even famines.

That is because they do not leave the farmer enough margin to invest back into the needed equipment. As soon as the farmer understands this, the farmer stops spending on smaller expenses that would expand his production over time, because he knows he's doomed. So the result is smaller harvests, while the "stock" is consumed and not renewed (in this case the stock would be soil quality and equipment).

(cont)

By Blogger MaxedOutMama, at 10:58 AM, January 26, 2010  

MOM, I really do understand all this, honest.

What I am saying there is is still a certain cognitive dissonance in this whole discussions around Carl's tax post.

It is the classic problem of linear logic on non-linear systems and the endless circular loops which make up our society.

Here you say those on the top are paying the most in taxes (on both a percentage as well as absolute basis) while those on the bottom are not- agreed.

Yet we know the government is 50+% of the economy and it gets its money from those taxes. Further, to use Carl's own words, the government apparently mostly in the business of redistribution.

So the 50+% which is taken from those at the top is redistributed to:
A. Those at the top again
B. Those in the middle
C. Those in the bottom

Whoever gets this redistributed wealth can either:
A. consume it in ways that lead to its permanent loss
B. Consume it in ways that lead to further "wealth/growth" (pick you term)

Take this money from those at the top and stop giving it back to those at the top while giving it to those at the bottom has the effect of taking the people who were at the top because of their redistribution back to them down to a different run.

Cut taxes for those on the top and in the short term they have more and the rest have less, and with this new found wealth they can either:
A. Consume it in ways that lead to its permanent loss- say a wild night of fireworks and partying.
B. Consume it in ways that lead to further wealth/growth

I think it is not at all clear that people at the top of the income distribution necessarily do A with their assets as opposed to B. If they did, we would not be net borrowing as a nation from abroad.

Some top income Americans are doing A, some are doing B and probably the majority are doing both.

Of course the problem with discussions around A or B is that it can get into some rather unpleasant/uncomfortable topics. As we are both aware, ife can be rather unpleasant and uncomfortable at times and require making very difficult choices.

Further, to add even more difficulty into the mix, what is A to one person can be seen as B to another and vice versa, etc...

If I have testicular cancer, I might want resources going to that. If you have heart disease, you might want resources going to that, if Carl's son has a learning disability, he might want resources going to that.

Which is "more right"?, etc...

We all have different views of what we want the world to look- views as I have tried to share with Carl's in the past which are largely driven by different "moral matrices", etc...

But my basic point is that those on the bottom are hurting and yet they do not pay the taxes which assists them in the first place. Cutting the taxes that help them (even if their help is consumption of the A variety) requires the funds either get made up some way else or that they cut consumption further.

Not they can get back the resources they lost as those on the bottom are hired by those on the top who now have more money, etc...

But what if they do not have the skills/talents/etc... that those on the top want?

As I said in one of my comments earlier:

"And yet to me personally, they do not smell the same. I do not want a system under 100 (or even 50% control) by one (very diverse) entity and I guess I feel this way as I am not happy with HOW we are spending our money as a society"

By Blogger Thai, at 11:33 AM, January 26, 2010  

Sorry for all the typos.

I find it very hard to proof read in these little boxes

By Blogger Thai, at 11:36 AM, January 26, 2010  

Thai - I can't proofread these either.

I do understand your point better, thanks.

My answer is of course my personal view, but my personal view is formed partly by the hard laws of economics.

Anyway, the bottom needs a safety net, and I think it would be inhumane and destructive to remove that. However if you take too much from those at the top (who are producing somehow), then, over time, you will cut the share of revenues you can devote to that safety net.

It is easy to miss this fact, even though time after time nations make this mistake and wind up engendering poverty where they wished to alleviate it.

Btw, the government isn't 50% of the economy. If you figure it by GDP measures, it is less than 22%. If you figure federal government spending last year vs Q3 GDP, the federal government spent about 3.5T of our 14.24T economy. But much of that goes back out in transfer payments to people, so it shows up in GDP as a different number.

Then the middle third - I am arguing passionately not to make the mistake of taxing that third on the level of the socialist republics, because if you do, the bottom will remain the bottom - forever.

And I'm arguing also that the top shouldn't be paying marginal tax rates so high that the rates suppress reinvestment of their money (whether in education or whatever). So my basic argument is cut much of the tax breaks for the top, so that you can provide a lower tax rate across income. This is fairer but will also generate growth in the long run.

By Blogger MaxedOutMama, at 3:36 PM, January 26, 2010  

Finally, and I'm sorry for going on so long, this is the reason why governments are poor at directing investment flows.

Suppose a farmer expects to get $2,000 if he puts $1,000 in grain this year. That makes his gross return 100%. But suppose on average he takes losses on 15% (some years he doesn't make back his costs, some he makes little, some he makes a lot more).

So his average rate of raw return is 100-15 or 85%. That still sounds great, but, his funding costs are 7% of the investment, so now we are down to 78%. Still good, but now we realize that the equipment he uses to farm has to be replaced and repaired. Here is where scaling comes in, but let's say 20%. So now his average return before taxes is 58%, in other words, if he invests $1,000 he will make $580. If his tax on that is 60%, he'll be left with $232.

You can argue that this is a pretty good profit, but it is really far too close to his average loss and his need to invest in equipment. Because average loss rates aren't created over a few years - they are the result of years of average, and he can easily see a few years with 30% loss rates, at which he'll be running capital shy. Therefore he is going to be wary about investing in equipment. He has to conserve profits to be sure of being able to continue to conduct business.

Most business ventures in this country have a much higher average loss rate, so marginal taxation at rates that high lowers investment rates and decreases the economy's average growth rate and its rate of job production.

And really it is no different if you look at skilled professionals or service businesses. When you figure taxes, you implicitly ignore all the losses that didn't occur that year, but to be sure of going on, we have to set aside for them.

People don't realize this.

By Blogger MaxedOutMama, at 3:54 PM, January 26, 2010  

OBH - well, the real benefit to the US in IP production that is easily disseminated is that over time it is making the world wealthier. Since we personally grieve over and send money to relieve countries that are suffering, this is a good.

Also, over time it should help us grow our own economy, given free trade (a big if) and given sane domestic policies.

By Blogger MaxedOutMama, at 3:57 PM, January 26, 2010  

Mom, it is delightful to share thoughts with you. I have immense respect for your blog.

Please understand a few things from my perspective

1. I don't disagree with much of what you say- though I am not sure I agree with you that the farmers who work for the government can't make the same calculations and a private farmer can.
... Though I do agree with you that they are probably not as motivate to make this calculation as a private farmer would be.
2. From certain perspectives, I don't really see a difference between a system which is 100% controlled by government (a marxist/socialist system) and a system which is 0% controlled by the government ( a free market system). At some level they are tweedle dumb vs. tweedle dee.
... Except of course "a rose by any other name does not smell as sweet" is true and I do understand how there is a very big different from certain viewpoints.
- As I said, my frustration with "government" is how our money is being spent, nothing more. I suspect we might share similar frustrations.
3. I certainly agree with you that we must all help each other in need.
4. I assume the law of economics you refer to is "there is no free lunch"?
- We have a similar law in science/medicine known as The Conservation of Energy.
5. Re: government is now more than 50% of the economy
- I am referring to federal + state + local as you yourself referred when you commented on how income taxes are now greater than 50% of income (you did not discuss sales taxes, progressive entitlement taxes, etc...)
6. I still do not understand how you would cut taxes on high income earners and not cut assistance to people in need. The laws of economics I know tell me there is no free lunch. Would you cut them, borrow more in the short term and hope the difference is made up through growth?
- My response would be: it depends how the money is spent. Fireworks are still fireworks.

By Blogger Thai, at 5:16 PM, January 26, 2010  

Thai - because you're NOT really cutting taxes on the top income bracket - you are changing the distribution in that bracket. Actually you would be increasing overall taxes in that bracket, but the increase would hit only individuals who had amassed a lot of wealth.

Right now, the marginal tax rate for a person living in a high tax state who is earning say 150K can be much higher than for a person who has tax sheltered income of 250K. Or for that matter, like Teresa Heinz Kerry, in the millions. That is not good public policy.

My proposal is basically to spread taxes more (take away tax breaks) in order to avoid raising marginal tax rates or raising money through a federal sales tax.

However you made a very good point about different levels of government fighting against each other. I am not sure we can do anything about states like NJ and CA - they have created their mess and they have to get out of it.

Also it is not that the farmer works for the government - it is the government who decides the marginal tax rate and thus how much the farmer has left to reinvest. And the government generally kind of screws up when they start trying to get too precise with these things. They seem to be effing up the medical system right now by trying to squeeze every possible dollar out of the service providers. It's not working.

I think a lot of our federal spending is a mistake, but I think we need to spend more on health, not less. I think we need more spending for fundamental welfare and that we need to strengthen the safety net.

But this bit of subsidizing people who are really very wealthy at the expense of people who are very productive is not going to work.

I think we as a society should decide what we really need, and then really settle down and figure out how to tax ourselves to pay for it. We can handle special circumstances through borrowing, but we can't continue our current levels of deficit spending and we have to address the next two decades in which our social program costs are going to balloon.

Anyway, there is a grim sort of humor in this situation. It has prompted people across all walks of life to sit down and think about these things, and almost everyone realizes that some of our federal spending makes no sense, and also that we are going to have to restrain the costs of our current entitlement programs.

Why we are essentially throwing huge subsidies at these large financial systems or companies that don't function is beyond me, and how anyone can justify some of the house-purchase subsidies is also beyond me.

An awful lot of the money we are spending now is really a closet subsidy to large corporations. That includes corporations like GE, which stands to profit hugely from wind subsidies. Our government has become a racket driven by money paid to politicians.

As to government being 50%, yes, in some places the take on certain individuals in the top 20% of households ranked by income is more than that - and scheduled to go higher. But the top 20% leaves another 80%, and many of them don't pay any net federal taxes at all.

By Blogger MaxedOutMama, at 8:12 PM, January 26, 2010  

So if I read you correctly, you are not actually a conservative as I have come to understand the current battle lines (my apologies for misunderstanding you- I made associations between yourself and say OBH I should not have, my bad).

For if I read you correctly, your proposal would actually increase the percentage control of the economy by the US government beyond its current levels but would shift the way the money is being spent.

As this is classic Obama/Clinton policy I am a little confused why I often read that you disagree with them so strongly?

As for increasing health care spending, this is another of these incredibly difficult issues I am of (at least) two minds on though I am currently of the view we should not spend more on health care- I listen to all reasonable arguments however.

If it helps you to see the way I think about health care, I tend to see the current battle lines as falling across a four dimensional battlefield where the axes are:

W. Universality
X. Cost
Y. Complexity
Z. Volume

... The three axes are of course closely intertwined but it is the cost/complexity/volume issues that tend to confuse most people not in health care. A paraphrased summary might be "the greater the complexity, the greater the cost" and the greater the volume of care, the greater the cost.

Whether you do or do not agree with any particular side in this 3D health care battle- and as I said I am of many minds on this issue- the current administration policy wonks have clearly set themselves in the following camp:
1. Increase universality
2. Reduce costs (which they have obviously not done)
3. Reducing complexity in all cases except where clear "outcome driven data" shows benefit.
4. Reduce the volume of health care delivery

... Personally I think they will have a very hard time with 3 and 4 (though it is clear these are where a lot of the monies are going) as it is always one of those "from whose viewpoint" are you defining this benefit or need for reduced volume? We shall obviously see.


I am not saying this approach is either right or wrong, only that it is their strategy. I am sympathetic to it but as I said before I am not in the camp who thinks we should be spending more money- rather I think we should be wiser in its use.

For I am a little perturbed by suggestions that we already spend so much on health care we actually are creating higher mortality than we would otherwise have if we spent less and diverted the resources elsewhere:

... Which might be plausible if less valuable health care spending was actually crowding out more valuable health spending such as ... (pick your choice): primary education, road safety, infrastructure, alcohol education, police, etc...

As a physician, I do see that we spend an awful lot of money rather poorly- though I readily admit this is according to my own value system which may or may not be different than your own, others, etc...

Hard choices are simply part of life imo and health care is really no different.

I see we are now cutting school budgets. And while I readily admit there is fat in the school system which can be cut, still what is one man's fat is another man's flesh and at least to me we are now cutting into real flesh.

When did tough choices ever stop being part of the world we live in?

By Blogger Thai, at 9:11 PM, January 26, 2010  

Carl, I am interested to read a clarification about the apparent differences between yourself and MOM on this issue of tax policy or is there not one?

I have come to read your blogs as a way of fairly trying to undertand the mind of the well meaning modern conservative and now you have absolutely thrown me for a loop.

Clarification would be greatly appreciated

Be well

By Blogger Thai, at 9:23 PM, January 26, 2010  

Thai: I'm too pressed at work to permit anything other than a brief response now, though have been following the debate. Your government as a percent of GDP point is new to me (I also initially considered Federal only), but I'm not sure M_O_M has answered.

In general, I don't depart that much from M_O_M's conclusions. I too oppose distorting subsidies and taxation, and distrust government selection of winners and losers. I also favor a safety net, and dislike using tax breaks in policy making (though suspect that lower quintiles benefit as much or more, in percentage terms, as other earners).

I wonder whether this comment of yours is a source of some confusion. I think it fundamentally understates investment, gains from trade and the velocity of money (see generally David Ricardo). Consumption is not a "permanent loss" -- whether yogurt or yacht, somebody's got to produce it. And the whole theory of progressive taxation presumes that the relatively wealthy consume less (as a percentage of income) than the relatively poor. Which is why both middle class and rich have stocks and/or a 401k (or IRA).

OBH: I don't think copyright law dead, and hope to address the question some day.

More later this week, I hope.

By Blogger Carl, at 12:25 AM, January 27, 2010  

Thai - space here does not really permit me to explain a whole lot further.

I think your point about "control" of the economy is important, and my response basically is that "control" of the economy is either accomplished by mandate or by taking such a high percentage of revenue in taxes that it distorts private decision making.

But the individual entities who make up our society - legal entities like corporations, and natural persons like me - can avoid government control by having the government not take so much revenue from us individually that it forces us to make choices we don't want to make.

There are a number of points you have made that I think are important.

Carl, I either have to take this discussion partially to my blog or post a guest post on yours? What is your preference?

Anyway Thai, today it is back to the hospital for some tests on the Chief. It will be a day or two before I can really get back to this.

I would also like to hear something from you as a physician on how you think our money can be spent more wisely (both medically, if you have insights, and on anything else).

I certainly agree that we have to make tough choices and that our current system is set up to obfuscate that. My contention is that the obfuscation leads to generally worse choices, more government control, and poorer outcomes across our society.

By Blogger MaxedOutMama, at 6:21 AM, January 27, 2010  

"My contention is that the obfuscation leads to generally worse choices, more government control, and poorer outcomes across our society."

Amen

I think you would like Dr Rich very much... but I could be wrong.

I hope your husband is well and if I can ever be helpful, do not hesitate to ask.

Re: solutions to the health care issue.

I do not think there is a "right answer" when it comes to health care- indeed, I have come to the conclusion that right answers are rare when they are being made for very large groups of people. Again, I just think it is one of those smells more or less sweet issues- if you understand my point. At some level it always gets back to one's personal values and how they would like to spend their money/what the want the world to look like.

So I am very happy to share what smells good to me, but I would also have to quickly agree with many points you might make regarding what is wrong with my personal solution.

Be well

By Blogger Thai, at 9:48 AM, January 27, 2010  

Carl, I read your response and without sounding critical, I don't see any substantive answer in it.

It is kind of like an electrical engineer saying "I prefer superconductors to conduct my electricity more than wires with high impedance" but then going on to say why you are using high impedance wires anyway.

No one would disagree with this statement of concept, where it gets difficult is when you actually have to build the bread box using it as a blueprint.

By Blogger Thai, at 10:07 AM, January 27, 2010  

M_O_M: Since it started here, why don't you take a swing at moving phase 2 to your blog?

By Blogger Carl, at 11:05 AM, January 27, 2010  

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